<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
DECEMBER 31, 1999
ANNUAL REPORT
SEPARATE ACCOUNT VUL-2 FUNDING
EQUIBUILDER II-TM- AND EQUIBUILDER III-TM- FLEXIBLE PREMIUM VARIABLE
LIFE INSURANCE POLICIES
PRINCIPAL OFFICE LOCATED AT:
#1 Franklin Square
Springfield, Illinois 62713
ANNUAL REPORT DATED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
DECEMBER 31, 1999
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
ANNUAL REPORTS DATED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
The Annual Report of Separate Account VUL-2 is prepared and provided by The
American Franklin Life Insurance Company. The Annual Report of the Variable
Insurance Products Fund and the Variable Insurance Products Fund II is prepared
by Fidelity Investments. The Annual Report of MFS Variable Insurance Trust is
prepared by MFS Investment Management.
- --------------------------------------------------------------------------------
This Annual Report is not to be construed as an offering for sale of any
American Franklin Life policy. No offering is made except in conjunction with a
prospectus which must precede or accompany this report.
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
STATEMENT OF NET ASSETS
DECEMBER 31, 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>
Investments in Funds at fair value
(cost: see below) $ 6,559,005 $ 59,819,562 $ 121,001,658 $ 16,494,507 $ 3,349,133
Due from (to) general account 31,628 (12,482) (16,477) (2,435) (249)
--------------------------------------------------------------------------------------------
NET ASSETS $ 6,590,633 $ 59,807,080 $ 120,985,181 $ 16,492,072 $ 3,348,884
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
Unit value $ 138.06 $ 343.25 $ 505.18 $ 262.93 $ 168.64
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
Units outstanding 47,739 174,240 239,489 62,723 19,858
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
Cost of investments $ 6,627,834 $ 49,721,666 $ 73,142,197 $ 11,320,468 $ 3,588,804
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
1
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
STATEMENT OF NET ASSETS (CONTINUED)
DECEMBER 31, 1999
<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) $ 2,209,359 $ 34,883,206 $ 50,894,695 $ 11,383,629 $ 39,680,007
Due from (to) general account (191) (16,071) (2,574) (712) (12,526)
---------------------------------------------------------------------------------------------
NET ASSETS $ 2,209,168 $ 34,867,135 $ 50,892,121 $ 11,382,917 $ 39,667,481
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Unit value $ 155.31 $ 254.54 $ 347.55 $ 223.33 $ 276.97
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Units outstanding 14,225 136,980 146,433 50,968 143,217
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Cost of investments $ 2,209,269 $ 29,354,502 $ 35,721,607 $ 9,605,478 $ 28,029,156
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
2
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
STATEMENT OF NET ASSETS (CONTINUED)
DECEMBER 31, 1999
<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) $ 7,741,120 $ 3,834,599 $ 2,420,689 $ 1,637,035 $ 1,954,538 $ 2,779,954
Due from (to) general account 156 77 (847) 31 38 55
-----------------------------------------------------------------------------------------
NET ASSETS $ 7,741,276 $ 3,834,676 $ 2,419,842 $ 1,637,066 $ 1,954,576 $ 2,780,009
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
Unit value $ 189.94 $ 127.16 $ 112.63 $ 105.23 $ 137.83 $ 151.78
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
Units outstanding 40,756 30,156 21,484 15,557 14,181 18,316
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
Cost of investments $ 4,926,290 $ 3,138,332 $ 2,309,782 $ 1,640,127 $ 1,621,431 $ 2,119,058
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
*Formerly known as MFS Value Division
3
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 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 $ 251,436 $ 2,619,662 $ 9,446,395 $ 458,701 $ 292,551
Expenses
Mortality and expense risk charge 35,007 441,309 723,574 96,002 22,997
--------------------------------------------------------------------------
Net investment income (expense) 216,429 2,178,353 8,722,821 362,699 269,554
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) 23,858 1,051,810 933,427 155,042 (19,693)
Net unrealized appreciation
(depreciation)
Beginning of year (83,735) 11,152,579 27,077,236 1,229,297 (206,194)
End of year (68,829) 10,097,896 47,859,461 5,174,039 (239,671)
--------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) during the year 14,906 (1,054,683) 20,782,225 3,944,742 (33,477)
--------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments 38,764 (2,873) 21,715,652 4,099,784 (53,170)
--------------------------------------------------------------------------
Net increase (decrease) in net assets
from operations $ 255,193 $ 2,175,480 $ 30,438,473 $ 4,462,483 $ 216,384
--------------------------------------------------------------------------
--------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
STATEMENT OF OPERATIONS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
<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 17,031 244,708 306,261 70,371 233,365
-----------------------------------------------------------------------------
Net investment income (expense) 104,766 2,133,568 257,133 443,962 829,472
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain (loss) 21,389 318,639 203,229 62,797 112,244
Net unrealized appreciation
(depreciation)
Beginning of year 156,188 4,943,879 8,790,937 1,046,388 6,359,992
End of year 90 5,528,704 15,173,088 1,778,151 11,650,851
-----------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) during the year (156,098) 584,825 6,382,151 731,763 5,290,859
-----------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments (134,709) 903,464 6,585,380 794,560 5,403,103
-----------------------------------------------------------------------------
Net increase (decrease) in net assets
from operations $ (29,943) $ 3,037,032 $ 6,842,513 $ 1,238,522 $ 6,232,575
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
STATEMENT OF OPERATIONS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
MFS VARIABLE INSURANCE TRUST
------------------------------------------------------------------------------------------
MFS
MFS GROWTH MFS MFS
EMERGINGG 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 26,189 18,154 11,286 9,198 8,587 10,320
------------------------------------------------------------------------------------------
Net investment income (expense) (26,189) 6,606 (3,091) 45,353 57,145 (5,447)
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain (loss) 13,741 5,925 44,499 1,213 3,525 11,567
Net unrealized appreciation
(depreciation)
Beginning of year 252,419 140,093 57,569 32,868 30,425 54,315
End of year 2,814,830 696,267 110,907 (3,092) 333,107 660,896
------------------------------------------------------------------------------------------
Net change in unrealized
appreciation (depreciation)
during the year 2,562,411 556,174 53,338 (35,960) 302,682 606,581
------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments 2,576,152 562,099 97,837 (34,747) 306,207 618,148
------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets from operations $ 2,549,963 $ 568,705 $ 94,746 $ 10,606 $ 363,352 $ 612,701
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
*Formerly known as MFS Value Division
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
DIVISION DIVISION DIVISION DIVISION DIVISION
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 23,858 1,051,810 933,427 155,042 (19,693)
investments
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
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
DIVISION DIVISION DIVISION DIVISION DIVISION
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
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
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION*
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
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
*Formerly known as MFS Value Division
9
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
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 December 31, 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 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 (formerly MFS Value) 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)
DECEMBER 31, 1999
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 $32,856,400 and $26,329,000 for the years
ended December 31, 1999 and 1998, respectively.
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)
DECEMBER 31, 1999
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>
YEAR ENDED DECEMBER 31, 1999
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 year $132.28 $329.63 $373.90 $191.40 $156.98
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Unit value, end of year $138.06 $343.25 $505.18 $262.93 $168.64
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Number of units outstanding,
beginning of year 34,035 164,324 218,934 59,098 18,351
Net contract purchase payments 150,533 40,893 43,852 13,165 6,309
Withdrawals (10,614) (29,345) (33,027) (9,110) (3,997)
Transfers between Separate Account
VUL-2 divisions, net (126,215) (1,632) 9,730 (430) (805)
--------------------------------------------------------------------------
Number of units outstanding,
end of year 47,739 174,240 239,489 62,723 19,858
--------------------------------------------------------------------------
--------------------------------------------------------------------------
<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 year $157.66 $232.11 $295.61 $196.85 $229.00
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Unit value, end of year $155.31 $254.54 $347.55 $223.33 $276.97
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Number of units outstanding,
beginning of year 14,690 136,532 112,414 39,775 110,811
Net contract purchase payments 3,247 22,571 42,965 17,744 42,651
Withdrawals (2,950) (20,963) (22,550) (8,962) (22,419)
Transfers between Separate Account
VUL-2 divisions, net (762) (1,160) 13,604 2,411 12,174
--------------------------------------------------------------------------
Number of units outstanding,
end of year 14,225 136,980 146,433 50,968 143,217
--------------------------------------------------------------------------
--------------------------------------------------------------------------
</TABLE>
12
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
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>
YEAR ENDED DECEMBER 31, 1999
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 year $113.74 $104.90 $107.39 $103.73 $106.58 $105.18
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Unit value, end of year $189.94 $127.16 $112.63 $105.23 $137.83 $151.78
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Number of units outstanding,
beginning of year 13,238 12,247 5,767 5,701 4,268 5,951
Net contract purchase payments 18,545 14,652 9,996 5,935 8,077 7,199
Withdrawals (6,401) (5,764) (3,651) (2,105) (2,931) (2,276)
Transfers between Separate
Account VUL-2 divisions, net 15,374 9,021 9,372 6,026 4,767 7,442
--------------------------------------------------------------------------------------
Number of units outstanding,
end of year 40,756 30,156 21,484 15,557 14,181 18,316
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
</TABLE>
*Formerly known as MFS Value Division
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 and non-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, 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; and (5) return the systems to operations. As of December 31, 1999,
these activities had been completed, making American Franklin's critical
systems Year 2000 ready.
13
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
American Franklin continued to test its systems throughout 1999 to maintain
Year 2000 readiness. In addition, American Franklin implemented plans for
the century transition. These plans included a freeze on system
modifications from November 1999 through January 2000, the creation of
rapid response teams to address problems and limiting vacations for certain
business and technical personnel. In addition, AGC established Y2K command
centers in Houston and each of its locations across the country. Each
command center monitored all major business processing activities during
the century transition and reported progress to the Houston command center
which coordinated AGC's nationwide Year 2000 effort. The command centers
continued to operate 24 hours a day until January 7, 2000.
On January 1, 2000, AGC announced that its Year 2000 command centers
reported that all major technology systems, programs, and applications were
operating smoothly following the transition into the 21st century. As of
February 9, 2000, American Franklin has experienced no interruptions to
normal business operations, including the processing of customer account
data and transactions. American Franklin will continue to monitor its
technology systems and maintain quality customer service throughout the
transition period.
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 such parties' Year 2000 readiness.
American Franklin developed plans to assess and mitigate the risks
associated with the potential failure of third parties to achieve Year 2000
readiness. These plans included the following activities: (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, and, where feasible,
American Franklin has taken reasonable precautions to protect against the
receipt of non-Year 2000 ready data. Where necessary, critical third party
dependencies have been included in American Franklin's contingency plans.
CONTINGENCY PLANS. American Franklin's contingency planning process was
designed to reduce the risk of Year 2000-related business failures related
to both internal systems and third party relationships. The contingency
plans 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. The contingency plans were tested and
updated throughout 1999.
14
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
RISKS AND UNCERTAINTIES. Based on the Year 2000 readiness of internal
systems, century transition plans, plans to deal with third party
relationships, contingency plans and the reports from the AGC command
centers described above, American Franklin believes that American Franklin
will experience at most isolated and minor disruptions of business
processes due to the Year 2000 transition. 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. Through December 31, 1999, American Franklin has incurred, and
anticipates that it will continue to incur, costs relative to achieving and
maintaining Year 2000 readiness. 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. None of the costs
associated with Year 2000 readiness are passed to divisions of the Account.
15
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The American Franklin Life Insurance Company
Policyowners of Separate Account VUL-2
We have audited the accompanying statement of net assets of Separate Account
VUL-2 (comprising, respectively, the VIP Money Market, VIP Equity-Income, VIP
Growth, VIP Overseas, VIP High Income, VIPII Investment Grade Bond, VIPII Asset
Manager, VIPII Index 500, VIPII Asset Manager: Growth, VIPII Contrafund, MFS
Emerging Growth, MFS Research, MFS Growth With Income, MFS Total Return, MFS
Utilities, and MFS Capital Opportunities (formerly MFS Value) Divisions) as of
December 31, 1999, and the related statement of operations for the year then
ended and the statement of changes in net assets for each of the two years then
ended for the VIP Money Market, VIP Equity-Income, VIP Growth, VIP Overseas, VIP
High Income, VIPII Investment Grade Bond, VIPII Asset Manager, VIPII Index 500,
VIPII Asset Manager: Growth and VIPII Contrafund Divisions and the related
statement of operations for the year then ended and the statement of changes in
net assets for the MFS Emerging Growth, MFS Research, MFS Growth with Income,
MFS Total Return, MFS Utilities, and MFS Capital Opportunities (formerly MFS
Value) Divisions for the year ended December 31, 1999 and for the period from
May 1, 1998 (date of inception) to December 31, 1998. These financial statements
are the responsibility of Separate Account VUL-2 management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of December 31, 1999 by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective
Divisions constituting Separate Account VUL-2 at December 31, 1999, and the
results of their operations and changes in net assets for the periods referred
to above in conformity with accounting principles generally accepted in the
United States.
/s/ Ernst & Young LLP
Chicago, Illinois
February 9, 2000
16
