<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
JUNE 30, 2000
SEMI-ANNUAL REPORT
(UNAUDITED)
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
--------------------------------------------------------------------------------
JUNE 30, 2000
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
--------------------------------------------------------------------------------
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, 2000
(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) $ 4,552,737 $ 58,340,514 $ 131,814,991 $ 17,900,668 $ 3,083,082
Due from (to) general account 22,973 1,473 2,864 332 (470)
---------------------------------------------------------------------------------------
NET ASSETS $ 4,575,710 $ 58,341,987 $ 131,817,855 $ 17,901,000 $ 3,082,612
=======================================================================================
Unit value $ 141.65 $ 340.59 $ 531.04 $ 256.28 $ 160.27
=======================================================================================
Units outstanding 32,302 171,299 248,226 69,849 19,234
=======================================================================================
Cost of investments $ 4,586,365 $ 54,169,036 $ 91,791,844 $ 14,874,440 $ 3,638,345
=======================================================================================
</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, 2000
(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) $ 2,165,421 $ 33,831,484 $ 55,437,497 $ 12,019,133 $ 44,050,251
Due from (to) general account (90) 568 1,393 275 913
-------------------------------------------------------------------------------------------
NET ASSETS $ 2,165,331 $ 33,832,052 $ 55,438,890 $ 12,019,408 $ 44,051,164
===========================================================================================
Unit value $ 159.64 $ 253.79 $ 346.95 $ 221.15 $ 277.88
===========================================================================================
Units outstanding 13,564 133,307 159,788 54,351 158,527
===========================================================================================
Cost of investments $ 2,245,090 $ 32,248,699 $ 41,386,422 $ 11,569,445 $ 37,651,124
===========================================================================================
</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, 2000
(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) $ 15,864,743 $ 5,605,086 $ 2,824,082 $ 1,699,744 $ 3,426,815 $ 6,785,883
Due from (to) general account 314 136 651 (597) 68 142
---------------------------------------------------------------------------------------------
NET ASSETS $ 15,865,057 $ 5,605,222 $ 2,824,733 $ 1,699,147 $ 3,426,883 $ 6,786,025
=============================================================================================
Unit value $ 195.28 $ 137.03 $ 113.43 $ 108.58 $ 145.34 $ 167.86
=============================================================================================
Units outstanding 81,242 40,905 24,903 15,649 23,579 40,428
=============================================================================================
Cost of investments $ 13,973,662 $ 4,886,130 $ 2,730,345 $ 1,733,016 $ 3,238,454 $ 6,237,471
=============================================================================================
</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, 2000
(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 $ 116,883 $ 1,012,235 $ 135,838 $ 232,206 $ 212,877
Capital gains distributions - 3,813,536 13,515,874 1,462,268 -
Expenses
Mortality and expense risk charge 18,182 215,620 475,422 63,904 12,715
-------------------------------------------------------------------------------------------
Net investment income (expense) 98,701 4,610,151 13,176,290 1,630,570 200,162
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain (loss) - 803,498 1,050,289 78,732 (45,415)
Net unrealized appreciation
(depreciation)
Beginning of period (68,829) 10,097,896 47,859,461 5,174,039 (239,671)
End of period (33,628) 4,171,478 40,023,147 3,026,228 (555,263)
-------------------------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) during the period 35,201 (5,926,418) (7,836,314) (2,147,811) (315,592)
-------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments 35,201 (5,122,920) (6,786,025) (2,069,079) (361,007)
-------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
from operations $ 133,902 $ (512,769) $ 6,390,265 $ (438,509) $ (160,845)
===========================================================================================
</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, 2000
(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 $ 151,561 $ 1,096,893 $ 523,953 $ 234,857 $ 143,566
Capital gains distributions - 2,584,207 229,033 952,121 5,211,441
Expenses
Mortality and expense risk charge 8,113 127,357 195,463 43,235 158,861
-------------------------------------------------------------------------------------------
Net investment income (expense) 143,448 3,553,743 557,523 1,143,743 5,196,146
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain (loss) (3,229) 273,256 537,430 81,332 129,473
Net unrealized appreciation
(depreciation)
Beginning of period 90 5,528,704 15,173,088 1,778,151 11,650,851
End of period (79,669) 1,582,785 14,051,075 449,688 6,399,127
-------------------------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) during the period (79,759) (3,945,919) (1,122,013) (1,328,463) (5,251,724)
-------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments (82,988) (3,672,663) (584,583) (1,247,131) (5,122,251)
-------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
from operations $ 60,460 $ (118,920) $ (27,060) $ (103,388) $ 73,895
===========================================================================================
</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, 2000
(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 $ 431,471 $ 28,734 $ 11,963 $ 52,188 $ 226,556 $ 377,431
Capital gains distributions 325,493 293,858 21,724 25,041 14,434 72,177
Expenses
Mortality and expense risk
charge 46,184 17,760 10,464 6,105 9,747 18,279
-----------------------------------------------------------------------------------------------
Net investment income (expense) 710,780 304,832 23,223 71,124 231,243 431,329
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain (loss) 10,513 24,781 19,960 9,837 15,154 3,790
Net unrealized appreciation
(depreciation)
Beginning of period 2,814,830 696,267 110,907 (3,092) 333,107 660,896
End of period 1,891,081 718,956 93,737 (33,272) 188,361 548,412
-----------------------------------------------------------------------------------------------
Net change in unrealized
appreciation (depreciation)
during the year (923,749) 22,689 (17,170) (30,180) (144,746) (112,484)
-----------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments (913,236) 47,470 2,790 (20,343) (129,592) (108,694)
-----------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets from operations $ (202,456) $ 352,302 $ 26,013 $ 50,781 $ 101,651 $ 322,635
===============================================================================================
</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
SIX MONTHS ENDED JUNE 30, 2000 MARKET INCOME GROWTH OVERSEAS INCOME
(UNAUDITED) DIVISION DIVISION DIVISION DIVISION DIVISION
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ 98,701 $ 4,610,151 $ 13,176,290 $ 1,630,570 $ 200,162
Net realized gain (loss) on investments - 803,498 1,050,289 78,732 (45,415)
Net change in unrealized appreciation
(depreciation) on investments 35,201 (5,926,418) (7,836,314) (2,147,811) (315,592)
-----------------------------------------------------------------------------------
Net increase (decrease) in net assets from
operations 133,902 (512,769) 6,390,265 (438,509) (160,845)
FROM POLICY RELATED TRANSACTIONS:
Net contract purchase payments 13,338,768 6,537,243 10,795,290 1,878,400 466,268
Withdrawals (894,158) (5,263,058) (9,521,348) (1,297,542) (336,611)
Transfers between Separate Account
VUL-2 divisions, net (14,593,435) (2,226,509) 3,168,467 1,266,579 (235,084)
-----------------------------------------------------------------------------------
Net increase (decrease) in net assets from
policy related transactions (2,148,825) (952,324) 4,442,409 1,847,437 (105,427)
-----------------------------------------------------------------------------------
Net increase (decrease) in net assets (2,014,923) (1,465,093) 10,832,674 1,408,928 (266,272)
Net assets, beginning of period 6,590,633 59,807,080 120,985,181 16,492,072 3,348,884
-----------------------------------------------------------------------------------
Net assets, end of period $ 4,575,710 $ 58,341,987 $ 131,817,855 $ 17,901,000 $ 3,082,612
===================================================================================
YEAR ENDED DECEMBER 31, 1999
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ 216,429 $ 2,178,353 $ 8,722,821 $ 362,699 $ 269,554
Net realized gain (loss) on investments 23,858 1,051,810 933,427 155,042 (19,693)
Net change in unrealized appreciation
(depreciation) on investments 14,906 (1,054,683) 20,782,225 3,944,742 (33,477)
-----------------------------------------------------------------------------------
Net increase (decrease) in net assets
from operations 255,193 2,175,480 30,438,473 4,462,483 216,384
FROM POLICY RELATED TRANSACTIONS:
Net contract purchase payments 20,390,047 14,189,126 18,487,950 2,756,248 1,051,554
Withdrawals (1,477,209) (10,184,231) (13,945,360) (1,998,575) (667,582)
Transfers between Separate Account
VUL-2 divisions, net (17,079,666) (538,991) 4,144,426 (39,699) (132,311)
-----------------------------------------------------------------------------------
Net increase (decrease) in net assets from
policy related transactions 1,833,172 3,465,904 8,687,016 717,974 251,661
-----------------------------------------------------------------------------------
Net increase (decrease) in net assets 2,088,365 5,641,384 39,125,489 5,180,457 468,045
Net assets, beginning of year 4,502,268 54,165,696 81,859,692 11,311,615 2,880,839
-----------------------------------------------------------------------------------
Net assets, end of year $ 6,590,633 $ 59,807,080 $ 120,985,181 $ 16,492,072 $ 3,348,884
===================================================================================
</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-
SIX MONTHS ENDED JUNE 30, 2000 BOND MANAGER 500 GROWTH FUND
(UNAUDITED) DIVISION DIVISION DIVISION DIVISION DIVISION
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ 143,448 $ 3,553,743 $ 557,523 $ 1,143,743 $ 5,196,146
Net realized gain (loss) on investments (3,229) 273,256 537,430 81,332 129,473
Net change in unrealized appreciation
(depreciation) on investments (79,759) (3,945,919) (1,122,013) (1,328,463) (5,251,724)
-----------------------------------------------------------------------------------
Net increase (decrease) in net assets from
operations 60,460 (118,920) (27,060) (103,388) 73,895
FROM POLICY RELATED TRANSACTIONS:
Net contract purchase payments 200,752 2,532,634 8,139,892 1,859,986 6,150,563
Withdrawals (211,937) (2,695,933) (4,583,772) (1,160,392) (3,703,821)
Transfers between Separate Account
VUL-2 divisions, net (93,112) (752,864) 1,017,709 40,285 1,863,046
-----------------------------------------------------------------------------------
Net increase (decrease) in net assets from
policy related transactions (104,297) (916,163) 4,573,829 739,879 4,309,788
-----------------------------------------------------------------------------------
Net increase (decrease) in net assets (43,837) (1,035,083) 4,546,769 636,491 4,383,683
Net assets, beginning of period 2,209,168 34,867,135 50,892,121 11,382,917 39,667,481
-----------------------------------------------------------------------------------
Net assets, end of period $ 2,165,331 $ 33,832,052 $ 55,438,890 $ 12,019,408 $ 44,051,164
===================================================================================
YEAR ENDED DECEMBER 31, 1999
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ 104,766 $ 2,133,568 $ 257,133 $ 443,962 $ 829,472
Net realized gain (loss) on investments 21,389 318,639 203,229 62,797 112,244
Net change in unrealized appreciation
(depreciation) on investments (156,098) 584,825 6,382,151 731,763 5,290,859
-----------------------------------------------------------------------------------
Net increase (decrease) in net assets from
operations (29,943) 3,037,032 6,842,513 1,238,522 6,232,575
FROM POLICY RELATED TRANSACTIONS:
Net contract purchase payments 508,217 5,410,700 13,605,268 3,660,580 10,574,487
Withdrawals (465,806) (5,012,240) (7,102,948) (1,847,689) (5,566,604)
Transfers between Separate Account
VUL-2 divisions, net (119,367) (259,252) 4,316,026 501,769 3,050,952
-----------------------------------------------------------------------------------
Net increase (decrease) in net assets from
policy related transactions (76,956) 139,208 10,818,346 2,314,660 8,058,835
-----------------------------------------------------------------------------------
Net increase (decrease) in net assets (106,899) 3,176,240 17,660,859 3,553,182 14,291,410
Net assets, beginning of year 2,316,067 31,690,895 33,231,262 7,829,735 25,376,071
-----------------------------------------------------------------------------------
Net assets, end of year $ 2,209,168 $ 34,867,135 $ 50,892,121 $ 11,382,917 $ 39,667,481
===================================================================================
</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
SIX MONTHS ENDED JUNE 30, 2000 GROWTH RESEARCH INCOME RETURN UTILITIES OPPORTUNITIES
(UNAUDITED) DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ 710,780 $ 304,832 $ 23,223 $ 71,124 $ 231,243 $ 431,329
Net realized gain (loss) on investments 10,513 24,781 19,960 9,837 15,154 3,790
Net change in unrealized appreciation
(depreciation) on investments (923,749) 22,689 (17,170) (30,180) (144,746) (112,484)
---------------------------------------------------------------------------------------
Net increase (decrease) in net assets from
operations (202,456) 352,302 26,013 50,781 101,651 322,635
FROM POLICY RELATED TRANSACTIONS:
Net contract purchase payments 3,256,574 1,105,335 664,133 316,477 810,914 1,471,393
Withdrawals (1,189,453) (447,919) (334,854) (142,360) (302,442) (475,159)
Transfers between Separate Account
VUL-2 divisions, net 6,259,116 760,828 49,599 (162,817) 862,184 2,687,147
---------------------------------------------------------------------------------------
Net increase (decrease) in net assets from
policy related transactions 8,326,237 1,418,244 378,878 11,300 1,370,656 3,683,381
---------------------------------------------------------------------------------------
Net increase (decrease) in net assets 8,123,781 1,770,546 404,891 62,081 1,472,307 4,006,016
Net assets, beginning of period 7,741,276 3,834,676 2,419,842 1,637,066 1,954,576 2,780,009
---------------------------------------------------------------------------------------
Net assets, end of period $15,865,057 $ 5,605,222 $ 2,824,733 $ 1,699,147 $ 3,426,883 $ 6,786,025
=======================================================================================
YEAR ENDED DECEMBER 31, 1999
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ (26,189) $ 6,606 $ (3,091) $ 45,353 $ 57,145 $ (5,447)
Net realized gain (loss) on investments 13,741 5,925 44,499 1,213 3,525 11,567
Net change in unrealized appreciation
(depreciation) on investments 2,562,411 556,174 53,338 (35,960) 302,682 606,581
---------------------------------------------------------------------------------------
Net increase (decrease) in net assets
from operations 2,549,963 568,705 94,746 10,606 363,352 612,701
FROM POLICY RELATED TRANSACTIONS:
Net contract purchase payments 2,439,724 1,628,413 1,086,393 625,687 938,854 899,529
Withdrawals (837,970) (638,998) (399,640) (222,380) (340,639) (279,352)
Transfers between Separate Account
VUL-2 divisions, net 2,083,854 991,809 1,019,100 631,756 538,146 921,222
---------------------------------------------------------------------------------------
Net increase (decrease) in net assets from
policy related transactions 3,685,608 1,981,224 1,705,853 1,035,063 1,136,361 1,541,399
---------------------------------------------------------------------------------------
Net increase (decrease) in net assets 6,235,571 2,549,929 1,800,599 1,045,669 1,499,713 2,154,100
Net assets, beginning of year 1,505,705 1,284,747 619,243 591,397 454,863 625,909
---------------------------------------------------------------------------------------
Net assets, end of year $ 7,741,276 $ 3,834,676 $ 2,419,842 $ 1,637,066 $ 1,954,576 $ 2,780,009
=======================================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000
(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, 2000,
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 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 VIP; 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 VIPII; 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 using 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 and losses on sales of the Account's shares are
determined on the specific identification method.
10
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
(UNAUDITED)
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 deductions 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
$19,242,400 for the six months ended June 30, 2000 and $32,856,400 for
the year ended December 31, 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, 2000
(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:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000
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 $138.06 $343.25 $505.18 $262.93 $168.64
===================================================================
Unit value, end of period $141.65 $340.59 $531.04 $256.28 $160.27
===================================================================
Number of units outstanding,
beginning of period 47,739 174,240 239,489 62,723 19,858
Net contract purchase payments 95,411 19,658 20,755 7,256 2,845
Withdrawals (6,335) (15,791) (18,297) (5,004) (2,043)
Transfers between Separate Account
VUL-2 divisions, net (104,513) (6,808) 6,279 4,874 (1,426)
-------------------------------------------------------------------
Number of units outstanding,
end of period 32,302 171,299 248,226 69,849 19,234
===================================================================
<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 $155.31 $254.54 $347.55 $223.33 $276.97
===================================================================
Unit value, end of period $159.64 $253.79 $346.95 $221.15 $277.88
===================================================================
Number of units outstanding,
beginning of period 14,225 136,980 146,433 50,968 143,217
Net contract purchase payments 1,279 10,016 23,787 8,483 21,977
Withdrawals (1,347) (10,715) (13,348) (5,290) (13,231)
Transfers between Separate Account
VUL-2 divisions, net (593) (2,974) 2,916 190 6,564
-------------------------------------------------------------------
Number of units outstanding,
end of period 13,564 133,307 159,788 54,351 158,527
===================================================================
</TABLE>
12
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
(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:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000
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 $189.94 $127.16 $112.63 $105.23 $137.83 $151.78
=================================================================================
Unit value, end of period $195.28 $137.03 $113.43 $108.58 $145.34 $167.86
=================================================================================
Number of units outstanding,
beginning of period 40,756 30,156 21,484 15,557 14,181 18,316
Net contract purchase payments 16,256 8,339 5,994 3,002 5,580 8,864
Withdrawals (5,915) (3,368) (3,008) (1,343) (2,068) (2,857)
Transfers between Separate
Account VUL-2 divisions, net 30,145 5,778 433 (1,567) 5,886 16,105
---------------------------------------------------------------------------------
Number of units outstanding,
end of period 81,242 40,905 24,903 15,649 23,579 40,428
=================================================================================
</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.
13
