<PAGE> 1
CNA
CAPITAL SELECT
VARIABLE
ANNUITY
SEMI-ANNUAL REPORT
issued by the
VALLEY FORGE
LIFE INSURANCE COMPANY,
one of the CNA
companies
June 30, 1999
[CNA LOGO]
<PAGE> 2
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June 30, 1999
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Dear Contractholder:
When we created the CNA Capital Select(R) Variable Annuity (issued by Valley
Forge Life Insurance Company, one of the CNA companies), we designed it to be
competitive with some of the top products in the marketplace. But we didn't stop
there. Over time, we have added or enhanced features that we believe have made
our product even better.
For instance, one of the things we've done this past year is take a close
look at the subaccounts our variable annuity offers. As a result, the mix of
subaccounts will be improved to provide an even broader representation.
As we communicated previously, the MFS Limited Maturity Series was phased
out as an investment option for new contributions as of May 1, 1999. We will
soon be adding a variety of additional subaccount options, thereby increasing
your overall number of investment choices. We will communicate these changes to
you as they occur.
This Semi-Annual Report takes a look at the subaccounts that are represented
in our product. It reflects each subaccount's assets and liabilities as of June
30, 1999, results of operations for the six month period ending June 30, 1999
and changes in net assets for the six month and twelve month periods ending June
30, 1999 and December 31, 1998, respectively.*
These subaccounts are managed by six widely recognized fund managers:
- Federated Advisers
- Fidelity Management & Research Company
- Fred Alger Management, Inc.
- Massachusetts Financial Services Company (MFS)
- Societe Generale Asset Management Corp. (SoGen)
- Van Eck Associates Corporation
If you need additional information, please refer to your prospectus. If you
can't find it or need another copy, please contact your CNA representative -- or
let us hear from you directly.
Thank you, once again, for selecting the CNA Capital Select Variable Annuity
as one of the tools to help you reach your long-term goals.
Sincerely,
/s/ David M. Chernow
David M. Chernow
Senior Vice President & Chief Operating Officer
Investment Products
* Although a guaranteed-interest option is available in connection with CNA
Capital Select Variable Annuity, financial reports regarding this
fixed-interest fund are not included in this report.
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1
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VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIDELITY
FEDERATED FEDERATED FEDERATED FIDELITY ASSET FIDELITY FIDELITY
PRIME MONEY UTILITY HIGH INCOME EQUITY-INCOME MANAGER INDEX 500 CONTRAFUND
FUND II FUND II BOND FUND II PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at market value
(cost noted below): $18,114,133 $2,809,157 $4,353,643 $7,120,535 $4,213,462 $18,422,115 $7,212,397
----------- ---------- ---------- ---------- ---------- ----------- ----------
TOTAL ASSETS 18,114,133 2,809,157 4,353,643 7,120,535 4,213,462 18,422,115 7,212,397
LIABILITIES - - - - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $18,114,133 $2,809,157 $4,353,643 $7,120,535 $4,213,462 $18,422,115 $7,212,397
=================================================================================================================================
SUPPLEMENTAL COST INFORMATION:
Investments, at cost: $18,114,133 $2,745,225 $4,572,227 $6,255,863 $3,990,916 $15,676,288 $6,279,191
=================================================================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
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2
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<TABLE>
<CAPTION>
THE ALGER THE ALGER MFS
AMERICAN THE ALGER AMERICAN MFS GROWTH MFS MFS SOGEN
SMALL AMERICAN MIDCAP EMERGING MFS WITH LIMITED TOTAL OVERSEAS
CAPITALIZATION GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY RETURN VARIABLE
PORTFOLIO PORTFOLIO PORTFOLIO SERIES SERIES SERIES SERIES SERIES FUND
- ---------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$2,224,054 $12,840,082 $2,087,876 $4,841,733 $3,315,790 $4,436,716 $1,671,752 $4,017,405 $2,803,892
---------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
2,224,054 12,840,082 2,087,876 4,841,733 3,315,790 4,436,716 1,671,752 4,017,405 2,803,892
---------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
- - - - - - - - -
- ---------------------------------------------------------------------------------------------------------------------------
$2,224,054 $12,840,082 $2,087,876 $4,841,733 $3,315,790 $4,436,716 $1,671,752 $4,017,405 $2,803,892
===========================================================================================================================
$2,120,273 $11,598,603 $1,910,564 $3,802,664 $2,882,140 $3,960,249 $1,680,821 $3,897,504 $2,366,688
===========================================================================================================================
<CAPTION>
VAN ECK
WORLDWIDE VAN ECK
HARD EMERGING
ASSETS MARKETS
FUND FUND
- --- ---------------------
<C> <S> <C>
$209,466 $628,944
-------- --------
209,466 628,944
-------- --------
- -
- ------------------------------------
$209,466 $628,944
===
$186,586 $472,816
===
</TABLE>
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3
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VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIDELITY
FEDERATED FEDERATED FEDERATED FIDELITY ASSET FIDELITY FIDELITY
PRIME MONEY UTILITY HIGH INCOME EQUITY-INCOME MANAGER INDEX 500 CONTRAFUND
FUND II FUND II BOND FUND II PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividend income $346,638 $149,669 $ 304,785 $216,369 $180,618 $ 190,903 $161,610
-------- -------- --------- -------- -------- ---------- --------
346,638 149,669 304,785 216,369 180,618 190,903 161,610
-------- -------- --------- -------- -------- ---------- --------
Expenses:
Mortality and expense risk and
administration charges 115,630 15,064 26,903 39,713 20,264 97,254 35,857
-------- -------- --------- -------- -------- ---------- --------
115,630 15,064 26,903 39,713 20,264 97,254 35,857
-------- -------- --------- -------- -------- ---------- --------
NET INVESTMENT INCOME (LOSS) 231,008 134,605 277,882 176,656 160,354 93,649 125,753
-------- -------- --------- -------- -------- ---------- --------
Investment gains and (losses):
Net realized gains (losses) - 2,943 (17,270) 12,070 5,488 418,051 62,447
Net unrealized gains (losses) - (10,752) (204,120) 665,317 54,016 1,591,109 456,389
-------- -------- --------- -------- -------- ---------- --------
NET REALIZED AND UNREALIZED
INVESTMENT GAINS (LOSSES) - (7,809) (221,390) 677,387 59,504 2,009,160 518,836
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $231,008 $126,796 $ 56,492 $854,043 $219,858 $2,102,809 $644,589
=================================================================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
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4
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<TABLE>
<CAPTION>
THE ALGER THE ALGER MFS VAN ECK
AMERICAN THE ALGER AMERICAN MFS GROWTH MFS MFS SOGEN WORLDWIDE VAN ECK
SMALL AMERICAN MIDCAP EMERGING MFS WITH LIMITED TOTAL OVERSEAS HARD EMERGING
CAPITALIZATION GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY RETURN VARIABLE ASSETS MARKETS
PORTFOLIO PORTFOLIO PORTFOLIO SERIES SERIES SERIES SERIES SERIES FUND FUND FUND
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$240,850 $ 958,176 $220,841 $ - $32,893 $ 23,662 $ - $143,153 $ 22,316 $ 2,252 $ -
-------- ---------- -------- -------- -------- -------- ------- -------- -------- -------- --------
240,850 958,176 220,841 - 32,893 23,662 - 143,153 22,316 2,252 -
-------- ---------- -------- -------- -------- -------- ------- -------- -------- -------- --------
12,803 58,884 10,103 25,412 17,078 22,409 9,769 18,202 16,782 1,255 3,479
-------- ---------- -------- -------- -------- -------- ------- -------- -------- -------- --------
12,803 58,884 10,103 25,412 17,078 22,409 9,769 18,202 16,782 1,255 3,479
-------- ---------- -------- -------- -------- -------- ------- -------- -------- -------- --------
228,047 899,292 210,738 (25,412) 15,815 1,253 (9,769) 124,951 5,534 997 (3,479)
-------- ---------- -------- -------- -------- -------- ------- -------- -------- -------- --------
(22,632) 44,790 4,482 35,750 19,025 18,503 (1,798) (1,228) (2,208) (12,738) (32,512)
75,622 444,907 30,676 527,566 266,210 277,105 15,072 59,590 536,480 43,151 221,397
-------- ---------- -------- -------- -------- -------- ------- -------- -------- -------- --------
52,990 489,697 35,158 563,316 285,235 295,608 13,274 58,362 534,272 30,413 188,885
- --------------------------------------------------------------------------------------------------------------------------------
$281,037 $1,388,989 $245,896 $537,904 $301,050 $296,861 $ 3,505 $183,313 $539,806 $ 31,410 $185,406
================================================================================================================================
</TABLE>
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5
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VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIDELITY
FEDERATED FEDERATED FEDERATED FIDELITY ASSET
PRIME MONEY UTILITY HIGH INCOME EQUITY-INCOME MANAGER
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) FUND II FUND II BOND FUND II PORTFOLIO PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
From operations:
Net investment income (loss) $ 231,008 $ 134,605 $ 277,882 $ 176,656 $ 160,354
Net realized and unrealized gains (losses) - (7,809) (221,390) 677,387 59,504
------------ ---------- ---------- ---------- ----------
Change in net assets resulting from operations 231,008 126,796 56,492 854,043 219,858
------------ ---------- ---------- ---------- ----------
From capital transactions:
Net premiums/deposits 18,865,544 351,113 649,678 720,469 656,386
Death benefits - (9,468) (8,543) (10,015) (9,327)
Surrenders (169,773) (29,199) (112,379) (51,881) -
Withdrawals (102,878) (12,145) (38,217) (34,956) (22,359)
Transfers into (out of) subaccounts, net -- Note 1
(6,271,972) 688,398 639,847 1,378,407 1,110,881
------------ ---------- ---------- ---------- ----------
Change in net assets resulting from capital
transactions 12,320,921 988,699 1,130,386 2,002,024 1,735,581
------------ ---------- ---------- ---------- ----------
Increase in net assets 12,551,929 1,115,495 1,186,878 2,856,067 1,955,439
Net assets at beginning of period 5,562,204 1,693,662 3,166,765 4,264,468 2,258,023
------------ ---------- ---------- ---------- ----------
NET ASSETS AT END OF PERIOD $ 18,114,133 $2,809,157 $4,353,643 $7,120,535 $4,213,462
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER UNIT AT END OF PERIOD $ 1.00 $ 14.53 $ 10.27 $ 27.25 $ 17.69
========================================================================================================================
UNITS OUTSTANDING AT END OF PERIOD 18,114,133 193,335 423,919 261,304 238,183
========================================================================================================================
FOR THE YEAR ENDED DECEMBER 31, 1998
- ------------------------------------------------------------------------------------------------------------------------
From operations:
Net investment income (loss) $ 207,113 $ 3,202 $ (9,420) $ 8,287 $ 19,013
Net realized and unrealized gains (losses) 634 97,354 (26,804) 186,584 141,214
------------ ---------- ---------- ---------- ----------
Change in net assets resulting from operations 207,747 100,556 (36,224) 194,871 160,227
------------ ---------- ---------- ---------- ----------
From capital transactions:
Net premiums/deposits 24,848,283 1,307,253 2,301,701 2,167,250 1,237,984
Death benefits (15,275) (19,978) (13,846) (7,421) -
Surrenders (198,856) (15,885) (12,264) (37,904) (1,620)
Withdrawals (112,539) (77,318) (93,235) (31,134) (22,890)
Transfers into (out of) subaccounts, net -- Note 1
(20,028,240) 348,351 830,154 1,482,837 616,956
------------ ---------- ---------- ---------- ----------
Change in net assets resulting from capital
transactions 4,493,373 1,542,423 3,012,510 3,573,628 1,830,430
------------ ---------- ---------- ---------- ----------
Increase in net assets 4,701,120 1,642,979 2,976,286 3,768,499 1,990,657
Net assets at beginning of period 861,084 50,683 190,479 495,969 267,366
------------ ---------- ---------- ---------- ----------
NET ASSETS AT END OF PERIOD $ 5,562,204 $1,693,662 $3,166,765 $4,264,468 $2,258,023
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER UNIT AT END OF PERIOD $ 1.00 $ 15.27 $ 10.92 $ 25.42 $ 18.16
========================================================================================================================
UNITS OUTSTANDING AT END OF PERIOD 5,562,204 110,914 289,997 167,760 124,340
========================================================================================================================
<CAPTION>
FIDELITY FIDELITY
INDEX 500 CONTRAFUND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) PORTFOLIO PORTFOLIO
- --------------------------------------------------
<S> <C> <C>
From operations:
Net investment income (loss) $ 93,649 $ 125,753
Net realized and unrealized gains (losses) 2,009,160 518,836
----------- ----------
Change in net assets resulting from operations 2,102,809 644,589
----------- ----------
From capital transactions:
Net premiums/deposits 2,980,924 1,312,482
Death benefits (20,407) -
Surrenders (75,506) (60,085)
Withdrawals (103,594) (33,229)
Transfers into (out of) subaccounts, net -- Note
2,847,909 1,638,202
----------- ----------
Change in net assets resulting from capital
transactions 5,629,326 2,857,370
----------- ----------
Increase in net assets 7,732,135 3,501,959
Net assets at beginning of period 10,689,980 3,710,438
----------- ----------
NET ASSETS AT END OF PERIOD $18,422,115 $7,212,397
- ----------------------------------------------------------------------------
NET ASSET VALUE PER UNIT AT END OF PERIOD $ 155.65 $ 26.10
============================================================================
UNITS OUTSTANDING AT END OF PERIOD 118,356 276,337
============================================================================
FOR THE YEAR ENDED DECEMBER 31, 1998
- ----------------------------------------------------------------------------
From operations:
Net investment income (loss) $ (22,378) $ 3,442
Net realized and unrealized gains (losses) 1,288,532 507,452
----------- ----------
Change in net assets resulting from operations 1,266,154 510,894
----------- ----------
From capital transactions:
Net premiums/deposits 6,238,184 1,114,162
Death benefits - (10,449)
Surrenders (50,773) (23,821)
Withdrawals (110,964) (23,659)
Transfers into (out of) subaccounts, net -- Note
2,784,494 1,814,245
----------- ----------
Change in net assets resulting from capital
transactions 8,860,941 2,870,478
----------- ----------
Increase in net assets 10,127,095 3,381,372
Net assets at beginning of period 562,885 329,066
----------- ----------
NET ASSETS AT END OF PERIOD $10,689,980 $3,710,438
- ----------------------------------------------------------------------------
NET ASSET VALUE PER UNIT AT END OF PERIOD $ 141.25 $ 24.44
============================================================================
UNITS OUTSTANDING AT END OF PERIOD 75,681 151,818
============================================================================
</TABLE>
See accompanying Notes to Financial Statements.
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6
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<TABLE>
<CAPTION>
THE THE
ALGER THE ALGER MFS
AMERICAN ALGER AMERICAN MFS GROWTH MFS MFS SOGEN
SMALL AMERICAN MIDCAP EMERGING MFS WITH LIMITED TOTAL OVERSEAS
CAPITALIZATION GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY RETURN VARIABLE
PORTFOLIO PORTFOLIO PORTFOLIO SERIES SERIES SERIES SERIES SERIES FUND
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 228,047 $ 899,292 $ 210,738 $ (25,412) $ 15,815 $ 1,253 $ (9,769) $ 124,951 $ 5,534
52,990 489,697 35,158 563,316 285,235 295,608 13,274 58,362 534,272
----------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
281,037 1,388,989 245,896 537,904 301,050 296,861 3,505 183,313 539,806
----------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
148,623 1,754,775 197,726 718,099 389,213 619,665 213,418 592,479 178,356
- (26,683) (9,196) (5,257) - - (11,410) (17,475) -
(7,728) (32,227) (21,300) (20,165) (4,048) (23,450) (75,906) (27,926) (19,660)
(5,160) (55,833) (13,294) (13,688) (8,956) (27,556) (9,663) (22,437) (7,463)
206,027 4,366,161 515,040 701,029 960,360 1,185,778 520,250 1,416,264 74,391
----------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
341,762 6,006,193 668,976 1,380,018 1,336,569 1,754,437 636,689 1,940,905 225,624
----------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
622,799 7,395,182 914,872 1,917,922 1,637,619 2,051,298 640,194 2,124,218 765,430
1,601,255 5,444,900 1,173,004 2,923,811 1,678,171 2,385,418 1,031,558 1,893,187 2,038,462
----------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 2,224,054 $12,840,082 $2,087,876 $4,841,733 $3,315,790 $4,436,716 $1,671,752 $4,017,405 $2,803,892
- ---------------------------------------------------------------------------------------------------------------------------
$ 43.58 $ 55.84 $ 27.60 $ 24.22 $ 20.48 $ 21.14 $ 10.25 $ 18.10 $ 12.47
===========================================================================================================================
51,034 229,944 75,648 199,906 161,904 209,873 163,098 221,956 224,851
===========================================================================================================================
- ---------------------------------------------------------------------------------------------------------------------------
$ 115,699 $ 307,440 $ 18,386 $ (10,989) $ (1,475) $ (16,356) $ (7,862) $ 12,833 $ (24,005)
2,409 766,562 131,442 548,478 172,413 234,577 (11,034) 69,285 (64,492)
----------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
118,108 1,074,002 149,828 537,489 170,938 218,221 (18,896) 82,118 (88,497)
----------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
1,012,659 2,385,652 456,073 845,164 586,011 1,164,678 743,654 968,524 1,098,070
(3,193) - (3,436) - - (4,023) (7,699) - (3,348)
(27,136) (13,467) - (9,089) (1,253) - (6,502) (7,865) (16,724)
(16,711) (33,198) (1,155) (24,319) (11,140) (17,911) (6,087) (11,868) (21,157)
321,797 1,782,528 529,267 1,432,918 777,200 805,436 245,382 602,434 317,226
----------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
1,287,416 4,121,515 980,749 2,244,674 1,350,818 1,948,180 968,748 1,551,225 1,374,067
----------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
1,405,524 5,195,517 1,130,577 2,782,163 1,521,756 2,166,401 949,852 1,633,343 1,285,570
195,731 249,383 42,427 141,648 156,415 219,017 81,706 259,844 752,892
----------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 1,601,255 $ 5,444,900 $1,173,004 $2,923,811 $1,678,171 $2,385,418 $1,031,558 $1,893,187 $2,038,462
----------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 43.97 $ 53.22 $ 28.87 $ 21.47 $ 19.05 $ 20.11 $ 10.16 $ 18.12 $ 10.07
===========================================================================================================================
36,417 102,309 40,631 136,181 88,093 118,618 101,531 104,481 202,429
===========================================================================================================================
<CAPTION>
VAN ECK
WORLDWIDE VAN ECK
HARD EMERGING
ASSETS MARKETS
FUND FUND
- --------------------------
<S> <C> <C>
$ 997 $ (3,479)
30,413 188,885
-------- ---------
31,410 185,406
-------- ---------
17,848 43,091
- -
(8,640) -
(1,249) (1,661)
28,954 633
-------- ---------
36,913 42,063
-------- ---------
68,323 227,469
141,143 401,475
-------- ---------
$209,466 $ 628,944
- --------------------------
$ 10.71 $ 10.39
==========================
19,558 60,534
==========================
- --------------------------
$ 4,608 $ (2,674)
(40,765) (109,753)
-------- ---------
(36,157) (112,427)
-------- ---------
128,466 348,583
- -
(20,009) (3,769)
(1,198) (4,392)
61,004 156,590
-------- ---------
168,263 497,012
-------- ---------
132,106 384,585
9,037 16,890
-------- ---------
$141,143 $ 401,475
-------- ---------
$ 9.20 $ 7.12
==========================
15,342 56,387
==========================
</TABLE>
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7
<PAGE> 9
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NOTES TO FINANCIAL STATEMENTS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
JUNE 30, 1999 -- 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 Variable Account
began operation on February 3, 1997. The assets of the Variable Account are
segregated from VFL's general account and its other separate accounts. VFL is a
wholly-owned subsidiary of Continental Assurance Company ("Assurance").
Assurance is a wholly-owned subsidiary of Continental Casualty Company
("Casualty"), which is wholly-owned by CNA Financial Corporation ("CNA"). Loews
Corporation owns approximately 86% of the outstanding common stock of CNA.
VFL sells a wide range of life insurance products, including the Flexible
Premium Deferred Annuity Contract ("Contract"). Under the terms of the Contract,
contractholders select where the net purchase payments of the Contract are
invested. The contractholder may choose to invest in either the Variable
Account, the Guaranteed Interest Option Separate Account ("GIO Account") or both
the Variable Account and the GIO Account.
The Variable Account currently offers 17 subaccounts each of which invests
in shares of corresponding funds (Funds), in which 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 an investment advisor ("Investment Advisor") which is registered with
the Securities and Exchange Commission. The Investment Advisors and subaccounts
are identified here.
- ------------------------------------------------------------
INVESTMENT ADVISOR:
FUND/SUBACCOUNT
- ------------------------------------------------------------
FEDERATED ADVISERS:
Federated Prime Money Fund II
Federated Utility Fund II
Federated High Income Bond Fund II
FIDELITY MANAGEMENT & RESEARCH COMPANY:
Fidelity Variable Insurance Products Fund Equity-Income
Portfolio ("Fidelity Equity-Income Portfolio")
Fidelity Variable Insurance Products Fund II Asset
Manager Portfolio ("Fidelity Asset Manager Portfolio")
Fidelity Variable Insurance Products Fund II Index 500
Portfolio ("Fidelity Index 500 Portfolio")
Fidelity Variable Insurance Products Fund II Contrafund
Portfolio ("Fidelity Contrafund Portfolio")
- ------------------------------------------------------------
INVESTMENT ADVISOR:
FUND/SUBACCOUNT
- ------------------------------------------------------------
FRED ALGER MANAGEMENT, INC.:
The Alger American Small Capitalization Portfolio
The Alger American Growth Portfolio
The Alger American MidCap Growth Portfolio
MASSACHUSETTS FINANCIAL SERVICES COMPANY:
MFS Emerging Growth Series
MFS Research Series
MFS Growth With Income Series
MFS Limited Maturity Series (closed to new investments)
MFS Total Return Series
SOCIETE GENERALE ASSET MANAGEMENT CORP.:
SoGen Overseas Variable Fund
VAN ECK ASSOCIATES CORPORATION:
Van Eck Worldwide Hard Assets Fund
Van Eck Emerging Markets Fund
- --------------------------------------------------------------------------------
8
<PAGE> 10
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
JUNE 30, 1999 -- UNAUDITED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The GIO Account is also a separate account of VFL. Through the guaranteed
interest option, VFL offers specified effective annual rates of interest that
are credited daily and available for specified periods of time. Contractholders
choosing the guaranteed interest option do not participate in the investment
performance of the GIO Account and this performance does not determine the GIO
Account value or benefits relating thereto.
The assets of the GIO Account and the Variable Account are held separately
from other VFL assets and from the General Account of VFL. The contractholder
(before the maturity date, while the contractholder is still living or the
Contract is in force) may transfer all or part of any subaccount value to
another subaccount(s) or to the GIO Account, or transfer all or part of the GIO
Account value to any subaccounts. The MFS Limited Maturity Series subaccount is
no longer available for new allocations as of May 1, 1999. The GIO Account,
however, unlike the Variable Account, is not registered as an investment company
under the 1940 Act. Separate financial statements are not prepared for the GIO
Account and the accompanying financial statements do not reflect amounts
invested in the GIO Account.
- --------------------------------------------------------------------------------
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
VALUATION OF INVESTMENTS -- Investments in the Variable Account consist of
shares of the Funds and are stated at market value based on quoted market
prices. Changes in the difference between market value and cost are reflected as
net unrealized gains (losses) in the accompanying financial statements.
INVESTMENT INCOME -- Investment income consists of dividends declared by
the Funds and are recognized on the date of record.
REALIZED GAINS AND LOSSES -- Realized investment gains and losses in the
Variable Account represent the difference between the proceeds from sales of
shares of the Funds held by the subaccount and the cost of such shares, which
are determined using the average cost method.
FEDERAL INCOME TAXES -- Net investment income and realized gains and losses
on investments of the Variable Account are taxable to contractholders generally
upon distribution. Accordingly, no provision for income taxes has been recorded
in the accompanying financial statements.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles 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.
In the opinion of Variable Account's management, these statements include all
adjustments, consisting of normal recurring accruals, which are necessary for
the fair presentation of the financial position, results of operations and
changes in net assets in the accompanying financial statements.
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NOTES TO FINANCIAL STATEMENTS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
JUNE 30, 1999 -- UNAUDITED
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NOTE 3. CHARGES AND DEDUCTIONS
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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 equal to an annual rate of 1.25% of the net assets
of the subaccount.
An annual administration fee of $30 is also deducted from the subaccounts
on each Contract if the contract value is below $50,000. 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
subaccounts on each Contract to compensate it for a portion of the expenses it
incurs in administering the contracts. The daily charge is equal to an annual
rate of 0.15% of the net assets of the subaccounts.
VFL permits 12 free transfers among and between the subaccounts within the
Variable Account (four of which can be applied to the GIO Account) per contract
year without an assessment of a fee. For each additional transfer, VFL charges
$25 at the time each such transfer is processed. The fee is deducted from the
amount being transferred.
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NOTE 4. DIVERSIFICATION REQUIREMENTS
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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 the funds' prospectuses
if each of the Funds that the Variable Account participates in, that the mutual
Funds satisfy the diversification requirement of the regulations.
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<PAGE> 12
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NOTES TO FINANCIAL STATEMENTS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
JUNE 30, 1999 -- UNAUDITED
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NOTE 5. MANAGEMENT'S DISCUSSION OF YEAR 2000 IMPACT ON VARIABLE ACCOUNT
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The widespread use of computer programs, both in the United States and
internationally, that rely on two digit date fields to perform computations and
decision making functions may cause computer systems to malfunction when
processing information involving dates beginning in 1999. Such malfunctions
could lead to business delays and disruptions. Separate Account does not
maintain any systems. Instead, it relies on the systems of CNA, third party
vendors and other business partners. CNA, on behalf of Separate Account, has a
plan under which it reviews periodically the progress that these parties are
making on this issue. As of December 1, 1998, CNA had certified internally as
Year 2000-ready all of the internal systems used by Separate Account. However,
as business conditions change, CNA may respond by revising previous Year 2000
strategies or solutions affecting specific systems. In limited cases, a system
that was to have been replaced, instead, may be renovated to become Year 2000
ready prior to January 1, 2000. Separate Account does not believe these changes
will have a material impact on the Company.
CNA has also received statements of Year 2000 compliance from certain key
business partners. Separate Account management believes that the systems on
which it relies does not have any significant remaining exposure to the Year
2000 issue and, therefore Separate Account does not have a material exposure to
the Year 2000 issue. However, due to the interdependent nature of computer
systems, there may be an adverse impact on Separate Account if its business
partners fail to address the Year 2000 issue successfully. To mitigate this
impact, if any, CNA on behalf of itself and Separate Account is communicating
with its business partners to coordinate Year 2000 conversion. In addition, CNA
has developed business resumption plans to ensure that it and Separate Account
are able to continue critical processes through other means in the event that it
becomes necessary to do so. Formal strategies have been developed to include
appropriate recovery processes and use of alternative vendors.
Based on its current assessment, CNA estimates that the total cost to
replace and upgrade its systems to accommodate Year 2000 processing will be
approximately $70 million. As of June 30, 1999, CNA has spent approximately $60
million on Year 2000 readiness matter.
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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 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-132666-B 8/99 Printed in USA
