<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
JUNE 30, 1999
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, 1999
- --------------------------------------------------------------------------------
JUNE 30, 1999
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, 1999
- --------------------------------------------------------------------------------
The Semi-Annual Report of Separate Account VUL-2 is prepared and provided by The
American Franklin Life Insurance Company. The Semi-Annual Report of the Variable
Insurance Products Fund and the Variable Insurance Products Fund II is 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, 1999
(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>
Investments in Funds at fair value
(cost: see below) $ 4,461,111 $ 61,093,442 $ 94,795,626 $ 12,264,947 $ 3,270,049
Due from (to) general account 21,444 (10,665) (8,697) (1,511) (113)
----------------------------------------------------------------------------------------
NET ASSETS $ 4,482,555 $ 61,082,777 $ 94,786,929 $ 12,263,436 $ 3,269,936
----------------------------------------------------------------------------------------
Unit value $ 134.99 $ 360.01 $ 415.38 $ 204.36 $ 168.08
----------------------------------------------------------------------------------------
Units outstanding 33,207 169,670 228,194 60,009 19,454
----------------------------------------------------------------------------------------
Cost of investments $ 4,523,227 $ 47,779,068 $ 68,036,096 $ 10,678,343 $ 3,543,602
----------------------------------------------------------------------------------------
</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, 1999
(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>
Investments in Funds at fair value
(cost: see below) $ 2,229,446 $ 32,587,079 $ 41,034,956 $ 9,259,511 $ 31,390,976
Due from (to) general account (100) (13,693) (667) (252) (11,477)
--------------------------------------------------------------------------------------------
NET ASSETS $ 2,229,346 $ 32,573,386 $ 41,034,289 $ 9,259,259 31,379,499
--------------------------------------------------------------------------------------------
Unit value $ 153.85 $ 238.17 $ 317.13 $ 205.00 $ 249.76
--------------------------------------------------------------------------------------------
Units outstanding 14,491 136,766 129,391 45,167 125,638
--------------------------------------------------------------------------------------------
Cost of investments $ 2,251,350 $ 29,248,053 $ 30,274,919 $ 8,386,238 $ 23,671,842
--------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
2
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
STATEMENT OF NET ASSETS (CONTINUED)
JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
MFS VARIABLE INSURANCE TRUST
------------------------------------------------------------------------------------------------
MFS
MFS GROWTH MFS MFS
EMERGING MFS WITH TOTAL MFS CAPITAL
GROWTH RESEARCH INCOME RETURN UTILITIES OPPORTUNITIES
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investments in Funds at fair value
(cost: see below) $ 3,219,300 $ 2,368,836 $ 1,414,554 $ 1,245,028 $ 1,148,250 $ 1,299,172
Due from (to) general account 65 46 25 24 22 (640)
------------------------------------------------------------------------------------------------
NET ASSETS $ 3,219,365 $ 2,368,882 $ 1,414,579 $ 1,245,052 $ 1,148,272 $ 1,298,532
------------------------------------------------------------------------------------------------
Unit value $ 126.16 $ 111.62 $ 110.44 $ 107.07 $ 116.83 $ 123.14
------------------------------------------------------------------------------------------------
Units outstanding 25,519 21,222 12,808 11,628 9,829 10,546
------------------------------------------------------------------------------------------------
Cost of investments $ 2,727,483 $ 2,125,665 $ 1,335,749 $ 1,225,814 $ 1,090,949 $ 1,102,614
------------------------------------------------------------------------------------------------
</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, 1999
(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 (EXPENSE)
Income
Dividends $ 121,700 $ 2,619,662 $ 9,446,395 $ 458,701 $ 292,551
Expenses
Mortality and expense risk charge 16,039 213,574 334,549 44,453 11,747
------------------------------------------------------------------------------
Net investment income (expense) 105,661 2,406,088 9,111,846 414,248 280,804
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) 23,858 492,905 418,155 80,055 (8,270)
Net unrealized appreciation
(depreciation)
Beginning of period (83,735) 11,152,579 27,077,236 1,229,297 (206,194)
End of period (62,116) 13,314,374 26,759,530 1,586,604 (273,553)
------------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) during the period 21,619 2,161,795 (317,706) 357,307 (67,359)
------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments 45,477 2,654,700 100,449 437,362 (75,629)
------------------------------------------------------------------------------
Net increase (decrease) in net assets
from operations $ 151,138 $ 5,060,788 $ 9,212,295 $ 851,610 $ 205,175
------------------------------------------------------------------------------
</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, 1999
(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 (EXPENSE)
Income
Dividends $ 121,797 $ 2,378,276 $ 563,394 $ 514,333 $ 1,062,837
Expenses
Mortality and expense risk charge 8,576 119,689 137,972 32,346 105,375
-----------------------------------------------------------------------------------------
Net investment income (expense) 113,221 2,258,587 425,422 481,987 957,462
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain (loss) 13,987 134,552 105,902 25,059 74,919
Net unrealized appreciation
(depreciation)
Beginning of period 156,188 4,943,879 8,790,937 1,046,388 6,359,992
End of period (21,904) 3,339,026 10,760,037 873,273 7,719,134
-----------------------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) during the period (178,092) (1,604,853) 1,969,100 (173,115) 1,359,142
-----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments (164,105) (1,470,301) 2,075,002 (148,056) 1,434,061
-----------------------------------------------------------------------------------------
Net increase (decrease) in net assets
from operations $ (50,884) $ 788,286 $ 2,500,424 $ 333,931 $ 2,391,523
-----------------------------------------------------------------------------------------
</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, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
MFS VARIABLE INSURANCE TRUST
---------------------------------------------------------------------------------------------
MFS
MFS GROWTH MFS MFS
EMERGING MFS WITH TOTAL MFS CAPITAL
GROWTH RESEARCH INCOME RETURN UTILITIES OPPORTUNITIES
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET INVESTMENT INCOME (EXPENSE)
Income
Dividends $ - $ 24,760 $ 8,195 $ 54,551 $ 65,732 $ 4,873
Expenses
Mortality and expense risk charge 8,874 6,988 4,082 3,629 3,169 4,135
---------------------------------------------------------------------------------------------
Net investment income (expense) (8,874) 17,772 4,113 50,922 62,563 738
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain (loss) 3,295 1,453 8,983 101 106 5,746
Net unrealized appreciation
(depreciation)
Beginning of period 252,419 140,093 57,569 32,868 30,425 54,315
End of period 491,817 243,171 78,805 19,214 57,301 196,558
---------------------------------------------------------------------------------------------
Net change in unrealized
appreciation(depreciation)
during the period 239,398 103,078 21,236 (13,654) 26,876 142,243
---------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments 242,693 104,531 30,219 (13,553) 26,982 147,989
---------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets from operations $ 233,819 $ 122,303 $ 34,332 $ 37,369 $ 89,545 $ 148,727
---------------------------------------------------------------------------------------------
</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, 1999 DIVISION DIVISION DIVISION DIVISION DIVISION
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ 105,661 $ 2,406,088 $ 9,111,846 $ 414,248 $ 280,804
Net realized gain (loss) on 23,858 492,905 418,155 80,055 (8,270)
investments
Net change in unrealized appreciation
(depreciation) on investments 21,619 2,161,795 (317,706) 357,307 (67,359)
--------------------------------------------------------------------------------------
Net increase (decrease) in net assets from
operations 151,138 5,060,788 9,212,295 851,610 205,175
FROM POLICY RELATED TRANSACTIONS:
Net contract purchase payments 8,651,248 7,175,158 8,963,585 1,388,432 546,628
Withdrawals (704,563) (4,944,290) (6,976,047) (1,079,370) (341,839)
Transfers between Separate Account
VUL-2 divisions, net (8,117,536) (374,575) 1,727,404 (208,851) (20,867)
--------------------------------------------------------------------------------------
Net increase (decrease) in net assets from
policy related transactions (170,851) 1,856,293 3,714,942 100,211 183,922
--------------------------------------------------------------------------------------
Net increase (decrease) in net assets (19,713) 6,917,081 12,927,237 951,821 389,097
Net assets, beginning of period 4,502,268 54,165,696 81,859,692 11,311,615 2,880,839
--------------------------------------------------------------------------------------
Net assets, end of period $ 4,482,555 $ 61,082,777 $ 94,786,929 $ 12,263,436 $ 3,269,936
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ 116,801 $ 2,283,893 $ 6,967,299 $ 656,944 $ 263,936
Net realized gain (loss) on - 405,037 876,982 150,702 27,178
investments
Net change in unrealized appreciation
(depreciation) on investments (69,175) 3,053,827 15,122,901 300,563 (449,814)
--------------------------------------------------------------------------------------
Net increase (decrease) in net assets
from operations 47,626 5,742,757 22,967,182 1,108,209 (158,700)
FROM POLICY RELATED TRANSACTIONS:
Net contract purchase payments 18,043,987 14,163,958 16,320,192 3,010,083 1,104,184
Withdrawals (1,147,285) (8,392,173) (11,303,864) (1,817,197) (606,904)
Transfers between Separate Account
VUL-2 divisions, net (15,552,224) 2,808,460 2,158,143 (203,758) 127,361
--------------------------------------------------------------------------------------
Net increase (decrease) in net assets from
policy related transactions 1,344,478 8,580,245 7,174,471 989,128 624,641
--------------------------------------------------------------------------------------
Net increase (decrease) in net assets 1,392,104 14,323,002 30,141,653 2,097,337 465,941
Net assets, beginning of year 3,110,164 39,842,694 51,718,039 9,214,278 2,414,898
--------------------------------------------------------------------------------------
Net assets, end of year $ 4,502,268 $ 54,165,696 $ 81,859,692 $ 11,311,615 $ 2,880,839
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
</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 BOND ASSET INDEX MANAGER: CONTRA-
BOND MANAGER 500 GROWTH FUND
SIX MONTHS ENDED JUNE 30, 1999 DIVISION DIVISION DIVISION DIVISION DIVISION
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ 113,221 $ 2,258,587 $ 425,422 $ 481,987 $ 957,462
Net realized gain (loss) on investments 13,987 134,552 105,902 25,059 74,919
Net change in unrealized appreciation
(depreciation) on investments (178,092) (1,604,853) 1,969,100 (173,115) 1,359,142
------------------------------------------------------------------------------------
Net increase (decrease) in net assets from
operations (50,884) 788,286 2,500,424 333,931 2,391,523
FROM POLICY RELATED TRANSACTIONS:
Net contract purchase payments 250,171 2,825,277 6,308,436 1,712,850 4,931,652
Withdrawals (236,537) (2,578,830) (3,418,963) (853,658) (2,708,687)
Transfers between Separate Account
VUL-2 divisions, net (49,471) (152,242) 2,413,130 236,401 1,388,940
------------------------------------------------------------------------------------
Net increase (decrease) in net assets from
policy related transactions (35,837) 94,205 5,302,603 1,095,593 3,611,905
------------------------------------------------------------------------------------
Net increase (decrease) in net assets (86,721) 882,491 7,803,027 1,429,524 6,003,428
Net assets, beginning of period 2,316,067 31,690,895 33,231,262 7,829,735 25,376,071
------------------------------------------------------------------------------------
Net assets, end of period $ 2,229,346 $ 32,573,386 $ 41,034,289 $ 9,259,259 $ 31,379,499
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ 89,815 $ 3,196,688 $ 541,824 $ 479,016 $ 687,308
Net realized gain (loss) on investments 46,148 203,507 397,039 10,497 165,251
Net change in unrealized appreciation
(depreciation) on investments 21,980 839,972 5,788,405 537,579 4,469,638
------------------------------------------------------------------------------------
Net increase (decrease) in net assets from
operations 157,943 4,240,167 6,727,268 1,027,092 5,322,197
FROM POLICY RELATED TRANSACTIONS:
Net contract purchase payments 485,792 5,773,958 10,353,647 3,131,484 8,348,551
Withdrawals (439,642) (4,714,381) (5,713,776) (1,426,100) (3,884,561)
Transfers between Separate Account
VUL-2 divisions, net 101,464 (90,460) 4,513,723 1,021,698 2,413,432
------------------------------------------------------------------------------------
Net increase (decrease) in net assets from
policy related transactions 147,614 969,117 9,153,594 2,727,082 6,877,422
------------------------------------------------------------------------------------
Net increase (decrease) in net assets 305,557 5,209,284 15,880,862 3,754,174 12,199,619
Net assets, beginning of year 2,010,510 26,481,611 17,350,400 4,075,561 13,176,452
------------------------------------------------------------------------------------
Net assets, end of year $ 2,316,067 $ 31,690,895 $ 33,231,262 $ 7,829,735 $ 25,376,071
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
</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 MFS
EMERGING MFS WITH TOTAL MFS CAPITAL
GROWTH RESEARCH INCOME RETURN UTILITIES OPPORTUNITIES
SIX MONTHS ENDED JUNE 30, 1999 DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ (8,874) $ 17,772 $ 4,113 $ 50,922 $ 62,563 $ 738
Net realized gain (loss) on investments 3,295 1,453 8,983 101 106 5,746
Net change in unrealized appreciation
(depreciation) on investments 239,398 103,078 21,236 (13,654) 26,876 142,243
---------------------------------------------------------------------------------------
Net increase (decrease) in net assets from
operations 233,819 122,303 34,332 37,369 89,545 148,727
FROM POLICY RELATED TRANSACTIONS:
Net contract purchase payments 948,962 656,712 442,572 244,827 394,292 282,397
Withdrawals (347,699) (285,957) (171,743) (94,258) (136,700) (118,533)
Transfers between Separate Account
VUL-2 divisions, net 878,578 591,077 490,175 465,717 346,272 360,032
---------------------------------------------------------------------------------------
Net increase (decrease) in net assets from
policy related transactions 1,479,841 961,832 761,004 616,286 603,864 523,896
---------------------------------------------------------------------------------------
Net increase (decrease) in net assets 1,713,660 1,084,135 795,336 653,655 693,409 672,623
Net assets, beginning of period 1,505,705 1,284,747 619,243 591,397 454,863 625,909
---------------------------------------------------------------------------------------
Net assets, end of period $ 3,219,365 $ 2,368,882 $ 1,414,579 $ 1,245,052 $ 1,148,272 $ 1,298,532
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
PERIOD FROM MAY 1, 1998 (DATE OF
INCEPTION) TO DECEMBER 31, 1998
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ (2,485) $ (2,082) $ (688) $ (1,042) $ (1,577)$ (1,230)
Net realized gain (loss) on investments (880) (1,176) 140 (502) (10) 13,534
Net change in unrealized appreciation
(depreciation) on investments 252,419 140,093 57,569 32,868 30,425 54,315
---------------------------------------------------------------------------------------
Net increase (decrease) in net assets
from operations 249,054 136,835 57,021 31,324 28,838 66,619
FROM POLICY RELATED TRANSACTIONS:
Net contract purchase payments 616,401 526,652 233,241 218,045 253,967 275,910
Withdrawals (105,620) (78,873) (9,664) (33,304) (37,203) (38,438)
Transfers between Separate Account
VUL-2 divisions, net 745,870 700,133 338,645 375,332 209,261 321,818
---------------------------------------------------------------------------------------
Net increase (decrease) in net assets from
policy related transactions 1,256,651 1,147,912 562,222 560,073 426,025 559,290
---------------------------------------------------------------------------------------
Net increase (decrease) in net assets 1,505,705 1,284,747 619,243 591,397 454,863 625,909
Net assets, beginning of period - - - - - -
---------------------------------------------------------------------------------------
Net assets, end of period $ 1,505,705 $ 1,284,747 $ 619,243 $ 591,397 $ 454,863 $ 625,909
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
1. NATURE OF OPERATIONS
The American Franklin Life Insurance Company (American
Franklin) is a wholly-owned subsidiary of The Franklin Life
Insurance Company. American Franklin established Separate
Account VUL-2 (Account) as a unit investment trust registered
under the Investment Company Act of 1940. The Account, which
consists of sixteen investment divisions at June 30, 1999 was
established in April 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 (VIP) and Variable Insurance Products
Fund II (VIPII), sponsored by Fidelity Investments, and
beginning May 1, 1998, the MFS Variable Insurance Trust (MFS),
sponsored by MFS Investment Management (collectively, the
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 Capital Opportunities Divisions of the
Account are invested in shares of a corresponding Portfolio of
MFS. 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).
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.
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 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. Investment
transactions are recorded on the trade date. Dividends are
recorded as received. Realized gains
10
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(UNAUDITED)
and losses on sales of the Account's shares are determined
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. POLICY CHARGES
Certain jurisdictions require that deductions be made from
premium payments for taxes. The amount of such deductions
varies and may be up to 5% of the premium. 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 charges 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
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 $15,612,800 for the six
months ended June 30, 1999.
During the first ten years a Policy is in effect, a surrender
charge may be deducted from a Policy Account by American
Franklin if the Policy is surrendered for its net cash
surrender value, the face amount of the Policy is reduced or
the Policy is permitted to lapse. The maximum total surrender
charge applicable to a particular Policy is specified in the
Policy and is equal to 50% of one "target" premium. 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, 1999
(UNAUDITED)
4. SUMMARY OF UNIT VALUES AND CHANGES IN OUTSTANDING UNITS
Unit value information and a summary of changes in outstanding units is
shown below:
SIX MONTHS ENDED JUNE 30, 1999
<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>
Unit value, beginning of period $132.28 $329.63 $373.90 $191.40 $156.98
--------------------------------------------------------------------------
Unit value, end of period $134.99 $360.01 $415.38 $204.36 $168.08
--------------------------------------------------------------------------
Number of units outstanding,
beginning of period 34,035 164,324 218,934 59,098 18,351
Net contract purchase payments 64,657 20,851 22,250 7,038 3,283
Withdrawals (4,891) (14,369) (17,273) (5,061) (2,052)
Transfers between Separate Account
VUL-2 divisions, net (60,594) (1,136) 4,283 (1,066) (128)
--------------------------------------------------------------------------
Number of units outstanding,
end of period 33,207 169,670 228,194 60,009 19,454
--------------------------------------------------------------------------
<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>
Unit value, beginning of period $157.66 $232.11 $295.61 $196.85 $229.00
--------------------------------------------------------------------------
Unit value, end of period $153.85 $238.17 $317.13 $205.00 $249.76
--------------------------------------------------------------------------
Number of units outstanding,
beginning of period 14,690 136,532 112,414 39,775 110,811
Net contract purchase payments 1,592 11,931 20,432 8,488 20,351
Withdrawals (1,479) (10,955) (11,225) (4,259) (11,183)
Transfers between Separate Account
VUL-2 divisions, net (312) (742) 7,770 1,163 5,659
--------------------------------------------------------------------------
Number of units outstanding,
end of period 14,491 136,766 129,391 45,167 125,638
--------------------------------------------------------------------------
--------------------------------------------------------------------------
</TABLE>
12
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(UNAUDITED)
4. SUMMARY OF UNIT VALUES AND CHANGES IN OUTSTANDING UNITS (continued)
Unit value information and a summary of changes in outstanding units is
shown below:
SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
MFS VARIABLE INSURANCE TRUST
-------------------------------------------------------------------------------------------
MFS MFS MFS MFS
EMERGING MFS GROWTH WITH TOTAL MFS CAPITAL
GROWTH RESEARCH INCOME RETURN UTILITIES OPPORTUNITIES
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Unit value, beginning of period $113.74 $104.90 $107.39 $103.73 $106.58 $105.18
-------------------------------------------------------------------------------------------
Unit value, end of period $126.16 $111.62 $110.44 $107.07 $116.83 $123.14
-------------------------------------------------------------------------------------------
Number of units outstanding,
beginning of period 13,238 12,247 5,767 5,701 4,268 5,951
Net contract purchase payments 7,890 6,106 4,069 2,333 3,580 2,459
Withdrawals (2,895) (2,655) (1,566) (894) (1,238) (1,037)
Transfers between Separate
Account VUL-2 divisions, net 7,286 5,524 4,538 4,488 3,219 3,173
-------------------------------------------------------------------------------------------
Number of units outstanding,
end of period 25,519 21,222 12,808 11,628 9,829 10,546
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
</TABLE>
5. REMUNERATION OF MANAGEMENT
The Account incurs no liability for payments 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 (UNAUDITED)
INTERNAL SYSTEMS. American Franklin's ultimate parent, American General
Corporation (AGC), has numerous technology systems that are managed on a
decentralized basis. AGC's Year 2000 readiness efforts have been performed
by its key business units with centralized oversight. Each business unit,
including American Franklin, has executed a plan to minimize the risk of a
significant negative impact on its operations.
While the specifics of the plans varied, the plans included the following
activities: (1) perform an inventory of American Franklin's information
technology and non-information technology systems; (2) assess which items
in the inventory may expose American Franklin to business interruptions due
to Year 2000 issues; (3) reprogram or replace systems that are not Year
2000 ready; (4) test systems to prove that they will function into the next
century as they do currently; and (5) return the systems to operations.
As of June 30, 1999, these activities had been substantially completed,
making American Franklin's critical systems Year 2000 ready. American
Franklin will continue to test its systems throughout 1999 to maintain Year
2000 readiness. In addition, American Franklin currently is developing
plans for the century transition, which will restrict systems modifications
from November 1999 through January 2000, create rapid response teams to
address problems, and limit vacations for key technical personnel.
13
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
THIRD PARTY RELATIONSHIPS. American Franklin has relationships with various
third parties who must also be Year 2000 ready. These third parties provide
(or receive) resources and services to (or from) American Franklin and
include organizations with which American Franklin exchanges information.
Third parties include vendors of hardware, software, and information
services; providers of infrastructure services such as voice and data
communications and utilities for office facilities; investors; customers;
distribution channels; and joint venture partners. Third parties differ
from internal systems in that American Franklin exercises less, or no,
control over Year 2000 readiness.
American Franklin assessed and mitigated the risks associated with the
potential failure of third parties to achieve Year 2000 readiness. American
Franklin's activities included the following: (1) identify and classify
third party dependencies; (2) research, analyze, and document Year 2000
readiness for critical third parties; and (3) test critical hardware and
software products and electronic interfaces. As of June 30, 1999, these
activities have been substantially completed. Where necessary, critical
third party dependencies have been included in American Franklin's
contingency plans. Due to the various stages of Year 2000 readiness for
these critical third party dependencies, American Franklin's testing
activities related to critical third parties will extend throughout 1999.
CONTINGENCY PLANS. American Franklin has undertaken contingency planning to
reduce the risk of Year 2000-related business failures. The contingency
plans, which address both internal systems and third party relationships,
included the following activities: (1) evaluate the consequences of failure
of critical business processes with significant exposure to Year 2000 risk;
(2) determine the probability of a Year 2000-related failure for those
critical processes that have a high consequence of failure; (3) develop an
action plan to complete contingency plans for critical processes that rank
high in consequence and probability of failure; and (4) complete the
applicable contingency plans. As of June 30, 1999, these activities have
been substantially completed. The contingency plans will continue to be
tested and updated throughout 1999.
RISKS AND UNCERTAINTIES. Based on the Year 2000 readiness of internal
systems, century transition plans, plans to deal with third party
relationships, and contingency plans, American Franklin believes that it
will experience, at most, isolated and minor disruptions of business
processes following the turn of the century. Such disruptions are not
expected to have a material effect on American Franklin's future results of
operations, liquidity, or financial condition. However, due to the
magnitude and complexity of this project, risks and uncertainties exist and
American Franklin is not able to predict a most reasonably likely worst
case scenario. If Year 2000 readiness is not achieved due to American
Franklin's failure to maintain critical systems as Year 2000 ready, failure
of critical third parties to achieve Year 2000 readiness on a timely basis,
failure of contingency plans to reduce Year 2000-related business failures,
or other unforeseen circumstances in completing American Franklin's plans,
the Year 2000 issues could have a material adverse impact on American
Franklin's operations following the turn of the century.
COSTS. In 1999 American Franklin has, and will continue to incur costs for
internal staff, third party vendors, and other expenses to achieve Year
2000 readiness. These costs are not passed to the Account. The cost of
activities related to Year 2000 readiness has not had a material adverse
effect on American Franklin's results of operations or financial condition.
In addition, American Franklin has elected to accelerate the planned
replacement of certain systems as part of the Year 2000 plans. Costs of the
replacement systems are being capitalized and amortized over their useful
lives, in accordance with American Franklin's normal accounting policies.
14
