CNA CAPITAL
SELECT(SM)
VARIABLE ANNUITY
SEMI-ANNUAL REPORT
FLEXIBLE PREMIUM DEFERRED
VARIABLE ANNUITY
ISSUED BY THE
VALLEY FORGE LIFE INSURANCE
COMPANY
JUNE 30, 1997
[CNA LOGO]
FOR ALL THE COMMITMENTS YOU MAKE(R)
<PAGE>
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Dear Policyowner:
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I am pleased to present the Semi-Annual Report for the CNA Capital Select
Variable Annuity, issued by Valley Forge Life Insurance Company, one of the CNA
insurance companies. This report summarizes investments under each of the CNA
Capital Select Variable Annuity's 18 variable funds and the fixed-interest
accounts from inception through June 30, 1997. A document summarizing the
separate Semi-Annual Reports for each of the six fund managers is being
distributed simultaneously.
The CNA Capital Select Variable Annuity offers 18 variable subaccounts from
such well-known fund managers as Fidelity Management & Research Company,
Federated Advisors, Fred Alger Management, Inc., Massachusetts Financial
Services Company, Societe Generale Asset Management Corp. (SoGen) and Van Eck
Associates Corp. The full list of funds is found in the Notes To Financial
Statements, Note 1. Organization, in this report.
We'd like to take this opportunity to remind you of some of the tools the
CNA Capital Select Variable Annuity offers for managing your investment.
- You can transfer monies from one subaccount to another without tax
consequences.
- You are allowed 12 free transfers per year (no charge from CNA); four of
which can be from fixed-interest accounts. The minimum amount transferred
as well as the minimum remaining balance in the previous subaccount must
equal $500.
- You can establish Dollar Cost Averaging, which transfers fixed-dollar
amounts from the money market subaccount to other subaccounts at periodic
intervals. This service is provided at no charge.
- You can maintain a predetermined fund mix using our Automatic Subaccount
Rebalancing feature. Monies are transferred between and among specified
subaccounts on a quarterly, semi-annual or annual basis to return to the
fund mix you want. This service is also provided at no charge.
- You can make additional contributions to the plan in amounts as small as
$100.
You should refer to your contract and prospectus for additional information
regarding these features.
With 18 variable fund choices and with features like Dollar Cost Averaging
and Automatic Subaccount Rebalancing, the CNA Capital Select Variable Annuity is
designed to give you a great deal of control over the investment portion of your
policy. However, if you'd prefer the security of a guaranteed fixed-interest
account, this annuity is also at your service, with five fixed accounts to
choose from. Coupled with the product's other benefits, such as a guaranteed
minimum death benefit, and the benefits that come with all annuities, like
tax-deferral, we believe the CNA Capital Select Variable Annuity can meet the
accumulation needs of a wide variety of clients. We sincerely hope you find it
is meeting yours. We welcome your comments and suggestions, and thank you for
choosing the CNA Capital Select Variable Annuity.
Sincerely,
S/ALAN S. LURTY
Alan S. Lurty, FLMI
Senior Vice President and
Chief Operating Officer, Annuities
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1
<PAGE>
<TABLE>
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STATEMENT OF ASSETS AND LIABILITIES
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
AND THE GUARANTEED INTEREST OPTION SEPARATE ACCOUNT
===========================================================================================================================
<CAPTION>
FEDERATED FEDERATED FEDERATED FIDELITY FIDELITY
PRIME MONEY UTILITY HIGH INCOME EQUITY- ASSET FIDELITY FIDELITY
JUNE 30, 1997 (UNAUDITED) FUND II FUND II BOND FUND II INCOME MANAGER INDEX 500 CONTRAFUND
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at market value:
Federated Insurance Series $302,524 $7,553 $39,066
Variable Insurance Products Fund $83,882
Variable Insurance Products Fund II $65,834 $105,651 $21,759
The Alger American Fund
MFS Variable Insurance Trust
SoGen Variable Funds, Inc.
Van Eck Worldwide Insurance Trust
-------- ------ ------- ------- ------- -------- -------
TOTAL INVESTMENTS 302,524 7,553 39,066 83,882 65,834 105,651 21,759
Other - - - - - - -
-------- ------ ------- ------- ------- -------- -------
TOTAL ASSETS 302,524 7,553 39,066 83,882 65,834 105,651 21,759
TOTAL LIABILITIES - - - - - - -
- --------------------------------------------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY--NET ASSETS $302,524 $7,553 $39,066 $83,882 $65,834 $105,651 $21,759
==========================================================================================================================
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</TABLE>
2
<PAGE>
<TABLE>
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==========================================================================================================================
<CAPTION>
VAN ECK VAN ECK
ALGER ALGER MFS MFS MFS MFS WORLDWIDE WORLDWIDE
SMALL ALGER MID-CAP EMERGING MFS GROWTH W/ LIMITED TOTAL SOGEN HARD EMERGING GIO
CAPITAL GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY RETURN OVERSEAS ASSETS MARKETS ACCOUNT
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$4,461 $3,779 $10,435
$32,951 $66,321 $34,057 $49,977 $93,343
$677,908
$1,242 $2,439
- ------ ------ ------- ------- ------- ------- ------- ------- -------- ------ ------ ----
4,461 3,779 10,435 32,951 66,321 34,057 49,977 93,343 677,908 1,242 2,439 -
- - - - - - - - - - - $602
- ------ ------ ------- ------- ------- ------- ------- ------- -------- ------ ------ ----
4,461 3,779 10,435 32,951 66,321 34,057 49,977 93,343 677,908 1,242 2,439 602
- - - - - - - - - - - -
- ----------------------------------------------------------------------------------- -------------------------------------
$4,461 $3,779 $10,435 $32,951 $66,321 $34,057 $49,977 $93,343 $677,908 $1,242 $2,439 $602
=========================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -----------
===========
TOTAL
- ----------
<S> <C>
$ 349,143
83,882
193,244
18,675
276,649
677,908
3,681
- ----------
1,603,182
602
- ----------
1,603,784
-
- ----------
$1,603,784
==========
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</TABLE>
3
<PAGE>
<TABLE>
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STATEMENT OF OPERATIONS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
AND THE GUARANTEED INTEREST OPTION SEPARATE ACCOUNT
==========================================================================================================================
<CAPTION>
FEDERATED FEDERATED FEDERATED FIDELITY
FOR THE PERIOD FROM INCEPTION TO PRIME MONEY UTILITY HIGH INCOME FIDELITY ASSET FIDELITY FIDELITY
JUNE 30, 1997 (UNAUDITED) FUND II FUND II BOND FUND II EQUITY-INCOME MANAGER INDEX 500 CONTRAFUND
- --------------------------------------------------------------------------------------------------------------------------
MAR. 4, MAR. 17, MAY 1, FEB. 21, FEB. 21, MAR. 17, FEB. 21,
INCEPTION DATE: 1997 1997 1997 1997 1997 1997 1997
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<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends $3,875 $ - $ - $ - $ - $ - $ -
Interest
------ ----- ---- ------ ------ ------ ------
3,875 - - - - - -
------ ----- ---- ------ ------ ------ ------
Expenses:
Mortality and expense risk and
administration charges 1,148 16 82 229 206 246 46
------ ----- ---- ------ ------ ------ ------
1,148 16 82 229 206 246 46
------ ----- ---- ------ ------ ------ ------
NET INVESTMENT INCOME (LOSS) 2,727 (16) (82) (229) (206) (246) (46)
------ ----- ---- ------ ------ ------ ------
Investment gain (loss):
Net realized gain (loss) - (333) 33 695 780 1,609 151
Net unrealized gain (loss) - 400 740 7,210 3,584 8,157 1,258
------ ----- ---- ------ ------ ------ ------
NET REALIZED AND UNREALIZED
INVESTMENT GAIN (LOSS) - 67 773 7,905 4,364 9,766 1,409
- -------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN
PARTICIPANTS' EQUITY RESULTING FROM
OPERATIONS $2,727 $ 51 $691 $7,676 $4,158 $9,520 $1,363
=========================================================================================================================
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</TABLE>
4
<PAGE>
<TABLE>
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STATEMENT OF OPERATIONS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
AND THE GUARANTEED INTEREST OPTION SEPARATE ACCOUNT
==========================================================================================================================
<CAPTION>
VAN ECK
ALGER ALGER MFS MFS MFS MFS VAN ECK WORLDWIDE
SMALL ALGER MID-CAP EMERGING MFS GROWTH W/ LIMITED TOTAL SOGEN WORLDWIDE EMERGING
CAPITAL GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY RETURN OVERSEAS HARD ASSETS MARKETS
- --------------------------------------------------------------------------------------------------------------------------
APR. 3, JUN. 17, FEB. 21, FEB. 21, FEB. 21, MAR. 13, MAY 1, FEB. 21, FEB. 3, APR. 3, APR. 11,
1997 1997 1997 1997 1997 1997 1997 1997 1997 1997 1997
- --------------------------------------------------------------------------------------------------------------------------
<S><C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 51 $- $ 89 $ - $ - $ - $- $ - $ - $- $-
---- ---- ---- ------- ------ ------ ----- ------ ------- ---- -----
51 - 89 - - - - - - - -
---- ---- ---- ------- ------ ------ ----- ------ ------- ---- -----
7 1 30 109 162 76 116 271 2,983 4 5
---- ---- ---- ------- ------ ------ ----- ------ ------- ---- -----
7 1 30 109 162 76 116 271 2,983 4 5
---- ---- ---- ------- ------ ------ ----- ------ ------- ---- -----
44 (1) 59 (109) (162) (76) (116) (271) (2,983) (4) (5)
---- ---- ---- ------- ------ ------ ----- ------ ------- ---- -----
1 - - (2,982) 71 328 7 (277) 327 - 10
249 (9) 494 3,206 4,687 2,316 730 5,271 47,978 79 223
---- ---- ---- ------- ------ ------ ----- ------ ------- ---- -----
250 (9) 494 224 4,758 2,644 737 4,994 48,305 79 233
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$294 $(10) $553 $ 115 $4,596 $2,568 $ 621 $4,723 $45,322 $ 75 $ 228
==========================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------
==================
GIO
ACCOUNT TOTAL
- -----------------
JUN. 6,
1997
- -----------------
<S> <C>
$- $ 4,015
2 2
--- -------
2 4,017
--- -------
- 5,737
--- -------
- 5,737
--- -------
2 (1,720)
--- -------
- 420
- 86,573
--- -------
- 86,993
- -----------------
$2 $85,273
=================
</TABLE>
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5
<PAGE>
<TABLE>
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STATEMENT OF CHANGES IN NET ASSETS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
AND THE GUARANTEED INTEREST OPTION SEPARATE ACCOUNT
============================================================================================================================
<CAPTION>
FEDERATED FEDERATED FEDERATED FIDELITY FIDELITY
FOR THE PERIOD FROM INCEPTION TO PRIME MONEY UTILITY HIGH INCOME EQUITY- ASSET FIDELITY FIDELITY
JUNE 30, 1997 (UNAUDITED) FUND II FUND II BOND FUND II INCOME MANAGER INDEX 500 CONTRAFUND
- --------------------------------------------------------------------------------------------------------------------------
MAR. 4, MAR. 17, MAY 1, FEB. 21, FEB. 21, MAR. 17, FEB. 21,
INCEPTION DATE: 1997 1997 1997 1997 1997 1997 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
From operations:
Net investment income $ 2,727 $ (16) $ (82) $ (229) $ (206) $ (246) $ (46)
Net realized gain (loss) - (333) 33 695 780 1,609 151
Net unrealized gain (loss) - 400 740 7,210 3,584 8,157 1,258
---------- ------- --------- --------- ------- --------- ---------
Change in net assets resulting from
operations 2,727 51 691 7,676 4,158 9,520 1,363
---------- ------- --------- --------- ------- --------- ---------
From capital transactions:
Net premiums/deposits 358,144 6,336 39,299 79,233 39,387 77,129 18,150
Withdrawals - - (174) (247) - (247) -
Transfers among sub-accounts and with
the Guaranteed Income Options -- net (58,347) 1,166 (750) (2,780) 22,289 19,249 2,246
---------- ------- --------- --------- ------- --------- ---------
Change in net assets resulting from
capital transactions 299,797 7,502 38,375 76,206 61,676 96,131 20,396
Increase in net assets 302,524 7,553 39,066 83,882 65,834 105,651 21,759
Net assets at beginning of period - - - - - - -
---------- ------- --------- --------- ------- --------- ---------
Net assets at end of period $ 302,524 $ 7,553 $ 39,066 $ 83,882 $65,834 $ 105,651 $ 21,759
- --------------------------------------------------------------------------------------------------------------------------
Net asset value per unit at end of
period $ 1.00 $ 12.37 $ 10.35 $ 22.06 $ 16.60 $ 103.62 $ 17.93
==========================================================================================================================
Units outstanding at end of period 302,524.00 610.59 3,774.49 3,802.45 3,965.92 1,019.60 1,213.58
==========================================================================================================================
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</TABLE>
6
<PAGE>
<TABLE>
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=========================================================================================================================
<CAPTION>
VAN ECK VAN ECK
ALGER ALGER MFS MFS MFS MFS WORLDWIDE WORLDWIDE
SMALL ALGER MID-CAP EMERGING MFS GROWTH W/ LIMITED TOTAL SOGEN HARD EMERGING
CAPITAL GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY RETURN OVERSEAS ASSETS MARKETS
- ------------------------------------------------------------------------------------------------------------------------
APRIL 3, JUNE 17, FEB. 21, FEB. 21, FEB. 21, MAR. 13, MAY 1, FEB. 21, FEB. 3, APRIL 3, APRIL 11,
1997 1997 1997 1997 1997 1997 1997 1997 1997 1997 1997
- ------------------------------------------------------------------------------------------------------------------------
<S><C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 44 $ (1) $ 59 $ (109) $ (162) $ (76) $ (116) $ (271) $ (2,983) $ (4) $ (5)
1 - - (2,982) 71 328 7 (277) 327 - 10
249 (9) 494 3,206 4,687 2,316 730 5,271 47,978 79 223
- ------- ------ ------- --------- --------- --------- --------- --------- --------- ------ -------
294 (10) 553 115 4,596 2,568 621 4,723 45,322 75 228
- ------- ------ ------- --------- --------- --------- --------- --------- --------- ------ -------
4,167 2,788 8,721 28,481 57,454 23,839 49,933 91,643 630,255 1,167 1,710
- - - - - - (327) (273) (337) - -
- 1,001 1,161 4,355 4,271 7,650 (250) (2,750) 2,668 - 501
- ------- ------ ------- --------- --------- --------- --------- --------- --------- ------ -------
4,167 3,789 9,882 32,836 61,725 31,489 49,356 88,620 632,586 1,167 2,211
4,461 3,779 10,435 32,951 66,321 34,057 49,977 93,343 677,908 1,242 2,439
- - - - - - - - - - -
- ------- ------ ------- --------- --------- --------- --------- --------- --------- ------ -------
$ 4,461 $3,779 $10,435 $ 32,951 $ 66,321 $ 34,057 $ 49,977 $ 93,343 $ 677,908 $1,242 $ 2,439
- -------------------------------------------------------------------------------------------------------------------------
$ 39.53 $39.53 $22.51 $ 14.67 $ 14.92 $ 15.31 $ 10.27 $ 15.27 $ 10.76 $15.94 $ 15.29
=========================================================================================================================
112.85 95.59 463.58 2,246.12 4,445.13 2,224.51 4,866.26 6,112.83 63,002.58 77.94 159.52
=========================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------
========================
- ------------------------
GIO
ACCOUNT TOTAL
- ------------------------
JUNE 6,
1997
- ------------------------
<S> <C>
$ 2 $ (1,720)
- 420
- 86,573
---- ----------
2 85,273
---- ----------
600 1,518,436
- (1,605)
- 1,680
---- ----------
600 1,518,511
602 1,603,784
- -
---- ----------
$602 $1,603,784
- ------------------------
</TABLE>
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7
<PAGE>
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NOTES TO FINANCIAL STATEMENTS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
AND THE GUARANTEED INTEREST OPTION SEPARATE ACCOUNT
PERIOD FROM INCEPTION TO JUNE 30, 1997 -- UNAUDITED
================================================================================
NOTE 1. ORGANIZATION
- --------------------------------------------------------------------------------
Valley Forge Life Insurance Company Variable Annuity Separate Account
("Variable Account"), a unit investment trust registered with the Securities and
Exchange Commission under the Investment Company Act of 1940, is a separate
account of Valley Forge Life Insurance Company ("VFL"). The assets of the
Variable Account are held separate from VFL's general account and its other
separate accounts. VFL is a wholly-owned subsidiary of Continental Assurance
Company ("Assurance") which is wholly-owned by CNA Financial Corporation
("CNA"). Loews Corporation owns approximately 84% of the outstanding common
stock of CNA.
The Variable Account currently offers 18 sub-accounts each of which invests
in shares of a corresponding fund (i.e. investment portfolios), wherein the
contractholders bear all of the investment risk. Each fund is either an open-end
diversified management investment company or a separate investment portfolio of
such a company and is managed by a registered investment advisor. The
sub-accounts are as follows:
FEDERATED INSURANCE SERIES:
Federated Prime Money
Fund II
Federated Utility Fund II
Federated High Income
Bond Fund II
FIDELITY VARIABLE INSURANCE PRODUCTS FUND (VIP):
Fidelity VIP Equity-
Income Portfolio
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II (VIP II):
Fidelity VIP II Asset
Manager Portfolio
Fidelity VIP II Index 500
Portfolio
Fidelity VIP II Contrafund
Portfolio
ALGER AMERICAN FUND:
Alger American Small
Capitalization Portfolio
Alger American Growth
Portfolio
Alger American MidCap
Growth Portfolio
MFS VARIABLE INSURANCE TRUST:
MFS Emerging Growth
Series
MFS Research Series
MFS Growth With Income
Series
MFS Limited Maturity
Series
MFS Total Return Series
SOGEN VARIABLE FUNDS, INC.:
SoGen Overseas Portfolio
VAN ECK WORLDWIDE INSURANCE TRUST:
Van Eck Worldwide Hard
Assets Fund
Van Eck Worldwide
Emerging Markets Fund
<PAGE>
The Guaranteed Interest Option Account ("GIO Account") is also a separate
account of VFL, however, unlike the Variable Account, the GIO Account is not
registered as an investment company under the 1940 Act. The GIO Account supports
the values and benefits under the Guaranteed Interest Option. Through the
Guaranteed Interest Option, VFL offers specified effective annual rates of
interest that are credited daily and available for specified periods of time.
Contract holders choosing the Guaranteed Interest Option do not participate in
the investment performance of the GIO Account and this performance does not
determine the Guaranteed Interest Option value or benefits relating thereto. The
assets of the GIO Account are held separately from other VFL assets and from the
General Account of VFL.
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8
<PAGE>
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NOTES TO FINANCIAL STATEMENTS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
AND THE GUARANTEED INTEREST OPTION SEPARATE ACCOUNT
PERIOD FROM INCEPTION TO JUNE 30, 1997 -- UNAUDITED
================================================================================
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
VALUATION OF INVESTMENTS -- Investments consists of shares in the
portfolios of the funds and are stated at fair value based on quoted market
prices.
RECOGNITION OF INVESTMENT INCOME -- Investment income consists of dividends
declared by the portfolios of the funds and interest income earned within the
GIO Account. Dividends declared by the portfolios of the fund are recognized on
the date of record and interest income within the GIO Account is credited daily.
REALIZED GAINS AND LOSSES -- Realized gains and losses represent the
difference between the proceeds from sales of shares by the Account and the cost
of such shares, which are determined using the average cost method.
CONTRACTHOLDER ACCOUNT ACTIVITY -- Account activity is reflected in
individual contractholder accounts on a daily basis.
FEDERAL INCOME TAXES -- Net investment income and realized gains and losses
on investments of the Account are taxable to contractholders generally upon
distribution. Accordingly, no provision for income taxes has been recorded.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principals (GAAP) requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
- --------------------------------------------------------------------------------
9
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
AND THE GUARANTEED INTEREST OPTION SEPARATE ACCOUNT
PERIOD FROM INCEPTION TO JUNE 30, 1997 -- UNAUDITED
================================================================================
NOTE 3. INVESTMENTS
- --------------------------------------------------------------------------------
At June 30, 1997, the investments of the respective subaccounts are as
follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INSURANCE SERIES:
Federated Prime Money Fund II 302,524 $302,524 $302,524
Federated Utility Fund II 611 7,153 7,553
Federated High Income Bond Fund II 3,774 38,326 39,066
VARIABLE INSURANCE PRODUCTS FUND:
Equity-Income 3,802 76,672 83,882
VARIABLE INSURANCE PRODUCTS FUND II:
Asset Manager 3,966 62,250 65,834
Index 500 1,020 97,495 105,651
Contrafund 1,214 20,501 21,759
THE ALGER AMERICAN FUND:
Small Capitalization 113 4,212 4,461
Growth 96 3,788 3,779
MidCap Growth 464 9,941 10,435
MFS VARIABLE INSURANCE TRUST:
Emerging Growth 2,246 29,745 32,951
Research 4,445 61,634 66,321
Growth With Income 2,225 31,742 34,057
Limited Maturity 4,866 49,247 49,977
Total Return 6,113 88,071 93,343
SOGEN VARIABLE FUNDS, INC.:
Overseas 63,003 629,930 677,908
VAN ECK WORLDWIDE INSURANCE TRUST:
Hard Assets 78 1,164 1,242
Emerging Markets 160 2,215 2,439
</TABLE>
- --------------------------------------------------------------------------------
NOTE 4. INVESTMENT TRANSACTIONS
- --------------------------------------------------------------------------------
The aggregate cost of purchases and proceeds from sales of Insurance
Series, VIP Fund, VIP Fund II, Alger American Fund, MFS Variable Insurance
Trust, SoGen Variable Funds, Inc. and Van Eck Worldwide Insurance Trust shares
from the date of inception to June 30, 1997, were $2,193,100 and $680,923,
respectively.
- --------------------------------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
AND THE GUARANTEED INTEREST OPTION SEPARATE ACCOUNT
PERIOD FROM INCEPTION TO JUNE 30, 1997 -- UNAUDITED
================================================================================
NOTE 5. CHARGES AND DEDUCTIONS
- --------------------------------------------------------------------------------
VFL deducts a daily charge from the assets of the Variable Account to
compensate it for mortality and expense risks that it assumes under the
Contract. The daily charge is approximately equal to an annual rate of 1.25% of
the net assets of the Variable Account.
An annual administration fee of $30 is deducted from contracts in both the
Variable and GIO Accounts if the contract value is below $50,000 at the time of
the deduction. This fee is to cover a portion of VFL's administrative expenses
related to the contracts.
VFL deducts a daily administration charge from the assets of the Variable
Account to compensate it for a portion of the expenses it incurs in the
administering the contracts. The daily charge is approximately equal to an
annual rate of 0.15% of the net assets of the Variable Account.
VFL permits 12 free transfers among and between the sub-accounts within the
Variable Account and the GIO Account per contract year. For each additional
transfer, VFL charges $25 at the time each such transfer is processed. The fee
is deducted from the amount being transferred.
- --------------------------------------------------------------------------------
NOTE 6. DIVERSIFICATION REQUIREMENTS
- --------------------------------------------------------------------------------
Under the provisions of Section 817(h) of the Internal Revenue Code of 1986
(the Code), a variable annuity contract, other than a contract issued in
connection with certain types of employee benefit plans, will not be treated as
an annuity contract for Federal tax purposes for any period for which the
investments of the segregated asset account on which the contract is based are
not adequately diversified. The Code provides that the "adequately diversified"
requirement may be met if the underlying investments satisfy either a statutory
safe harbor test or diversification requirements set forth in regulations issued
by the Secretary of the Treasury. VFL believes, based on assurances from the
mutual fund managers, that the mutual funds satisfy the requirement of the
regulations.
- --------------------------------------------------------------------------------
11
<PAGE>
The principal underwriter of this
product is CNA Investor Services,
Inc., a registered broker-dealer
and member of the National
Association of Securities Dealers.
CNA Investor Services, Inc., is an
affiliate of CNA Financial
Corporation. CNA annuities are
issued by the Valley Forge Life
Insurance Company, one of the
CNA insurance companies.
CNA is a registered service mark
of CNA Financial Corporation. The
policy form numbers for
this product are: V100-1128-A
Series, V100-1129-A Series,
P4-119913-A Series and
P4-119914-A Series. The CNA
Capital Select Variable Annuity is
not available in all states.
MAILING ADDRESS:
CNA Insurance Companies
Variable Product Team
P.O. Box 305139
Nashville TN 37230-5139
[CNA LOGO]
FOR ALL THE COMMITMENTS YOU MAKE(R)
AG-127395-A 8/97 Printed in USA
