<PAGE> 1
As filed with the Securities and Exchange Commission on February 26, 1999
File No. 333-1087
File No. 811-7547
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
-------------- [ ]
Post-Effective Amendment No. 3
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 4 [X]
VALLEY FORGE LIFE INSURANCE COMPANY VARIABLE
ANNUITY SEPARATE ACCOUNT
(Exact Name of Registrant)
VALLEY FORGE LIFE INSURANCE COMPANY
(Name of Depositor)
CNA Plaza, 43 South
Chicago, Illinois 60685
(Address of Depositor's Principal Executive Offices)
Depositor's Telephone Number, including Area Code: (312) 822-6597
Corporate Secretary
Continental Assurance Company
CNA Plaza, 43 South
(Name and Address of Agent for Service)
Copy to:
Stephen E. Roth, Esq.
Sutherland, Asbill & Brennan, LLP
1275 Pennsylvania Avenue, N.W.
Washington, DC 20004-2404
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[ ] on April 30, 1998 pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[X] on May 1, 1999 pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2) of Rule 485
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
================================================================================
<PAGE> 2
CROSS REFERENCE SHEET
Pursuant to Rules 481(a) and 495(a)
Showing location in Part A (prospectus) and Part B (statement of additional
information) of registration statement of information required by Form N-4
PART A
ITEM OF FORM N-4 PROSPECTUS CAPTION
1. Cover Page. . . . . . . . . . . . . . Cover Page
2. Definitions . . . . . . . . . . . . . Glossary
3. Synopsis. . . . . . . . . . . . . . . Fee Table; Summary
4. Condensed Financial
Information . . . . . . . . . . . . . Condensed Financial
Information
5. General Description of Registrant,
Depositor, and Portfolio Companies
(a) Depositor . . . . . . . . . . VFL; Additional Information
About Valley Forge Life
Insurance Company
(b) Registrant . . . . . . . . . The Variable Account
(c) Portfolio Company . . . . . . The Funds
(d) Portfolio Company Prospectus. The Funds
(e) Voting Rights . . . . . . . . Voting Privileges
(f) Administrator . . . . . . . . Administrative Services
6. Deductions
(a) General . . . . . . . . . . . Contract Charges and Fees;
Summary
(b) Sales Load. . . . . . . . . . Contract Charges and Fees
(c) Special Purchase Plan . . . . Not Applicable
(d) Commission . . . . . . . . . Distribution of the
Contracts
(e) Expenses . . . . . . . . . . Contract Charges and Fees
(f) Organizational Expenses . . . Not Applicable
<PAGE> 3
<TABLE>
<S> <C> <C>
7. General Description of Variable
Annuity Contracts
(a) Persons With Rights . . . . . . . . . . Cover Page; Summary;
Description of the
Contract; Additional
Contract Information;
Selecting an Annuity
Payment Option
(b)(i) Allocation of Purchase
Payments . . . . . . . . . . . . . . . . Summary; Cancelling the
Contract; Crediting and
Allocating Purchase
Payments
(ii) Transfers . . . . . . . . . . . . . . . Summary; Transfers,
Annuity Payments
(iii) Exchanges . . . . . . . . . . . . . . . Not Applicable
(c) Changes . . . . . . . . . . . . . . . . The Variable Account;
Additional Contract
Information
(d) Inquiries . . . . . . . . . . . . . . . Cover Page; Summary
8. Annuity Period . . . . . . . . . . . . . . . . Summary; Selecting an
Annuity Payment Option
9. Death Benefit . . . . . . . . . . . . . . . . . Death of Owner or
Annuitant
10. Purchases and Contract Value
(a) Purchases . . . . . . . . . . . . . . . Summary; Purchasing a
Contract; Cancelling
the Contract; Crediting
and Allocating Purchase
Payments; Variable
Contract Value;
Transfers; Selecting an
Annuity Payment Option
(b) Valuation . . . . . . . . . . . . . . . Summary; Description of
the Contract; Contract
Charges and Fees;
Selecting an Annuity
Payment Option
(c) Calculations. . . . . . . . . . . . . . Variable Contract
Value; The Guaranteed
Interest Option;
Selecting an Annuity
Payment Option
(d) Underwriter . . . . . . . . . . . . . . Distribution of the
Contracts
11. Redemptions
(a) By Owners . . . . . . . . . . . . . . . Summary; Withdrawals;
Surrenders; Selecting
an Annuity Payment
Option; Federal Tax
Considerations
By Annuitant. . . . . . . . . . . . . . Not Applicable
(b) Texas ORP . . . . . . . . . . . . . . . Not Applicable
(c) Payment Delay . . . . . . . . . . . . . Payments by VFL
(d) Lapse . . . . . . . . . . . . . . . . . Not Applicable
(e) Free Look . . . . . . . . . . . . . . . Summary; Cancelling the
Contract
</TABLE>
<PAGE> 4
12. Taxes . . . . . . . . . . . . . . . . . . Federal Tax Status
13. Legal Proceedings . . . . . . . . . . . . Legal Proceedings
14. Table of Contents for the Statement of
Additional Information . . . . . . . . . Statement of Additional
Information
PART B
ITEM OF FORM N-4 STATEMENT OF ADDITIONAL
INFORMATION CAPTION
15. Cover Page. . . . . . . . . . . . . . . . Cover Page
16. Table of Contents . . . . . . . . . . . . Table of Contents
17. General Information and History . . . . . Additional Information
About Valley Forge Life
Insurance Company
(Prospectus)
18. Services
(a) Fees and Expenses of
Registrant . . . . . . . . . . . Contract Charges and Fees
(Prospectus)
(b) Management Contracts. . . . . . . Not Applicable
(c) Custodian . . . . . . . . . . . . Not Applicable
Accountant . . . . . . . . . . . Experts
(d) Assets of Registrant. . . . . . . The Variable Account
(Prospectus)
(e) Affiliated Persons . . . . . . . . Administrative Services
(Prospectus); Distribution
of The Contracts
(Prospectus)
(f) Underwriter . . . . . . . . . . . Distribution of the
Contract (Prospectus)
19. Purchase of Securities Being Offered. . . Summary (Prospectus);
Purchasing a Contract
(Prospectus); Distribution
of the Contracts
(Prospectus)
20. Underwriters . . . . . . . . . . . . . . Distribution of the
Contracts (Prospectus)
21. Calculation of Performance Data . . . . . Performance Information
22. Annuity Payments. . . . . . . . . . . . . Selecting an Annuity
Payment Option
(Prospectus)
23. Financial Statements. . . . . . . . . . . Financial Statements of
Valley Forge Life
Insurance Company
(Prospectus)
<PAGE> 5
PART C -- OTHER INFORMATION
ITEM OF FORM N-4 PART C CAPTION
24. Financial Statements and Exhibits. . . . . . . Financial Statements of
Valley Forge Life
Insurance Company
25. Directors and Officers of the
Depositor . . . . . . . . . . . . . . . . . . Directors and Officers
26. Persons Controlled By or Under
Common Control with the Depositor
or Registrant. . . . . . . . . . . . . . . . . Persons Controlled By or
Under Common Control
with the Depositor or
Registrant
27. Number of Contractowners. . . . . . . . . . . Number of Contractowners
28. Indemnification . . . . . . . . . . . . . . . Indemnification
29. Principal Underwriters. . . . . . . . . . . . Principal Underwriter
30. Location of Books and Records . . . . . . . . Location of Books and
Records
31. Management Services . . . . . . . . . . . . . Management Services
32. Undertakings. . . . . . . . . . . . . . . . . Undertakings
<PAGE> 6
PROSPECTUS
FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY CONTRACT
ISSUED BY
VALLEY FORGE LIFE INSURANCE COMPANY AND
VALLEY FORGE LIFE INSURANCE COMPANY VARIABLE ANNUITY
SEPARATE ACCOUNT
This prospectus describes a flexible premium deferred variable annuity
contract (the "Contract") that Valley Forge Life Insurance Company ("VFL")
issues. The Contract may be sold to or used in connection with retirement plans,
including plans that qualify for special federal income tax treatment under the
Internal Revenue Code.
You (the Owner) may allocate Net Purchase Payments and Contract values to
one or more of the Subaccounts of Valley Forge Life Insurance Company Variable
Annuity Separate Account (the "Variable Account"), or to the Guaranteed Interest
Option for one or more Guarantee Periods, or to both. The 17 Subaccounts of the
Variable Account invest their assets in a corresponding investment portfolio
(each, a "Fund") of Insurance Series, Variable Insurance Products Fund, Variable
Insurance Products Fund II, The Alger American Fund, MFS Variable Insurance
Trust, SoGen Variable Funds, Inc., and Van Eck Worldwide Insurance Trust (you
may review a complete list of the Funds on the next page). The Guaranteed
Interest Option guarantees a minimum fixed interest rate for specified periods
of time, currently 1 year, 3 years, 5 years, 7 years, and 10 years.
The Contract Value will vary daily as a function of the Subaccounts'
investment performance and any interest VFL credits under the Guaranteed
Interest Option. VFL does not guarantee any minimum Variable Contract Value for
amounts you allocate to the Variable Account. VFL may apply a market value
adjustment to annuity payments and other values the Contract provides, when such
payments are based on the Guaranteed Interest Option. The market value
adjustment may result in upward or downward adjustments to amounts withdrawn,
surrendered, transferred, paid on a Death Benefit, or applied to purchase
annuity payments.
This prospectus sets forth information regarding the Contract, the Variable
Account, and the Guaranteed Interest Option that you should know before
purchasing a Contract. You should read the prospectuses for the Funds, which
provide information regarding each Fund's investment objectives and policies, in
conjunction with this prospectus. A Statement of Additional Information having
the same date as this prospectus and providing additional information about the
Contract and the Variable Account has been filed with the Securities and
Exchange Commission (the "SEC"). It is incorporated herein by reference. To
obtain a free copy of this document, call or write the Service Center.
The SEC maintains a website that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC, including VFL. The website address is http://www.sec.gov.
Please read this prospectus carefully and keep it for future reference. The
current prospectuses for the Funds must accompany this prospectus.
An investment in a Contract is not:
- - a bank deposit or obligation
- - guaranteed or endorsed by any bank
- - insured by the Federal Deposit Insurance Corporation or any other government
agency
An investment in the Contract involves certain risks. You may lose your
purchase payments (principal).
THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
May 1, 1999
<PAGE> 7
You may choose to invest in the following funds:
- - Federated High Income Bond Fund II
- - Federated Prime Money Fund II
- - Federated Utility Fund II
- - Asset Manager Portfolio in the Variable Insurance Products Fund II
- - Contrafund Portfolio in the Variable Insurance Products Fund II
- - Index 500 Portfolio in the Variable Insurance Products Fund II
- - Equity-Income Portfolio in the Variable Insurance Products Fund
- - Alger American Growth Portfolio
- - Alger American MidCap Growth Portfolio
- - Alger American Small Capitalization Portfolio
- - MFS Emerging Growth Series
- - MFS Growth With Income Series
- - MFS Research Series
- - MFS Total Return Series
- - SoGen Overseas Variable Funds
- - Van Eck Worldwide Emerging Markets Fund
- - Van Eck Worldwide Hard Assets Funds
<PAGE> 8
TABLE OF CONTENTS
<TABLE>
<S> <C>
FEE TABLE................................................... 1
SUMMARY..................................................... 5
General Description....................................... 5
Purchasing a Contract..................................... 6
Canceling the Contract.................................... 6
Charges and Fees.......................................... 7
Transfers................................................. 8
Withdrawals............................................... 8
Surrenders................................................ 8
VFL, THE VARIABLE ACCOUNT, THE FUNDS, AND THE GUARANTEED
INTEREST OPTION........................................... 9
VFL....................................................... 9
The Variable Account...................................... 9
The Funds................................................. 10
The Guaranteed Interest Option............................ 13
DESCRIPTION OF THE CONTRACT................................. 16
Purchasing a Contract..................................... 16
Canceling the Contract.................................... 16
Crediting and Allocating Purchase Payments................ 17
Variable Contract Value................................... 17
Transfers................................................. 19
Withdrawals............................................... 21
Surrenders................................................ 22
Death of Owner or Annuitant............................... 22
Payments by VFL........................................... 24
Telephone Transaction Privileges.......................... 24
Supplemental Riders....................................... 25
CONTRACT CHARGES AND FEES................................... 25
Surrender Charge (Contingent Deferred Sales Charge)....... 25
Annual Administration Fee................................. 27
Transfer Processing Fee................................... 27
Taxes on Purchase Payments................................ 27
Mortality and Expense Risk Charge......................... 27
Administration Charge..................................... 28
Fund Expenses............................................. 28
Possible Charge for VFL's Taxes........................... 28
SELECTING AN ANNUITY PAYMENT OPTION......................... 28
Annuity Date.............................................. 28
Annuity Payment Dates..................................... 29
Election and Changes of Annuity Payment Options........... 29
Annuity Payments.......................................... 29
Annuity Payment Options................................... 31
ADDITIONAL CONTRACT INFORMATION............................. 32
Ownership................................................. 32
Changing the Owner or Beneficiary......................... 33
Misstatement of Age or Sex................................ 33
Change of Contract Terms.................................. 33
Reports to Owners......................................... 34
Miscellaneous............................................. 34
YIELDS AND TOTAL RETURNS.................................... 34
</TABLE>
i
<PAGE> 9
<TABLE>
<S> <C>
FEDERAL TAX STATUS............................................................................. 37
The Treatment of Annuities................................................................... 38
Taxation of Non-Qualified Contracts.......................................................... 38
Taxation of Qualified Plans.................................................................. 39
Withholding.................................................................................. 41
Possible Changes in Taxation................................................................. 41
Other Tax Consequences....................................................................... 41
OTHER INFORMATION.............................................................................. 42
Distribution of the Contracts................................................................ 42
Voting Privileges............................................................................ 42
Legal Proceedings............................................................................ 43
Company Holidays............................................................................. 43
Legal Matters................................................................................ 43
Experts...................................................................................... 43
ADDITIONAL INFORMATION ABOUT VALLEY FORGE LIFE INSURANCE COMPANY............................... 44
History and Business......................................................................... 44
Selected Financial Data...................................................................... 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........ 45
Results of Operations..................................................................... 45
Financial Condition....................................................................... 46
Investments............................................................................... 47
Risks and Uncertainties................................................................... 48
Liquidity and Capital Resources........................................................... 50
Accounting Standards...................................................................... 50
Forward-Looking Statements................................................................ 51
Other Additional Information................................................................. 52
Employees................................................................................. 52
Properties................................................................................ 52
Certain Agreements........................................................................ 52
Regulation................................................................................ 52
Directors and Executive Officers.......................................................... 54
Executive Compensation.................................................................... 55
Employment Contracts...................................................................... 56
Retirement Plans.......................................................................... 57
INDEPENDENT AUDITORS' REPORT................................................................... 59
FINANCIAL STATEMENTS OF VALLEY FORGE LIFE INSURANCE COMPANY.................................... 60
GLOSSARY....................................................................................... 61
APPENDIX A..................................................................................... A-1
APPENDIX B..................................................................................... B-1
APPENDIX C..................................................................................... C-1
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE
ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS.
ii
<PAGE> 10
FEE TABLE
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CONTRACT OWNER TRANSACTION EXPENSES
Sales load imposed on purchase payments..................... 0%
Maximum Surrender Charge (as a percentage of purchase
payments surrendered or withdrawn)........................ 7%
Transfer Processing Fee (each, after first 12 in a Contract
Year)..................................................... $25
Annual Administration Fee (waived if Contract Value exceeds
$50,000).................................................. $30
VARIABLE ACCOUNT ANNUAL EXPENSES (AS A PERCENTAGE OF NET
ASSETS)
Mortality and Expense Risk Charge........................... 1.25%
Administration Charge....................................... 0.15%
- -------------------------------------------------------------------
Total Variable Account Expenses 1.40%
===================================================================
</TABLE>
ANNUAL FUND EXPENSES [TO BE UPDATED BY AMENDMENT]
(AS A PERCENTAGE OF FUND AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
MANAGEMENT
(ADVISORY) OTHER TOTAL ANNUAL
FEES EXPENSES EXPENSES
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
INSURANCE SERIES:
Federated High Income Bond Fund II......
Federated Prime Money Fund II...........
Federated Utility Fund II...............
VARIABLE INSURANCE PRODUCTS FUND (VIP) AND
VARIABLE INSURANCE PRODUCTS FUND II (VIP
II):
Fidelity VIP Equity-Income Portfolio....
Fidelity VIP II Asset Manager
Portfolio............................
Fidelity VIP II Contrafund Portfolio....
Fidelity VIP II Index 500 Portfolio.....
THE ALGER AMERICAN FUND:
Alger American Growth Portfolio.........
Alger American MidCap Growth
Portfolio............................
Alger American Small Capitalization
Portfolio............................
MFS VARIABLE INSURANCE TRUST:
MFS Emerging Growth Series..............
MFS Growth With Income Series...........
MFS Research Series.....................
MFS Total Return Series.................
SOGEN VARIABLE FUNDS, INC.:
SoGen Overseas Variable Fund............
VAN ECK WORLDWIDE INSURANCE TRUST:
Van Eck Worldwide Emerging Markets
Fund.................................
Van Eck Worldwide Hard Assets Fund......
- ---------------------------------------------------------------------------------------
</TABLE>
1
<PAGE> 11
[1]
[2]
[3]
[4]
[5]
[6]
[7]
[8]
Taxes on purchase payments, generally ranging from 0% to 3.5% of purchase
payments, may be applicable, depending upon the laws of various jurisdictions.
The above tables are intended to help you understand the costs and expenses
that you will bear directly or indirectly. The table reflects the Variable
Account's anticipated expenses and reflects each Fund's actual expenses for the
year ended December 31, 1998. Expenses for these Funds are estimates and are not
based on past experience. For a more complete description of the various costs
and expenses, see "CONTRACT CHARGES AND FEES" and each Fund's prospectus.
2
<PAGE> 12
EXAMPLES [TO BE UPDATED BY AMENDMENT]
If you surrender your Contract at the end of the applicable time period,
you would pay the following expenses on a $1,000 purchase payment, assuming a 5%
annual rate of return on assets:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federated High Income Bond Fund II
Subaccount............................... $ 96 $139 $169 $268
Federated Prime Money Fund II Subaccount... $ 96 $139 $169 $268
Federated Utility Fund II Subaccount....... $ 96 $141 $172 $273
Fidelity VIP Equity-Income Subaccount...... $ 94 $132 $157 $243
Fidelity VIP II Asset Manager Subaccount... $ 94 $134 $161 $251
Fidelity VIP II Contrafund Subaccount...... $ 95 $136 $164 $258
Fidelity VIP II Index 500 Subaccount....... $ 91 $123 $141 $209
Alger American Growth Subaccount........... $ 96 $139 $168 $267
Alger American MidCap Growth Subaccount.... $ 96 $140 $171 $272
Alger American Small Capitalization
Subaccount............................... $ 97 $142 $174 $278
MFS Emerging Growth Subaccount............. $ 97 $142 $174 $279
MFS Growth With Income Subaccount.......... $ 98 $145 $179 $290
MFS Research Subaccount.................... $ 97 $145 $175 $281
MFS Total Return Subaccount................ $ 98 $145 $179 $290
SoGen Overseas Subaccount.................. $108 $176 $231 $393
Van Eck Worldwide Emerging Markets
Subaccount............................... $ 96 $139 $169 $268
Van Eck Worldwide Hard Assets Subaccount... $100 $150 $188 $380
- --------------------------------------------------------------------------------------------
</TABLE>
If you do not surrender your Contract or if you annuitize, you would pay
the following expenses on a $1,000 purchase payment, assuming a 5% annual rate
of return on assets:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federated High Income Bond Fund II
Subaccount............................... $ 26 $ 79 $129 $268
Federated Prime Money Fund II Subaccount... $ 26 $ 79 $129 $268
Federated Utility Fund II Subaccount....... $ 26 $ 81 $132 $273
Fidelity VIP Equity-Income Subaccount...... $ 24 $ 72 $117 $243
Fidelity VIP II Asset Manager Subaccount... $ 24 $ 74 $121 $251
Fidelity VIP II Contrafund Subaccount...... $ 25 $ 76 $124 $258
Fidelity VIP II Index 500 Subaccount....... $ 21 $ 63 $101 $209
Alger American Growth Subaccount........... $ 26 $ 79 $128 $267
Alger American MidCap Growth Subaccount.... $ 26 $ 80 $131 $272
Alger American Small Capitalization
Subaccount............................... $ 27 $ 82 $134 $278
MFS Emerging Growth Subaccount............. $ 27 $ 82 $134 $279
MFS Growth With Income Subaccount.......... $ 28 $ 85 $139 $290
MFS Research Subaccount.................... $ 27 $ 83 $135 $281
MFS Total Return Subaccount................ $ 28 $ 85 $139 $290
SoGen Overseas Subaccount.................. $ 38 $116 $191 $393
Van Eck Worldwide Emerging Markets
Subaccount............................... $ 26 $ 79 $129 $268
Van Eck Worldwide Hard Assets Subaccount... $ 30 $ 90 $148 $308
- --------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 13
The examples provided above assume that no transfer processing fees or
purchase payment taxes have been assessed. The examples also assume that the
annual administration fee is $30 and that the Contract Value per Contract is
$10,000, which translates the annual administration fee into an assumed .30%
charge (for purposes of the examples) based on a $1,000 investment. Under some
fixed annuity options, the surrender charges would not apply.
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THE 5% ANNUAL
RETURN ASSUMED IS HYPOTHETICAL AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE ANNUAL RETURNS, WHICH MAY BE GREATER OR LESS THAN THE ASSUMED
RATE.
4
<PAGE> 14
SUMMARY
GENERAL DESCRIPTION OF THE CONTRACT
The summary section of this prospectus contains a brief description of the
most important parts of the contract. You may find further detail in other
sections of this prospectus, the related Statement of Additional Information,
the contract, and the prospectuses of the underlying mutual funds. If you need
more information, please contact our Service Center at (800)808-4537.
In many jurisdictions, we issue the contract directly to individuals. In
some jurisdictions, however, we may issue only group contracts. We issue group
contracts to or on behalf of groups. For example, we may issue a group contract
to an employer on behalf of its employees. Individuals who are part of groups
for which a contract is issued receive a certificate containing the same
provisions as the group contract. Throughout this prospectus, the term
"contract" refers to individual contracts, group contracts and certificates for
group contracts.
Under this contract you may:
- allocate all or a portion of your net purchase payments among
several subaccounts of our Valley Forge Life Insurance Company
Variable Annuity Separate Account;
- transfer amounts you have already invested under the contract
among the subaccounts;
- allocate all (or a portion of) your net purchase payments to
our Guaranteed Interest Option Account; and
- transfer amounts you have already invested under the contract
to our Guaranteed Interest Option Account.
You may invest in the Guaranteed Interest Option Account for a guarantee
period of 1, 3, 5, 7, or 10 years. If the amount that you allocated or
transferred to the Guaranteed Interest Option Account remains in the account for
the entire guarantee period that you selected, its value will be equal to the
amount originally allocated or transferred plus the interest earned. We
calculate the interest that you earn by multiplying the amount you allocate or
transfer to the Guarantee Interest Option Account by the guarantee interest rate
on an annually compounded basis.
If you surrender, withdraw, transfer, or annuitize the amount that you
invested or transferred from another subaccount at any time other than within
the 30 days prior to the expiration of the guarantee period that you selected,
that amount will be subject to a market value adjustment. The market value
adjustment may cause the amount that you remove from the Guaranteed Interest
Option Account to increase or decrease from the amount you would receive if you
had invested for the entire guarantee period. The market value adjustment may
even reduce the amount you remove from the Guaranteed Interest Option Account to
an amount that is less than the net purchase payment that you initially
allocated or transferred to the Guaranteed Interest Option Account.
We do not promise that the amount that you invest under this contract will
increase in value. You bear the investment risk for all amounts invested under
this contract, except for the amounts that you allocate to the Guaranteed
Interest Option Account and leave in such account until at least 30 days before
the end of the guarantee period.
5
<PAGE> 15
You have a choice of annuity payment options. The beneficiary that you
select also may apply any death benefit to certain annuity payment options. You
may change your annuity date, within certain limits.
PURCHASING A CONTRACT
Your initial purchase payment for a contract must be at least $2,000. You
may make additional purchase payments of at least $100. We may refuse to accept
additional purchase payments at any time for any reason.
In your application to purchase a contract, you specify the accounts to
which you want to allocate your initial purchase payment. Your initial purchase
payment may be allocated in any combination among the subaccounts, and the
guarantee periods within the Guaranteed Interest Option Account.
You may cancel this contract by returning it to us within 10 days after you
first receive it. During this 10 day cancellation period, your home state may
require us to allocate the initial purchase payment to a money market account.
If we are required to allocate your initial purchase payment to a money market
account, then at the expiration of this cancellation period, we will add (or
subtract) the income earned (or lost) on this investment to your initial
purchase payment. We then will allocate the initial purchase payment as you
direct in your application.
Once you have selected the subaccounts or guarantee periods within the
Guarantee Interest Option Account to which you want to allocate your initial
purchase payment, you must then decide the percentage of the purchase payment to
be allocated to each selected account. All percentage allocations must be in
whole numbers. You must allocate at least:
- 1% of a purchase payment to any subaccount or to any guarantee
period within the Guaranteed Interest Option Account; and
- $500.00 to any selected guarantee period within the Guaranteed
Interest Option Account.
We will allocate any subsequent purchase payments among the subaccounts and
the guarantee periods within the Guaranteed Interest Option Account in
accordance with the percentages that you provided to us in your application. If
you want to change these percentage allocations, you must let us know, in
writing, of such changes.
You may also change these percentage allocations by telephone, provided you
have authorized us to accept such changes in your application, or in another
writing.
CANCELING THE CONTRACT
You may cancel this contract by returning it to us within 10 days after you
first receive it. Once you cancel the contract, we will give you a refund. Your
refund will be equal to the sum of the investment values in the subaccounts and
Guarantee Interest Option Accounts, less certain fees or charges. We will not
deduct any mortality risk charge, expense risk charge, or administration charge
from your refund.
Please note, you may live in a state that (1) requires a cancellation
period longer than 10 days; and/or (2) requires that we return to you the amount
of purchase payments that you made to us (rather than the investment values in
the subaccounts and Guarantee
6
<PAGE> 16
Interest Option Accounts). If you do live in such a state, we will comply with
such state's laws regarding cancellations and refunds.
CHARGES AND FEES
Once you purchase a contract, your contract value may be decreased by the
following charges and fees:
(1) SURRENDER CHARGE. We will deduct a surrender charge for certain
withdrawals if:
- you withdraw or surrender an amount equal to your purchase
payment (as described in the next two paragraphs) before the
passage of five full calendar years from the date that we
received your purchase payment; or
- you decide to receive annuity payments during the first full
five calendar years from the date we received your purchase
payment.
The surrender charge is 7% of the purchase payment if you surrender or
withdraw the purchase payment within two full years after we received it. The
surrender charge reduces by 1% each year for the next three years and is 0%
after five full years following receipt of the purchase payment.
In determining whether you have withdrawn your purchase payment, we assume
that when you withdraw amounts under your contract, that:
- you first withdraw the portion of your contract value that is
greater than the sum of your purchase payments; and
- you withdraw earlier purchases payments before later purchase
payments.
We will not deduct a surrender charge for withdrawals of any amount of your
contract value that exceeds the sum of your purchase payments. We will not
deduct a surrender charge under certain fixed annuitization options.
(2) ADMINISTRATION CHARGE. We will deduct a daily charge equal to 0.000411%
of the Valley Forge Life Insurance Company Variable Annuity Separate Account's
net assets. This daily charge covers a portion of our administration costs. This
daily charge is approximately equal to an annual charge of 0.15 %.
(3) MORTALITY AND EXPENSE RISK CHARGE. We will deduct a daily charge equal
to 0.003446% of the Valley Forge Life Insurance Company Variable Annuity
Separate Account's net assets. This charge compensates us for assuming certain
mortality and expense risks. This daily charge is approximately equal to an
annual charge of 1.25%.
(4) ANNUAL ADMINISTRATION FEE. If your contract value is less than $50,000,
we will deduct an annual administration fee of $30.
(5) TRANSFER PROCESSING FEE. Your first 12 transfers among the subaccounts
and/or Guarantee Interest Option Account are free. We will then deduct $25 for
each transfer in excess of the 12 free transfers during a Contract Year.
(6) TAXES ON PURCHASE PAYMENTS. Generally, you are taxed for income tax
purposes on purchase payments, if at all, at the time you begin to receive
annuity payments. Any
7
<PAGE> 17
charges for taxes on purchase payments are deducted from your contract value at
that time. These taxes range generally between 0% and 3.5% of purchase payments.
(7) MUTUAL FUND EXPENSES. The mutual funds in which your purchase payments
are invested may deduct certain operating fees. Please read the prospectus for
each of the mutual funds for details.
TRANSFERS
At any time prior to the date you begin to receive annuity payments, you
may transfer all or part of a contract value among subaccount(s) or guarantee
periods of the Guarantee Interest Option Account. You may transfer the lesser of
$500 or the entire value of the account.
WITHDRAWALS
At any time prior to the date you begin to receive annuity payments, you
may (subject to certain restrictions) withdraw part of the contract value. We
may deduct certain amounts from your withdrawal, which may include a surrender
charge, a market value adjustment, and purchase payment tax charges. Your
withdrawals may result in adverse federal income tax consequences, including a
penalty tax, in addition to any income tax that you may owe.
SURRENDERS
At any time prior to date you begin to receive annuity payments, you may
surrender the contract and receive its surrender value. The surrender value is
equal to the contract value, less certain charges (including a surrender charge,
purchase payment tax charges, administration charges, and market value
adjustments). You may elect to have the surrender value paid in a single sum or
under an annuity payment option. Your surrender may result in adverse federal
income tax consequences, including a penalty tax, in addition to any income tax
that you may owe.
OTHER INFORMATION
CONDENSED FINANCIAL INFORMATION. You will find the Variable Account's
condensed financial information in Appendix A of this prospectus.
8
<PAGE> 18
THE COMPANY, THE VARIABLE ACCOUNT, THE FUNDS
AND THE GUARANTEED INTEREST OPTION
VFL
VFL is a life insurance company organized under the laws of the
Commonwealth of Pennsylvania in 1956 and is authorized to transact business in
the District of Columbia, Puerto Rico, Guam and all states except New York.
VFL's home office is located at 401 Penn St., Reading, Pennsylvania 19601, and
its executive office is located at CNA Plaza, Chicago, Illinois 60685. VFL is a
wholly-owned subsidiary of Continental Assurance Company ("Assurance"), a life
insurance company which, as of December 31, 1998, had consolidated assets of
approximately $ billion. Subject to a reinsurance pooling agreement with
Assurance, VFL assumes all insurance risks under the Contracts, and VFL's
assets, which as of December 31, 1998 exceeded $ billion, support the
benefits under the Contracts. See "ADDITIONAL INFORMATION ABOUT VALLEY FORGE
LIFE INSURANCE COMPANY" for more detail regarding VFL.
THE VARIABLE ACCOUNT
The Variable Account is a separate investment account of VFL established
under Pennsylvania law on October 18, 1995. VFL owns the assets of the Variable
Account. These assets are held separately from VFL's General Account and its
other separate accounts. That portion of the Variable Account's assets that is
equal to the reserves and other Contract liabilities of the Variable Account is
not chargeable with liabilities arising out of any other business VFL may
conduct. If the assets exceed the required reserves and other contract
liabilities, VFL may transfer the excess to VFL's General Account. The Variable
Account's assets will at all times, equal or exceed the sum of the Subaccount
Values of all Contracts funded by the Variable Account.
The Variable Account is registered with the SEC under the Investment
Company Act of 1940 (the "1940 Act") as a unit investment trust and meets the
definition of a "separate account" under the federal securities laws. Such
registration does not involve any supervision by the SEC of the management of
the Variable Account or VFL. The Variable Account also is governed by the laws
of Pennsylvania, VFL's state of domicile, and may also be governed by laws of
other states in which VFL does business.
The Variable Account has 17 Subaccounts, each of which invests in shares of
a corresponding Fund. Income, gains and losses, realized or unrealized, from
assets allocated to a Subaccount are credited to or charged against that
Subaccount without regard to other income, gains or losses of VFL.
CHANGES TO THE VARIABLE ACCOUNT. Where permitted by applicable law, VFL may
make the following changes to the Variable Account:
1. any changes required by the 1940 Act or other applicable law or
regulation;
2. combine separate accounts, including the Variable Account;
3. add new Subaccounts to or remove existing Subaccounts from the
Variable Account or combine Subaccounts;
4. make Subaccounts (including new Subaccounts) available to such
classes of Contracts as VFL may determine;
5. add new Funds or remove existing Funds;
9
<PAGE> 19
6. substitute new Fund(s) for any existing Fund if shares of the Fund
are no longer available for investment or if VFL determines that investment
in a Fund is no longer appropriate in light of the purposes of the Variable
Account;
7. deregister the Variable Account under the 1940 Act if such
registration is no longer required; and
8. operate the Variable Account as a management investment company
under the 1940 Act or as any other form permitted by law.
No such changes will be made without any necessary approval of the SEC and
applicable state insurance departments. Owners will be notified of any changes.
THE FUNDS
Each Subaccount invests in a corresponding Fund. Each of the Funds 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
adviser. The Funds as well as a brief description of their investment objectives
are provided below.
Certain Funds may have investment objectives and policies similar to other
funds that are managed by the same investment advisor or manager. The investment
results of the Funds, however, may be higher or lower than those of such other
funds. We do not guarantee or make any representation that the investment
results of the Funds will be comparable to any other fund, even those with the
same investment advisor or manager.
INSURANCE SERIES
The Federated High Income Bond Fund II, Federated Prime Money Fund II and
Federated Utility Fund II Subaccounts each invest in shares of corresponding
Funds (i.e., investment portfolios) of Insurance Series ("IS"). IS issues five
"series" or classes of shares, each of which represents an interest in a Fund of
IS. Three of these series of shares are available as investment options under
the Contract. The investment objectives of these Funds are set forth below.
FEDERATED HIGH INCOME BOND FUND II. This Fund invests primarily in
lower-rated fixed-income securities that seek to achieve high current
income.
FEDERATED PRIME MONEY FUND II. This Fund invests in money market
instruments maturing in thirteen months or less to achieve current income
consistent with stability of principal and liquidity.
FEDERATED UTILITY FUND II. This Fund invests in equity and debt
securities of utility companies to achieve high current income and moderate
capital appreciation.
IS is advised by Federated Advisers.
VARIABLE INSURANCE PRODUCTS FUND AND VARIABLE INSURANCE PRODUCTS FUND II
The Equity-Income Subaccount invests in shares of a corresponding Fund of
Variable Insurance Products Fund ("VIP Fund"). VIP Fund issues five "series" or
classes of shares, each of which represents an interest in a Fund of VIP Fund.
One of these series of shares is available as an investment option under the
Contracts. Asset Manager,
10
<PAGE> 20
Contrafund, and Index 500 Subaccounts each invest in shares of corresponding
Funds of Variable Insurance Products Fund II ("VIP Fund II"). VIP Fund II issues
five "series" or classes of shares, each of which represents an interest in a
Fund of VIP Fund II. Three of these series of shares are available as investment
options under the Contract. The investment objectives of these Funds are set
forth below.
ASSET MANAGER PORTFOLIO. This Fund seeks high total return with
reduced risk over the long-term by allocating its assets among domestic and
foreign stocks, bonds and short-term fixed-income instruments.
CONTRAFUND PORTFOLIO. This Fund seeks capital appreciation over the
long-term by investing in companies that are undervalued or out-of-favor.
EQUITY-INCOME PORTFOLIO. This Fund seeks current income by investing
primarily in income producing equity securities. In choosing these
securities, the Fund also considers the potential for capital appreciation.
INDEX 500 PORTFOLIO. This Fund seeks investment results that
correspond to the total return of common stocks publicly traded in the
United States, as represented by the Standard & Poor's 500 Composite Index
of 500 Common Stocks.
VIP Fund and VIP Fund II are each advised by Fidelity Management & Research
Company.
THE ALGER AMERICAN FUND
Alger American Growth, Alger American MidCap Growth and Alger American
Small Capitalization Subaccounts each invest in shares of corresponding Funds of
The Alger American Fund ("AAF"). AAF issues six "series" or classes of shares,
each of which represents an interest in a Fund of AAF. Three of these series of
shares are available as investment options under the Contract. The investment
objectives of these Funds are set forth below.
ALGER AMERICAN GROWTH PORTFOLIO. This Fund seeks long-term capital
appreciation by investing in a diversified, actively managed portfolio of
equity securities, primarily of companies with total market capitalization
of $1 billion or greater.
ALGER AMERICAN MIDCAP GROWTH PORTFOLIO. This Fund seeks long-term
capital appreciation by investing in a diversified, actively managed
portfolio of equity securities, primarily of companies with total market
capitalization between $750 million and $3.5 billion.
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO. This Fund seeks
long-term capital appreciation by investing in a diversified, actively
managed portfolio of equity securities, primarily of companies with total
market capitalization of less than $1 billion.
AAF is advised by Fred Alger Management, Inc.
MFS VARIABLE INSURANCE TRUST
The MFS Emerging Growth, MFS Growth with Income, MFS Research and MFS Total
Return Subaccounts each invest in shares of corresponding Funds of MFS Variable
Insurance Trust ("MFSVIT"). MFSVIT issues 12 "series" or classes of shares, each
of
11
<PAGE> 21
which represents an interest in a Fund of MFSVIT. Four of these series of shares
are available as investment options under the Contract. The investment
objectives of these Funds are set forth below.
MFS EMERGING GROWTH SERIES. This Fund seeks to obtain long-term growth
of capital by investing primarily in common stocks of small and
medium-sized companies that are early in their life cycle but which have
the potential to become major enterprises.
MFS GROWTH WITH INCOME SERIES. This Fund seeks to provide reasonable
current income and long-term growth of capital and income.
MFS RESEARCH SERIES. This Fund seeks to provide long-term growth of
capital and future income.
MFS TOTAL RETURN SERIES. This Fund seeks primarily to provide
above-average income consistent with prudent employment of capital and
secondarily to provide a reasonable opportunity for growth of capital and
income.
MFSVIT is advised by Massachusetts Financial Services Company.
SOGEN VARIABLE FUNDS, INC.
The SoGen Overseas Subaccount invests in shares of a corresponding Fund of
SoGen Variable Funds, Inc. ("SGVF"). SGVF issues one "series" or class of shares
which represents an interest in a Fund of SGVF. This series of shares is
available as an investment option under the Contract. The investment objective
of this Fund is set forth below.
SOGEN OVERSEAS VARIABLE FUND. This Fund seeks long-term growth of
capital by investing primarily in securities of small and medium size
non-U.S. companies.
SGVF is advised by Societe Generale Asset Management Corp.
VAN ECK WORLDWIDE INSURANCE TRUST
The Worldwide Emerging Markets and Worldwide Hard Assets Subaccounts each
invest in shares of corresponding Funds of Van Eck Worldwide Insurance Trust
("VEWIT"). VEWIT issues five "series" or classes of shares, each of which
represents an interest in a Fund of VEWIT. Two of these series of shares are
available as investment options under the Contract. The investment objectives of
these Funds are set forth below.
WORLDWIDE EMERGING MARKETS FUND. This Fund seeks capital appreciation
by investing primarily in equity securities in emerging markets around the
world.
WORLDWIDE HARD ASSETS FUND. This Fund seeks long-term capital
appreciation by investing globally, primarily in securities of companies
engaged directly or indirectly in the exploration, development, production
and distribution of one or more of the following sectors: precious metals,
ferrous and non-ferrous metals, oil and gas, forest products, real estate
and other basic non-agricultural commodities.
VEWIT is advised by Van Eck Associates Corporation.
12
<PAGE> 22
NO ONE CAN ASSURE THAT ANY FUND WILL ACHIEVE ITS STATED OBJECTIVES AND POLICIES.
More detailed information concerning the investment objectives, policies
and restrictions of the Funds, the expenses of the Funds, the risks attendant to
investing in the Funds and other aspects of their operations can be found in the
current prospectus for each Fund which accompanies this prospectus and the
current statement of additional information for the Funds. The Funds'
prospectuses should be read carefully before any decision is made concerning the
allocation of Purchase Payments or transfers among the Subaccounts.
Please note that not all of the Funds described in the prospectuses for the
Funds are available with the Contract. Moreover, VFL cannot guarantee that each
Fund will always be available for its variable annuity contracts, but in the
event that a Fund is not available, VFL will take reasonable steps to secure the
availability of a comparable fund. Shares of each Fund are purchased and
redeemed at net asset value, without a sales charge.
VFL has entered into agreements with the investment advisers of several of
the Funds pursuant to which each such investment adviser pays VFL a servicing
fee based upon an annual percentage of the average aggregate net assets invested
by VFL on behalf of the Variable Account. These agreements reflect
administrative services provided to the Funds by VFL. Payments of such amounts
by an adviser do not increase the fees paid by the Funds or their shareholders.
Shares of the Funds are sold to separate accounts of insurance companies
that are not affiliated with VFL or each other, a practice known as "shared
funding." They are also sold to separate accounts to serve as the underlying
investment for both variable annuity contracts and variable life insurance
contracts, a practice known as "mixed funding." As a result, there is a
possibility that a material conflict may arise between the interests of Owners,
whose Contract Values are allocated to the Variable Account, and of owners of
other contracts whose contract values are allocated to one or more other
separate accounts investing in any one of the Funds. Shares of some of the Funds
may also be sold directly to certain qualified pension and retirement plans
qualifying under Section 401 of the Code. As a result, there is a possibility
that a material conflict may arise between the interests of Owners or owners of
other contracts (including contracts issued by other companies), and such
retirement plans or participants in such retirement plans. In the event of any
such material conflicts, VFL will consider what action may be appropriate,
including removing the Fund from the Variable Account or replacing the Fund with
another Fund. There are certain risks associated with mixed and shared funding
and with the sale of shares to qualified pension and retirement plans, as
disclosed in each Fund's prospectus.
THE GUARANTEED INTEREST OPTION
The Guaranteed Interest Option is an investment option available under the
Contract and is supported by VFL's General Account and the GIO Account
(described below). All or a portion of an Owner's Purchase Payments may be
allocated to and transfers of Contract Value may be made to Guarantee Periods
under the Guaranteed Interest Option. Through the Guaranteed Interest Option,
VFL offers specified effective annual rates of interest (Guaranteed Interest
Rates) that are credited daily and available for specified periods of time
selected by an Owner (Guarantee Periods). Although the Guaranteed Interest Rate
may differ among Guarantee Periods, it will never be less than the effective
annual rate shown in the Contract.
13
<PAGE> 23
Interests issued by VFL in connection with the Guaranteed Interest Option
have been registered under the Securities Act of 1933, but neither the
Guaranteed Interest Option, the GIO Account, nor the General Account has been
registered as an investment company under the 1940 Act. Accordingly, neither the
Guaranteed Interest Option, the GIO Account, nor the General Account, nor any
interest therein are generally subject to regulation under the 1940 Act.
Initial Guarantee Periods begin on the date as of which a Purchase Payment
is allocated to or a portion of Contract Value is transferred to the Guarantee
Period, and end when the number of years in the Guarantee Period elected
(measured from the end of the calendar month in which the amount was allocated
or transferred to the Guarantee Period) has elapsed. The last day of the
Guarantee Period is the expiration date for that Guarantee Period. Subsequent
Guarantee Periods begin on the first day following the expiration date of a
previous Guarantee Period.
Allocations of Purchase Payments and transfers of Contract Value to the
Guaranteed Interest Option may have different applicable Guaranteed Interest
Rates depending on the timing of such allocations or transfers. However, the
applicable Guaranteed Interest Rate does not change during a Guarantee Period.
If the allocated or transferred amount remains in the Guaranteed Interest Option
until the end of the applicable Guarantee Period, its value will be equal to the
amount originally allocated or transferred, multiplied, on an annually
compounded basis by its Guaranteed Interest Rate. If a Guarantee Amount is
surrendered, withdrawn, transferred, or applied to an Annuity Payment Option
prior to 30 days before the expiration of the Guarantee Period, the Guaranteed
Interest Rate for that Guarantee Period is subject to a Market Value Adjustment,
as described below. The application of a Market Value Adjustment may result in
the payment of an amount less than the amount originally allocated or
transferred to the Guarantee Period.
VFL will notify Owners in writing at least 30 days prior to the expiration
date of any Guarantee Period about the then currently available Guarantee
Periods and the Guaranteed Interest Rates applicable to such Guarantee Periods.
A new Guarantee Period of the same duration as the previous Guarantee Period
will commence automatically on the first day following the expiring Guarantee
Period, unless VFL receives Written Notice prior to the start of the new
Guarantee Period of the Owner's election of a different Guarantee Period from
among those being offered by VFL at that time, or instructions to transfer all
or a portion of the expiring Guarantee Amount to a Subaccount. If VFL does not
receive such Written Notice and is not offering a Guarantee Period of the same
duration as the expiring Guarantee Period or if the duration of the expiring
Guarantee Period would, if renewed, extend beyond the Annuity Date, then a new
Guarantee Period of one year will commence automatically on the first day
following the expiring Guarantee Period. The minimum Guarantee Amount is $500.
To the extent permitted by law, VFL reserves the right at any time to offer
Guarantee Periods that differ from those available when an Owner's Contract was
issued. VFL also reserves the right, at any time, to stop accepting Purchase
Payment allocations or transfers of Contract Value to a particular Guarantee
Period. Since the specific Guarantee Periods available may change periodically,
please contact the Service Center to determine the Guarantee Periods currently
being offered.
GIO ACCOUNT. The assets in the GIO Account are used to support the values
and benefits under the Guaranteed Interest Option of the Contract and similar
contracts. VFL owns the assets in the GIO Account and holds such assets
separately from its other assets
14
<PAGE> 24
and from the General Account. The portion of the assets of the GIO Account equal
to the reserves and other contract liabilities of the GIO Account are not
chargeable with liabilities that arise from any other business that VFL
conducts. VFL may transfer to the General Account any assets of the GIO Account
that are in excess of such reserves and other liabilities.
Under Pennsylvania insurance law, VFL is required to maintain assets in the
GIO Account at least equal to the reserves and other contract liabilities of the
GIO Account. In the unlikely event of liquidation of VFL, if VFL cannot satisfy
all of its insurance obligations, Owners with Guaranteed Interest Option Value
will have a priority claim against assets of the GIO Account equal to its
liabilities, and a claim against VFL's general account for any remaining VFL
liabilities. Thus, the GIO Account represents a pool of assets that provides an
additional measure of assurance that Owners allocating Purchase Payments and
Contract Value to the Guaranteed Interest Option will receive full payment of
benefits attributable to Guaranteed Interest Option.
Owners allocating Purchase Payments and/or Contract Value to the Guaranteed
Interest Option do not participate in the investment performance of assets of
the GIO Account, and this performance does not determine the Guaranteed Interest
Option Value or benefits relating thereto. The Guaranteed Interest Option
provides values and benefits based only upon the Purchase Payments and Contract
Values allocated thereto, the Guaranteed Interest Rate credited on such amounts,
and any charges or Market Value Adjustments imposed on such amounts in
accordance with the terms of the Contract.
MARKET VALUE ADJUSTMENT. A Market Value Adjustment reflects the
relationship between: (i) the current Guaranteed Interest Rate that VFL is
crediting for a Guarantee Period equal to the time remaining in the Guarantee
Period from which the Guarantee Amount is requested to be surrendered,
withdrawn, transferred or annuitized; and (ii) the Guaranteed Interest Rate
being applied to the Guarantee Period from which the Guarantee Amount will be
surrendered, withdrawn, transferred or annuitized. Any surrender, withdrawal,
transfer or application to an Annuity Payment Option of a Guarantee Amount is
subject to a Market Value Adjustment that may be positive or negative, unless
the effective date of the surrender, withdrawal, transfer or application is
within 30 days prior to the end of a Guarantee Period. The Market Value
Adjustment will be applied after the deduction of any applicable annual
administration fee or transfer processing fee, and before the deduction of any
applicable surrender charge or charge for taxes on purchase payments (also
referred to as a "premium tax" charge).
Generally, if the Guaranteed Interest Rate for the selected Guarantee
Period is lower than the Guaranteed Interest Rate currently being offered for
new Guarantee Periods of a duration equal to the balance of the selected
Guarantee Period as of the date that the Market Value Adjustment is applied,
then the application of the Market Value Adjustment will result in the payment,
upon surrender, withdrawal, transfer or application of amounts to an Annuity
Payment Option, of an amount less than the Guarantee Amount (or portion thereof)
being surrendered, withdrawn, transferred or applied to an Annuity Payment
Option. It may even result in the payment of an amount less than the Purchase
Payment allocated to or the portion of Contract Value transferred to the
Guarantee Period. Similarly, if the Guaranteed Interest Rate for the selected
Guarantee Period is higher than the Guaranteed Interest Rate currently being
offered for new Guarantee Periods of a duration equal to the balance of the
selected Guarantee Period as of the date that the Market Value Adjustment is
applied, then the application of the Market Value Adjustment will result in the
payment, upon surrender, withdrawal, transfer or application of amounts to an
Annuity Payment Option, of an amount greater than the Guarantee
15
<PAGE> 25
Amount (or portion thereof) being surrendered, withdrawn, transferred or applied
to an Annuity Payment Option.
The Market Value Adjustment is computed by multiplying the amount being
surrendered, withdrawn, transferred or applied to an Annuity Payment Option by
the Market Value Adjustment Factor. The Market Value Adjustment Factor is
calculated as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Market Value Adjustment = Amount multiplied by 3 1 1+A 2 N/12 -1 4
1+B
</TABLE>
where:
"Amount" is the amount being surrendered, withdrawn, transferred or
applied to an Annuity Payment Option less any applicable annual
administration fees or transfer processing fees;
"a" is the Guaranteed Interest Rate currently being credited to the
"Amount";
"b" is the Guaranteed Interest Rate that is currently being offered
for a Guarantee Period of duration equal to the time remaining to the
expiration of the Guarantee Period for the Guarantee Amount from which the
"Amount" is taken. Where the time remaining to the expiration of the
Guarantee Period is not 1, 3, 5, 7 or 10 years, "b" is the rate found by
linear interpolation of the rate for the Guarantee Period having the
duration closest to the time remaining or, if the time remaining is less
than 1 year, "b" is the rate for a 1 year period; and
"n" is the number of complete months remaining before the expiration
of the Guarantee Period for the Guarantee Amount from which the "Amount" is
taken.
Examples of computing the Market Value Adjustment are set forth in Appendix C.
DESCRIPTION OF THE CONTRACT
PURCHASING A CONTRACT
A prospective Owner may purchase a Contract by submitting an application
through a licensed agent of VFL who is also a representative of a broker-dealer
having a selling agreement with CNA Investor Services, Inc. ("CNA/ISI"), the
principal underwriter for the Contracts. The maximum Age on the Contract
Effective Date for Annuitants is 85. An initial purchase payment must be
delivered to the Service Center along with the Owner's application. The minimum
initial purchase payment is $2,000. The minimum additional purchase payment VFL
will accept is $100. Unless VFL gives its prior approval, it will not accept an
initial purchase payment in excess of $500,000 and reserves the right not to
accept any purchase payment for any reason. VFL will send Owners a confirmation
notice upon receipt and acceptance of the Owner's purchase payment.
CANCELING THE CONTRACT
Owners may cancel the Contract during the Cancellation Period, which is the
10-day period after an Owner receives the Contract. Some states may require a
longer Cancellation Period. To cancel the Contract, the Owner must mail or
deliver the Contract to the Service Center or to the agent who sold it. VFL will
refund the Contract Value plus any fees or charges deducted except for the
mortality and expense risk charge and the
16
<PAGE> 26
administration charge. If the Owner purchased a Contract in a state that
requires the return of purchase payments during the Cancellation Period and the
Owner chooses to exercise the cancellation right, then VFL will return the
purchase payments.
CREDITING AND ALLOCATING PURCHASE PAYMENTS
If the application for a Contract is properly completed and is accompanied
by all the information necessary to process it (including payment of the initial
purchase payment) VFL will allocate the initial Purchase Payment then as
designated by the Owner, to one or more of the Subaccounts or to the Guarantee
Periods within two business days of receipt of such Purchase Payment by VFL at
its Service Center. If the application is not properly completed, VFL reserves
the right to retain the Purchase Payment for up to five business days while it
attempts to complete the application. If the application cannot be made complete
within five business days, the applicant will be informed of the reasons for the
delay and the initial Purchase Payment will be returned immediately unless the
applicant specifically consents to VFL retaining the initial Purchase Payment
until the application is made complete. The initial Purchase Payment will then
be credited within two business days after receipt of a properly completed
application. VFL will credit additional Purchase Payments that are accepted by
VFL as of the end of the Valuation Period during which the Payment was received
at the Service Center.
The initial Purchase Payment is allocated among the Subaccounts and
Guarantee Periods as specified on the application, unless the Contract is issued
in a state that requires the return of purchase payments during the Cancellation
Period. In those states, any portion of the initial Purchase Payment allocated
to the Guaranteed Interest Option will be allocated to that option upon receipt;
and any portion of the initial Purchase Payment allocated to the Subaccounts
will be allocated to the Money Market Subaccount for a period equal to the
number of days in the Cancellation Period. At the expiration of this period,
such portion of the Purchase Payment, as adjusted to reflect the investment
performance of the Money Market Subaccount during this period, is then allocated
to the Subaccounts as described above.
Owners may allocate Purchase Payments among any or all Subaccounts or
Guarantee Periods available. If an Owner elects to invest in a particular
Subaccount or Guarantee Period, at least 1% of the Purchase Payment must be
allocated to that Subaccount or Guarantee Period. All percentage allocations
must be in whole numbers. The minimum amount that may be allocated to any
Guarantee Period is $500. VFL allocates any additional Purchase Payments among
the Subaccounts and the Guaranteed Interest Option in accordance with the
allocation schedule in effect when such Purchase Payment is received at the
Service Center unless it is accompanied by Written Notice directing a different
allocation.
VARIABLE CONTRACT VALUE
SUBACCOUNT VALUE. The Variable Contract Value is the sum of all Subaccount
Values and therefore reflects the investment experience of the Subaccounts to
which it is allocated. The Subaccount Value for any Subaccount as of the
Contract Effective Date is equal to the amount of the initial Purchase Payment
allocated to that Subaccount. On subsequent Valuation Days prior to the Annuity
Date, the Subaccount Value is equal to that part of any Purchase Payment
allocated to the Subaccount and any amount transferred to that Subaccount,
adjusted by interest income, dividends, net capital gains or losses, realized or
unrealized, and decreased by withdrawals (including any applicable
17
<PAGE> 27
surrender charges and any applicable purchase payment tax charge) and any
amounts transferred out of that Subaccount.
ACCUMULATION UNITS. Purchase Payments allocated to a Subaccount or amounts
of Contract Value transferred to a Subaccount are converted into Accumulation
Units. For any Contract, the number of Accumulation Units credited to a
Subaccount is determined by dividing the dollar amount directed to the
Subaccount by the value of the Accumulation Unit for that Subaccount for the
Valuation Day on which the Purchase Payment or transferred amount is invested in
the Subaccount. Therefore, Purchase Payments allocated to or amounts transferred
to a Subaccount under a Contract increase the number of Accumulation Units of
that Subaccount credited to the Contract.
Decreases in Subaccount Value under a Contract are effected by the
cancellation of Accumulation Units of a Subaccount. Therefore, surrenders,
withdrawals, transfers out of a Subaccount, payment of a death benefit, the
application of Variable Contract Value to an Annuity Payment Option on the
Annuity Date, and the deduction of the annual administration fee all result in
the cancellation of an appropriate number of Accumulation Units of one or more
Subaccounts. Accumulation Units are canceled as of the end of the Valuation
Period in which VFL received Written Notice regarding the event.
The Accumulation Unit value for each Subaccount was arbitrarily set
initially at $10 when the Subaccount began operations. Thereafter, the
Accumulation Unit value at the end of every Valuation Day equals the
Accumulation Unit value at the end of the preceding Valuation Day multiplied by
the Net Investment Factor (described below). The Subaccount Value for a Contract
is determined on any day by multiplying the number of Accumulation Units
attributable to the Contract in that Subaccount by the Accumulation Unit value
for that Subaccount.
THE NET INVESTMENT FACTOR. The Net Investment Factor is an index applied to
measure the investment performance of a Subaccount from one Valuation Period to
the next. For each Subaccount, the Net Investment Factor reflects the investment
experience of the Fund in which that Subaccount invests and the charges assessed
against that Subaccount for a Valuation Period. The Net Investment Factor is
calculated by dividing (1) by (2) and subtracting (3) from the result, where:
(1) is the result of:
a. the Net Asset Value Per Share of the Fund held in the
Subaccount, determined at the end of the current Valuation
Period; plus
b. the per share amount of any dividend or capital gain
distributions made by the Fund held in the Subaccount, if the
"ex-dividend" date occurs during the current Valuation Period;
plus or minus
c. a per share charge or credit for any taxes reserved for, which
is determined by VFL to have resulted from the operations of
the Subaccount.
(2) is the Net Asset Value Per Share of the Fund held in the
Subaccount, determined at the end of the last prior Valuation Period.
(3) is a daily factor representing the mortality and expense risk
charge and the administration charge deducted from the Subaccount, adjusted
for the number of days in the Valuation Period.
18
<PAGE> 28
TRANSFERS
GENERAL. Prior to the Annuity Date and after the Cancellation Period, an
Owner may transfer (by Written Notice) all or part of any Subaccount Value to
another Subaccount(s) (subject to its availability) or to one or more available
Guarantee Periods, or transfer all or part of any Guarantee Amount to any
Subaccount(s) (subject to its availability) or to one or more available
Guarantee Periods, subject to the following restrictions. The minimum transfer
amount is $500 or the entire Subaccount Value or Guarantee Amount, if less. The
minimum Subaccount Value or Guarantee Amount that may remain following a
transfer is $500. A transfer request that would reduce any Subaccount Value or
Guarantee Amount below $500 is treated as a transfer request for the entire
Subaccount Value or Guarantee Amount. Only four transfers may be made each
Contract Year from all or part of any Guarantee Amount. The first 12 transfers
during each Contract Year are free. VFL assesses a transfer processing fee of
$25 for each transfer in excess of 12 during a Contract Year. The transfer
processing fee is deducted from the amount being transferred. Each Written
Notice of transfer is considered one transfer regardless of how many Subaccounts
or Guarantee Periods are affected by the transfer.
DOLLAR-COST AVERAGING FACILITY. If elected in the application or at any
time thereafter prior to the Annuity Date by Written Notice, an Owner may
systematically transfer (on a monthly, quarterly, semi-annual or annual basis)
specified dollar amounts from the Money Market Subaccount to other Subaccounts.
Dollar cost averaging begins on the first available transfer date after our
Service Center receives your request. This is known as the "dollar-cost
averaging" method of investment. The fixed-dollar amount purchases more
Accumulation Units of a Subaccount when their value is lower and fewer units
when their value is higher. Over time, the cost per unit averages out to be less
than if all purchases of Units had been made at the highest value and greater
than if all purchases had been made at the lowest value. The dollar-cost
averaging method of investment reduces the risk of making purchases only when
the price of Accumulation Units is high. It does not assure a profit or protect
against a loss in declining markets.
Owners may only elect to use the dollar-cost averaging facility if their
Money Market Subaccount Value is at least $1,000 at the time of the election.
The minimum transfer amount under the facility is $100 per month (or the
equivalent). If dollar-cost averaging transfers are to be made to more than one
Subaccount, then the Owner must indicate the dollar amount of the transfer to be
made to each. At least $50 must be designated to each Subaccount.
Transfers under the dollar-cost averaging facility are made as of the same
calendar day each month. If this calendar day is not a Valuation Day, transfers
are made as of the next Valuation Day. Once elected, transfers under the
dollar-cost averaging facility continue until the Money Market Subaccount Value
is depleted, the Annuity Date occurs or until the Owner cancels the election by
Written Notice at least seven days in advance of the next transfer date.
Alternatively, Owners may specify in advance a date for transfers under the
facility to cease. There is no additional charge for using the dollar-cost
averaging facility. Transfers under the facility do not count towards the 12
transfers permitted without a transfer processing fee in any Contract Year. VFL
reserves the right to discontinue offering the dollar-cost averaging facility at
any time and for any reason or to change its features.
19
<PAGE> 29
GUARANTEED DOLLAR-COST AVERAGING FACILITY. If elected in the application,
an Owner may use the dollar-cost averaging facility to systematically transfer
specified dollar amounts (on a monthly or quarterly basis) from a Guarantee
Amount under the Guaranteed Interest Option. For this purpose, VFL may, from
time to time, offer a special one-year or six-month Guarantee Period designed
for use with the dollar-cost averaging facility. When available, an Owner may
allocate all or part of the initial purchase payment to a special Guarantee
Period. These special Guarantee Periods are not available for subsequent
purchase payments or transfers of Contract Value. The minimum dollar amount that
may be transferred from a Guarantee Amount using the dollar-cost averaging
facility is that amount which results in the entire Guarantee Amount being
transferred to one or more Subaccounts by the end of the special Guarantee
Period and in no case shall be less than $5,000. Once elected, transfers from a
Guarantee Amount under the facility do not cease until the Guarantee Amount is
depleted. No Market Value Adjustment applies to transfers described in this
paragraph. All other requirements applicable to dollar-cost averaging transfers
from the Money Market Subaccount apply to transfers described in this paragraph.
AUTOMATIC SUBACCOUNT VALUE REBALANCING. If elected in the application or
requested by Written Notice at any time thereafter prior to the Annuity Date, an
Owner may instruct VFL to automatically transfer (on a quarterly, semi-annual or
annual basis) Variable Contract Value between and among specified Subaccounts in
order to achieve a particular percentage allocation of Variable Contract Value
among such Subaccounts ("automatic Subaccount Value rebalancing"). Such
percentage allocations must be in whole numbers. Once elected, automatic
Subaccount Value rebalancing begins on the first Valuation Day of the next
calendar quarter or other period (or, if later, the next calendar quarter or
other period after the expiration of the Cancellation Period).
Owners may stop automatic Subaccount Value rebalancing at any time by
Written Notice at least seven calendar days before the first Valuation Day in a
new period. Owners may specify allocations between and among as many Subaccounts
as are available at the time automatic Subaccount Value rebalancing is elected.
Once automatic Subaccount Value rebalancing has been elected, any subsequent
allocation instructions that differ from the then-current rebalancing allocation
instructions are treated as a request to change the automatic Subaccount Value
rebalancing allocation. Owners may change automatic Subaccount Value rebalancing
allocations at any time. Allocation changes will take effect as of the Valuation
Day that instructions are received at the Service Center. Once automatic
Subaccount Value rebalancing is in effect, an Owner may only transfer Subaccount
Value among or between Subaccounts by changing the automatic Subaccount Value
rebalancing allocation instructions. Changes to automatic Subaccount Value
rebalancing must be made by Written Notice.
There is no additional charge for automatic Subaccount Value rebalancing
and rebalancing transfers do not count as one the 12 transfers available without
a transfer processing fee during any Contract Year. If automatic Subaccount
Value rebalancing is elected at the same time as the dollar-cost averaging
facility or when the dollar-cost averaging facility is being utilized, automatic
Subaccount Value rebalancing will be postponed until the first Valuation Day in
the calendar quarter or other period following the termination of dollar-cost
averaging facility. VFL reserves the right to discontinue offering automatic
Subaccount Value rebalancing at any time for any reason or to change its
features.
20
<PAGE> 30
WITHDRAWALS
GENERAL. Prior to the Annuity Date and after the Cancellation Period, an
Owner may withdraw part of the Surrender Value, subject to certain limitations.
Each withdrawal must be requested by Written Notice. The minimum withdrawal
amount is $500. The maximum withdrawal is the amount that would leave a minimum
Surrender Value of $1,000. A withdrawal request that would reduce any Subaccount
Value or Guarantee Amount below $500 will be treated as a request for a
withdrawal of all of that Subaccount Value or Guarantee Amount.
VFL withdraws the amount requested from the Contract Value as of the day
that VFL receives an Owner's Written Notice, and sends the Owner that amount.
VFL will then deduct any applicable surrender charge and any applicable purchase
payment tax charge from the remaining Contract Value. If the withdrawal is
requested from a Guarantee Amount, VFL deducts any applicable Market Value
Adjustment from, or adds any applicable Market Value Adjustment to, remaining
Contract Value. A deduction of a Market Value Adjustment from Contract Value may
result in the payment of an amount which, when added to any remaining Guarantee
Amount and amounts previously withdrawn or transferred, is less than the amount
allocated or transferred to a Guarantee Period to create that Guarantee Amount.
A Written Notice of withdrawal must specify the amount to be withdrawn from
each Subaccount or Guarantee Amount. If the Written Notice does not specify this
information, or if any Subaccount Value or Guarantee Amount is inadequate to
comply with the request, VFL will make the withdrawal based on the proportion
that each Subaccount Value and each Guarantee Amount bears to the Contract Value
as of the day of the withdrawal.
SYSTEMATIC WITHDRAWALS. If elected in the application or requested at any
time thereafter prior to the Annuity Date by Written Notice, an Owner may elect
to receive periodic withdrawals under VFL's systematic withdrawal plan, free of
any surrender charges. Under the systematic withdrawal plan, VFL will make
withdrawals (on a monthly, quarterly, semi-annual or annual basis) from
Subaccounts specified by the Owner. Withdrawals will begin one frequency period
after the request is received at our Service Center. Systematic withdrawals must
be at least $100 each and may only be made from Variable Contract Value.
Withdrawals under the systematic withdrawal plan may only be made from
Subaccounts having $1,000 or more of Subaccount Value at the time of election.
The systematic withdrawal plan is not available to Owners using the dollar-cost
averaging facility or automatic Subaccount Value rebalancing.
VFL makes systematic withdrawals on the following basis: (1) as a specified
dollar amount, or (2) as a specified whole percent of Subaccount Value.
Participation in the systematic withdrawal plan terminates on the earliest
of the following events: (1) the Subaccount Value from which withdrawals are
being made becomes zero, (2) a termination date specified by the Owner is
reached, or (3) the Owner requests that his or her participation in the plan
cease. Systematic withdrawals being made in order to meet the required minimum
distribution under the Code or to make substantially equal payments as required
under the Code will continue even though a surrender charge is deducted.
TAX CONSEQUENCES OF WITHDRAWALS. Consult your tax adviser regarding the tax
consequences associated with making withdrawals. A withdrawal made before the
taxpayer
21
<PAGE> 31
reaches Age 59 1/2, including systematic withdrawals, may result in imposition
of a penalty tax of 10% of the taxable portion withdrawn. See "FEDERAL TAX
STATUS" for more details.
SURRENDERS
An Owner may surrender the Contract for its Surrender Value at any time
prior to the Annuity Date. A Contract's Surrender Value fluctuates daily as a
function of the investment experience of the Subaccounts in which an Owner is
invested. VFL does not guarantee any minimum Surrender Value for amounts
invested in the Subaccounts. Likewise, VFL does not guarantee any minimum
Surrender Value for Guarantee Amounts surrendered, withdrawn, transferred or
applied to an Annuity Payment Option before the 30-day period prior to the
expiration of a Guarantee Period.
An Owner may elect to have the Surrender Value paid in a single sum or
under an Annuity Payment Option. The Surrender Value will be determined as of
the date VFL receives the Written Notice for surrender and the Contract at the
Service Center.
Consult your tax adviser regarding the tax consequences of a Surrender. A
Surrender made before age 59 1/2 may result in the imposition of a penalty tax
of 10% of the taxable portion of the Surrender Value. See "FEDERAL TAX STATUS"
for more details.
DEATH OF OWNER OR ANNUITANT
DEATH BENEFITS ON OR AFTER THE ANNUITY DATE. If an Owner dies on or after
the Annuity Date, any surviving joint Owner becomes the sole Owner. If there is
no surviving Owner, any successor Owner becomes the new Owner. If there is no
surviving or successor Owner, the Payee becomes the new Owner. If an Annuitant
or an Owner dies on or after the Annuity Date, the remaining undistributed
portion, if any, of the Contract Value will be distributed at least as rapidly
as under the method of distribution being used as of the date of such death.
Under some Annuity Payment Options, there will be no death benefit.
DEATH BENEFITS WHEN THE OWNER DIES BEFORE THE ANNUITY DATE. If any Owner
dies prior to the Annuity Date, any surviving joint Owner becomes the new sole
Owner. If there is no surviving joint Owner, any successor Owner becomes the new
Owner and if there is no successor Owner the Annuitant becomes the new Owner
unless the deceased Owner was also the Annuitant. If the sole deceased Owner was
also the Annuitant, then the provisions relating to the death of the Annuitant
(described below) will govern unless the deceased Owner was one of two joint
Annuitants, in which event the surviving Annuitant becomes the new Owner.
The following options are available to new Owners:
1. to receive the Adjusted Contract Value in a single lump sum within
five years of the deceased Owner's death; or
2. elect to receive the Adjusted Contract Value paid out under an
Annuity Payment Option provided that: (a) Annuity Payments begin within one
year of the deceased Owner's death, and (b) Annuity Payments are made in
substantially equal installments over the life of the new Owner or over a
period not greater than the life expectancy of the new Owner; or
22
<PAGE> 32
3. if the new Owner is the spouse of the deceased Owner, he or she may
by Written Notice within one year of the Owner's death, elect to continue
the Contract as the new Owner. If the spouse so elects, all of his or her
rights as a Beneficiary cease and if the deceased Owner was also the sole
Annuitant and appointed no Contingent Annuitant, he or she will become the
Annuitant. The spouse will be deemed to have made the election to continue
the Contract if he or she makes no election before the expiration of the
one year period or if he or she makes any purchase payments under the
Contract.
With regard to new Owners who are not the spouse of the deceased Owner: (a)
1 and 2 apply even if the Annuitant or Contingent Annuitant is alive at the time
of the deceased Owner's death, (b) if the new Owner is not a natural person,
only option 1 is available, (c) if no election is made within one year of the
deceased Owner's death, option 1 is deemed to have been elected.
Adjusted Contract Value is computed as of the date that VFL receives Due
Proof of Death of the Owner. Payments under this provision are in full
settlement of all of VFL's liability under the Contract.
DEATH BENEFITS WHEN THE ANNUITANT DIES BEFORE THE ANNUITY DATE. If the
Annuitant dies before the Annuity Date while the Owner is still living, any
Contingent Annuitant will become the Annuitant. If the Annuitant dies before the
Annuity Date and no Contingent Annuitant has been named, VFL will pay the death
benefit described below to the Beneficiary. If there is no surviving
Beneficiary, VFL will pay the death benefit to any Contingent Beneficiary. If
there is no surviving Contingent Beneficiary, VFL will immediately pay the death
benefit to the Owner's estate in a lump sum.
If the Annuitant who is also an Owner dies or if the Annuitant dies and the
Owner is not a natural person, a Beneficiary (or a Contingent Beneficiary):
1. will receive the death benefit in a single lump sum within 5 years
of the deceased Annuitant's death; or
2. may elect to receive the death benefit paid out under an Annuity
Payment Option provided that: (a) Annuity Payments begin within 1 year of
the deceased Annuitant's death, and (b) Annuity Payments are made in
substantially equal installments over the life of the Beneficiary or over a
period not greater than the life expectancy of the Beneficiary; or
3. if the Beneficiary is the spouse of the deceased Annuitant, he or
she may by Written Notice within one year of the Annuitant's death, elect
to continue the Contract as the new Owner. If the spouse so elects, all his
or her rights as a Beneficiary cease and if the deceased Annuitant was also
the sole Annuitant and appointed no Contingent Annuitant, he or she will
become the Annuitant. The spouse will be deemed to have made the election
to continue the Contract if he or she makes no election before the
expiration of the one year period or if he or she makes any purchase
payments under the Contract.
THE DEATH BENEFIT. The death benefit is an amount equal to the greatest of:
1. aggregate purchase payments made less any withdrawals as of the
date that VFL receives Due Proof of Death of the Annuitant; or
23
<PAGE> 33
2. the Contract Value as of the date that VFL receives Due Proof of
Death of the Annuitant; or
3. the minimum death benefit described below;
less any applicable purchase payment tax charge on the date that the death
benefit is paid.
The minimum death benefit is the death benefit floor amount as of the date
of the Annuitant's death (a) adjusted, for each withdrawal made since the most
recent reset of the death benefit floor amount, multiplying that amount by the
product of all ratios of the Contract Value immediately after a withdrawal to
the Contract Value immediately before such withdrawal (b) plus any purchase
payments made since the most recent reset of the death benefit floor amount.
The death benefit floor amount is the largest Contract Value attained on
any prior Contract Anniversary prior to the Annuitant's Age 81. Therefore, the
death benefit floor amount is reset when, on a Contract Anniversary, Contract
Value exceeds the current death benefit floor amount.
Examples of the computation of the death benefit are shown in Appendix C.
PAYMENTS BY VFL
VFL generally makes payments of withdrawals, surrenders, death benefits, or
any Annuity Payments within seven days of receipt of all applicable Written
Notices and/or Due Proofs of Death. However, VFL may postpone such payments for
any of the following reasons:
1. when the New York Stock Exchange ("NYSE") is closed for
trading other than customary holiday or weekend closing, or trading on
the NYSE is restricted, as determined by the SEC; or
2. when the SEC by order permits a postponement for the
protection of Owners; or
3. when the SEC determines that an emergency exists that would
make the disposal of securities held in the Variable Account or the
determination of their value not reasonably practicable.
If a recent check or draft has been submitted, VFL has the right to defer
payment of surrenders, withdrawals, death benefits or Annuity Payments until the
check or draft has been honored.
VFL may defer payment of any withdrawal, surrender or transfer of
Guaranteed Interest Option Value up to six months after it receives an Owner's
Written Notice. VFL pays interest on the amount of any payment that is deferred.
TELEPHONE TRANSACTION PRIVILEGES
An Owner may make transfers or change allocation instructions by
telephoning the Service Center. An Owner may authorize his agent or
representative to make such transfer by completing a form provided by VFL. A
telephone authorization form received by VFL at the Service Center is valid
until it is rescinded or revoked by Written Notice or until a subsequently dated
form signed by the Owner is received at the Service Center. VFL will
24
<PAGE> 34
send Owners a written confirmation of all transfers and allocation changes made
pursuant to telephone instructions.
The Service Center requires a form of personal identification prior to
acting on instructions received by telephone and also may tape record
instructions received by phone. If VFL follows these procedures, it is not
liable for any losses due to unauthorized or fraudulent transactions. VFL
reserves the right to suspend telephone transaction privileges at any time for
any reason.
SUPPLEMENTAL RIDERS
The following rider is available and may be added to a Contract.
GUARANTEED INTEREST OPTION FOR SYSTEMATIC TRANSFERS RIDER. This rider
allows you to systematically transfer specified dollar amounts of your initial
purchase payment (on a monthly or quarterly basis) from a designated Guaranteed
Interest Option Account under the Guaranteed Interest Option. There is no cost
associated with this rider.
CONTRACT CHARGES AND FEES
SURRENDER CHARGE (CONTINGENT DEFERRED SALES CHARGE)
GENERAL. No sales charge is deducted from purchase payments at the time
that such payments are made. However, within certain time limits described
below, a surrender charge is deducted upon any withdrawal, surrender or
annuitization. A surrender charge is assessed on Cash Value applied to an
Annuity Payment Option during the first five Contract Years. The surrender
charge is waived if annuitization occurs during Contract Years 2 to 5 and you
select annuitization Option 4, 5, or 6. No surrender charge is assessed on
Contract Value applied to an Annuity Payment Option after the fifth Contract
Year. If on the Annuity Date, however, the Payee elects (or the Owner previously
elected) to receive a lump sum, this sum will equal the Surrender Value on such
date.
In the event that surrender charges are not sufficient to cover sales
expenses, such expenses will be borne by VFL. Conversely, if the revenue from
such charges exceeds such expenses, the excess of revenues from such charges
over expenses will be retained by VFL. VFL does not currently believe that the
surrender charges deducted will cover the expected costs of distributing the
Contracts. Any shortfall will be made up from VFL's general assets, which may
include amounts derived from the mortality and expense risk charge.
CHARGE FOR SURRENDER OR WITHDRAWALS. The surrender charge is equal to the
percentage of each purchase payment surrendered or withdrawn (or applied to an
Annuity Payment Option during the first five Contract Years) as shown in the
table below. The surrender charge is separately calculated and applied to each
purchase payment at the time that the purchase payment is surrendered or
withdrawn. No surrender charge applies to the Contract Value in excess of
aggregate purchase payments (less prior withdrawals of the payments). The
surrender charge is calculated using the assumption that purchase payments are
surrendered Contract Value in excess of aggregate purchase payments (less
25
<PAGE> 35
prior withdrawals of purchase payments) is surrendered or withdrawn before any
purchase payments and that purchase payments are withdrawn on a
first-in-first-out basis.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
SURRENDER CHARGE
NUMBER OF FULL YEARS AS A PERCENTAGE
ELAPSED BETWEEN DATE OF OF PURCHASE
RECEIPT OF PURCHASE PAYMENT PAYMENT WITHDRAWN
AND DATE OF SURRENDER OF WITHDRAWAL OR SURRENDERED
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
0 7%
1 7%
2 6%
3 5%
4 4%
5+ 0%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
WITHDRAWALS. With regard to all withdrawals, VFL withdraws the amount
requested from the Contract Value as of the day that it receives the Written
Notice regarding the withdrawal and sends the Owner that amount. VFL then
deducts any surrender charge and any applicable purchase payment tax charge from
the remaining Contract Value. If the withdrawal is requested from a Guarantee
Amount, VFL deducts any applicable Market Value Adjustment from, or adds any
applicable Market Value Adjustment to, remaining Contract Value.
AMOUNTS NOT SUBJECT TO A SURRENDER CHARGE. Each Contract Year after the
first Contract Year (or the first Contract Year if systematic withdrawals are in
effect), an Owner may withdraw an amount equal to 15% of the greater of: (1)
aggregate purchase payments (less prior withdrawals of purchase payments) as of
the first Valuation Day of that Contract Year, or (2) Contract Value as of the
day Written Request for the withdrawal is received, without incurring surrender
charge. VFL reserves the right to limit the number of such "free" withdrawals in
any Contract Year. Owners may carry over to subsequent Contract Years, any
unused "free" withdrawal percentages. For example, if 10% of either aggregate
purchase payments (less prior withdrawals of purchase payments) or Contract
Value is withdrawn in a Contract Year, then in the next Contract Year, the Owner
may withdraw an amount equal to 20% (5% unused from the previous Contract Year
plus 15% withdrawal percentage for the current Contract Year) of the greater of:
(1) aggregate purchase payments (less prior withdrawals of purchase payments) as
of the first Valuation Day of that Contract Year, or (2) Contract Value as of
the day Written Request for the withdrawal is received, without incurring
surrender charge. However, the maximum amount of "free" withdrawals in any
Contract Year is 30% of the greater of (1) or (2) as defined above.
WAIVER OF SURRENDER CHARGE. VFL will waive the surrender charge in the
event that the Owner: (1) enters an "eligible nursing home," as defined in the
Contract, for a period of at least 90 days, (2) is diagnosed as having a
"terminal medical condition," as defined in the Contract, or (3) is less than
age 65 and sustains a "permanent and total disability," as defined in the
Contract. VFL reserves the right to require written proof of terminal medical
condition or permanent and total disability satisfactory to it and to require an
examination by a licensed physician of its choice. The surrender charge waiver
is not available in all states due to applicable insurance laws in effect in
various states.
26
<PAGE> 36
ANNUAL ADMINISTRATION FEE
An annual administration fee is deducted as of each Contract Anniversary
for the prior Contract Year. VFL also deducts this fee for the current Contract
Year when determining the Surrender Value prior to the end of a Contract Year
and on the Annuity Date. If Contract Value is $50,000 or less at the time of the
fee deduction, then the annual administration fee is $30. The fee is zero for
Contracts where the Contract Value exceeds $50,000 at the time the fee would be
deducted. This fee is to cover a portion of VFL's administrative expenses
related to the Contracts. VFL does not expect to make a profit from this fee.
The annual administration fee is assessed against Subaccount Values and
Guarantee Amounts based on the proportion that each bears to the Contract Value.
Where the fee is deducted from Subaccount Values, VFL will cancel an appropriate
number of Accumulation Units. Where the fee is obtained from a Guarantee Amount,
VFL will reduce the Guarantee Amount by the amount of the fee.
TRANSFER PROCESSING FEE
Prior to the Annuity Date, VFL permits 12 free transfers per Contract Year
among and between the Subaccounts and the Guarantee Periods. For each additional
transfer, VFL charges $25 at the time each such transfer is processed. The fee
is deducted from the amount being transferred. VFL does not expect to make a
profit from this fee.
TAXES ON PURCHASE PAYMENTS
Certain states and municipalities impose a tax on VFL in connection with
the receipt of annuity considerations. This tax generally can range from 0% to
3.5% of such considerations and generally varies based on the Annuitant's state
of residence. Taxes on annuity considerations are generally incurred by VFL as
of the Annuity Date based on the Contract Value on that date, and VFL deducts
the charge for taxes on annuity considerations from the Contract Value as of the
Annuity Date. Some jurisdictions impose a tax on annuity considerations at the
time such considerations are made. In those jurisdictions, VFL's current
practice is to pay the tax on annuity considerations and then deduct the charge
for these taxes from the Contract Value upon surrender, payment of the death
benefit, or upon the Annuity Date. VFL reserves the right to deduct any state
and local taxes on annuity considerations from the Contract Value at the time
such tax is due.
MORTALITY AND EXPENSE RISK CHARGE
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 at the rate of 0.003446% (approximately equivalent
to an effective annual rate of 1.25%) of the net assets of the Variable Account.
Approximately .70% of this annual charge is for the assumption of mortality risk
and .55% is for the assumption of expense risk. If the mortality and expense
risk charge is insufficient to cover the actual cost of the mortality and
expense risks undertaken by VFL, VFL will bear the shortfall. Conversely, if the
charge proves more than sufficient, the excess will be profit to VFL and will be
available for any proper purpose including, among other things, payment of
expenses incurred in selling the Contracts.
27
<PAGE> 37
The mortality risk that VFL assumes is the risk that Annuitants, as a
group, will live for a longer period of time than VFL estimated when it
established the guaranteed Annuity Payment rates in the Contract. Because of
these guarantees, each Payee is assured that his or her longevity will not have
an adverse effect on the Annuity Payments that he or she receives under Annuity
Payment Options based on life contingencies. VFL also assumes a mortality risk
because the Contracts guarantee a death benefit if the Annuitant dies before the
Annuity Date. The expense risk that VFL assumes is the risk that administration
charge, annual administration fee and the transfer processing fee may be
insufficient to cover the actual expenses of administering the Contracts.
ADMINISTRATION CHARGE
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
administering the Contracts. The daily charge is at a rate of 0.000411%
(approximately equivalent to an effective annual rate of 0.15%) of the net
assets of the Variable Account. VFL does not expect to make a profit from this
charge.
FUND EXPENSES
The investment performance of each Fund reflects the management fee that it
pays to its investment manager or adviser as well as other operating expenses
that it incurs. Investment management fees are generally daily fees computed as
a percent of a Fund's average daily net assets at an annual rate. Please read
the prospectus for each Fund for complete details.
POSSIBLE CHARGE FOR VFL'S TAXES
At the present time, VFL makes no charge to the Variable Account for any
federal, state or local taxes that VFL incurs which may be attributable to the
Variable Account or the Contracts. VFL, however, reserves the right in the
future to make a charge for any such tax or other economic burden resulting from
the application of the tax laws that it determines to be properly attributable
to the Subaccounts or to the Contracts.
SELECTING AN ANNUITY PAYMENT OPTION
ANNUITY DATE
The Owner selects the Annuity Date. For Non-Qualified Contracts, the
Annuity Date must be no later than the later of the Contract Anniversary
following the Annuitant's Age 85 (Age 99 where permitted under state law). For
most Qualified Contracts, the Annuity Date must be no later than April 1 of the
calendar year following the calendar year in which the Owner attains age 70 1/2.
An Owner may change the Annuity Date by Written Notice, subject to the following
limitations:
1. Written Notice is received at least 30 days before the current
Annuity Date; and
2. the requested new Annuity Date must be at least 30 days after VFL
receives Written Notice.
28
<PAGE> 38
ANNUITY PAYMENT DATES
VFL computes the first Annuity Payment as of the Annuity Date and makes the
first Annuity Payment as of the initial Annuity Payment Date selected by the
Owner. The initial Annuity Payment Date is the Annuity Date unless the Annuity
Date is the 29th, 30th or 31st day of a calendar month, in which event, the
Owner must select a different date. All subsequent Annuity Payments are computed
and payable as of Annuity Payment Dates. These dates will be the same day of the
month as the initial Annuity Payment Date. Monthly Annuity Payments will be
computed and payable as of the same day each month as the initial Annuity
Payment Date. Quarterly Annuity Payments will be computed and payable as of the
same day in the third, sixth, ninth, and twelfth month following the initial
Annuity Payment Date and on the same days of such months in each successive
Contract Year. Semi-annual Annuity Payment Dates will be computed and payable as
of the same day in the sixth and twelfth month following the initial Annuity
Payment Date and on the same days of such months in each successive Contract
Year. Annual Annuity Payments will be computed and payable as of the same day in
each Contract Year as the initial Annuity Payment Date. The frequency of Annuity
Payments selected is shown in the Contract. In the event that the Owner does not
select a payment frequency, payments will be made monthly.
ELECTION AND CHANGES OF ANNUITY PAYMENT OPTIONS
On the Annuity Date, the Surrender Value or Adjusted Contract Value is
applied under an Annuity Payment Option, unless the Owner elects to receive the
Surrender Value in a lump sum. If the Annuity Date falls during the first five
Contract Years, Surrender Value is applied under an Annuity Payment Option.
However, the surrender charge will be waived if annuitization occurs during
Contract Years 2 to 5 and you select annuitization Option 4, 5, or 6. If the
Annuity Date falls after the fifth Contract Anniversary, Adjusted Contract Value
is applied under an Annuity Payment Option. The Annuity Payment Option specifies
the type of annuity to be paid and determines how long the annuity will be paid,
the frequency, and the amount of each payment. The Owner may elect or change the
Annuity Payment Option by Written Notice at any time prior to the Annuity Date.
(See "Annuity Payment Options.") The Owner may elect to apply any portion of the
Surrender Value or Adjusted Contract Value to provide either Variable Annuity
Payments or Fixed Annuity Payments or a combination of both. If Variable Annuity
Payments are selected, the Owner must also select the Subaccounts to which
Surrender Value or Adjusted Contract Value will be applied. If no selection has
been made by the Annuity Date, Surrender Value or Adjusted Contract Value from
any Guaranteed Interest Option Value will be applied to purchase Fixed Annuity
Payments and Surrender Value or Adjusted Contract Value from each Subaccount
Value will be applied to purchase Variable Annuity Payments from that
Subaccount. If no Annuity Payment Option has been selected by the Annuity Date,
Surrender Value or Adjusted Contract Value will be applied under Annuity Payment
Option 5 (Life Annuity with Period Certain) with a designated period of 10
years. Any death benefit applied to purchase Annuity Payments is allocated among
the Subaccounts and/or the Guaranteed Interest Option as instructed by the
Beneficiary unless the Owner previously made the foregoing elections.
ANNUITY PAYMENTS
FIXED ANNUITY PAYMENTS. Fixed Annuity Payments are periodic payments from
VFL to the designated Payee, the amount of which is fixed and guaranteed by VFL.
The dollar
29
<PAGE> 39
amount of each Fixed Annuity Payment depends on the form and duration of the
Annuity Payment Option chosen, the Age of the Annuitant, the sex of the
Annuitant (if applicable), the amount of Adjusted Contract Value applied to
purchase the Fixed Annuity Payments and, for Annuity Payment Options 3-6, the
applicable annuity purchase rates. The annuity purchase rates in the Contract
are based on a Guaranteed Interest Rate of not less than 3%. VFL may, in its
sole discretion, make Fixed Annuity Payments in an amount based on a higher
interest rate. If Fixed Annuity Payments are computed based on an interest rate
in excess of the minimum Guaranteed Interest Rate, then, for the period of the
higher rate, the dollar amount of such Fixed Annuity Payments will be greater
than the dollar amount based on a 3% interest rate. VFL guarantees that any
higher rate will be in effect for at least 12 months.
Except for Annuity Payment Options 1 and 2, the dollar amount of the first
Fixed Annuity Payment is determined by dividing the dollar amount of Adjusted
Contract Value being applied to purchase Fixed Annuity Payments by $1,000 and
multiplying the result by the annuity purchase rate in the Contract for the
selected Annuity Payment Option. Subsequent Fixed Annuity Payments are of the
same dollar amount unless VFL makes payments based on an interest rate different
from that used to compute the first payment.
VARIABLE ANNUITY PAYMENTS. Variable Annuity Payments are periodic payments
from VFL to the designated Payee, the amount of which varies from one Annuity
Payment Date to the next as a function of the net investment experience of the
Subaccounts selected by the Owner or Payee to support such payments. The dollar
amount of the first Variable Annuity Payment is determined in the same manner as
that of a Fixed Annuity Payment. Therefore, provided that the interest rate on
which Fixed Annuity Payments are based equals the Benchmark Rate of Return on
which Variable Annuity Payments are based, for any particular amount of Adjusted
Contract Value applied to a particular Annuity Payment Option, the dollar amount
of the first Variable Annuity Payment would be the same as the dollar amount of
each Fixed Annuity Payment. Variable Annuity Payments after the first Payment
are similar to Fixed Annuity Payments except that the amount of each Payment
varies to reflect the net investment experience of the Subaccounts selected by
the Owner or Payee.
The dollar amount of the initial Variable Annuity Payment attributable to
each Subaccount is determined by dividing the dollar amount of the Adjusted
Contract Value to be allocated to that Subaccount on the Annuity Date by $1,000
and multiplying the result by the annuity purchase rate in the Contract for the
selected Annuity Payment Option. The dollar value of the total initial Variable
Annuity Payment is the sum of the initial Variable Annuity Payments attributable
to each Subaccount.
The number of Annuity Units attributable to a Subaccount is derived by
dividing the initial Variable Annuity Payment attributable to that Subaccount by
the Annuity Unit Value for that Subaccount for the Valuation Period ending on
the Annuity Date or during which the Annuity Date falls if the Valuation Period
does not end on such date. The number of Annuity Units attributable to each
Subaccount under a Contract remains fixed unless there is an exchange of Annuity
Units.
The dollar amount of each subsequent Variable Annuity Payment attributable
to each Subaccount is determined by multiplying the number of Annuity Units of
that Subaccount credited under the Contract by the Annuity Unit Value (described
below) for that Subaccount for the Valuation Period ending on the Annuity
Payment Date, or during which the Annuity Payment Date falls if the Valuation
Period does not end on such date.
30
<PAGE> 40
The dollar value of each subsequent Variable Annuity Payment is the sum of the
subsequent Variable Annuity Payments attributable to each Subaccount.
The Annuity Unit Value of each Subaccount for any Valuation Period is equal
to (a) multiplied by (b) divided by (c) where:
(a) is the Net Investment Factor for the Valuation Period for which
the Annuity Unit Value is being calculated;
(b) is the Annuity Unit Value for the preceding Valuation Period; and
(c) is a daily Benchmark Rate of Return factor (for the 3% benchmark
rate of return) adjusted for the number of days in the Valuation Period.
The Benchmark Rate of Return factor is equal to one plus 3%, or 1.03. The
annual factor can be translated into a daily factor of 1.00008098.
If the net investment return of the Subaccount for an Annuity Payment
period is equal to the pro-rated portion of the 3% Benchmark Rate of Return, the
Variable Annuity Payment attributable to that Subaccount for that period will
equal the Payment for the prior period. To the extent that such net investment
return exceeds an annualized rate of return of 3% for a Payment period, the
Payment for that period will be greater than the Payment for the prior period
and to the extent that such return for a period falls short of an annualized
rate of 3%, the Payment for that period will be less than the Payment for the
prior period.
"TRANSFERS" BETWEEN SUBACCOUNTS. By Written Notice at any time after the
Annuity Date, the Payee may change the Subaccount(s) from which Annuity Payments
are being made by exchanging the dollar value of a designated number of Annuity
Units of a particular Subaccount for an equivalent dollar amount of Annuity
Units of another Subaccount. On the date of the exchange, the dollar amount of a
Variable Annuity Payment generated from the Annuity Units of either Subaccount
would be the same. Exchanges of Annuity Units are treated as transfers for the
purpose of computing any transfer processing fee.
ANNUITY PAYMENT OPTIONS
OPTION 1. INTEREST PAYMENTS. VFL holds the Adjusted Contract Value as
principal and pays interest to the Payee. The interest rate is 3% per year
compounded annually. VFL pays interest every 1 year, 6 months, 3 months or 1
month, as specified at the time this option is selected. At the death of the
Payee, the value of the remaining payments are paid in a lump sum to the Payee's
estate. Only Fixed Annuity Payments are available under Annuity Payment Option
1.
OPTION 2. PAYMENTS OF A SPECIFIED AMOUNT. VFL pays the Adjusted Contract
Value in equal payments every 1 year, 6 months, 3 months or 1 month. The amount
and frequency of the payments is specified at the time this option is selected.
After each payment, interest is added to the remaining amount applied under this
option that has not yet been paid. The interest rate is 3% per year compounded
annually. Payments are made to the Payee until the amount applied under this
option, including interest, is exhausted. The total of the payments made each
year must be at least 5% of the amount applied under this option. If the Payee
dies before the amount applied is exhausted, VFL pays the
31
<PAGE> 41
value of the remaining payments in a lump sum to the Payee's estate. Only Fixed
Annuity Payments are available under Annuity Payment Option 2.
ADDITIONAL INTEREST EARNINGS. VFL may pay interest at rates in excess of
the rates guaranteed in Annuity Payment Options 1 and 2.
OPTION 3. PAYMENTS FOR A SPECIFIED PERIOD. VFL pays the lump sum in equal
payments for the number of years specified when the option is selected. Payments
are made every 1 year, 6 months, 3 months or 1 month, as specified when the
option is selected. If the Payee dies before the expiration of the specified
number of years, VFL pays the commuted value of the remaining payments in a lump
sum to the Payee's estate.
OPTION 4. LIFE ANNUITY. VFL makes monthly payments to the Payee for as long
as the Annuitant lives. UNDER THIS OPTION, A PAYEE COULD RECEIVE ONLY ONE
PAYMENT IF THE ANNUITANT DIES AFTER THE FIRST PAYMENT, TWO PAYMENTS IF THE
ANNUITANT DIES AFTER THE SECOND PAYMENT, ETC.
OPTION 5. LIFE ANNUITY WITH PERIOD CERTAIN. VFL makes monthly payments to
the Payee for as long as the Annuitant lives. At the time this option is
selected, a period certain of 5, 10, 15, or 20 years must also be selected. If
the Annuitant dies before the specified period certain ends, the payments to the
Payee will continue until the end of the specified period. The amount of the
monthly payments therefore depends on the period certain selected.
OPTION 6. JOINT LIFE AND SURVIVORSHIP ANNUITY. VFL makes monthly payments
to the Payee while both Annuitants are living. After the death of either
Annuitant, payments continue to the Payee for as long as the other Annuitant
lives. UNDER THIS OPTION, THE PAYEE COULD RECEIVE ONLY ONE PAYMENT IF BOTH
ANNUITANTS DIE AFTER THE FIRST PAYMENT, TWO PAYMENTS IF BOTH ANNUITANTS DIE
AFTER THE SECOND PAYMENT, ETC.
ADDITIONAL CONTRACT INFORMATION
OWNERSHIP
The Contract belongs to the Owner. An Owner may exercise all of the rights
and options described in the Contract.
Subject to more specific provisions elsewhere herein, an Owner's rights
include the right to: (1) select or change a successor Owner, (2) select or
change any Beneficiary or Contingent Beneficiary, (3) select or change the Payee
prior to the Annuity Date, (4) select or change the Annuity Payment Option, (5)
allocate Purchase Payments among and between the Subaccounts and Guarantee
Periods, (6) transfer Contract Value among and between the Subaccounts and
Guarantee Periods, and (7) select or change the Subaccounts on which Variable
Annuity Payments are based.
The rights of Owners of Qualified Contracts may be restricted by the terms
of a related employee benefit plan. For example, such plans may require an Owner
of a Qualified Contract to obtain the consent of his or her spouse before
exercising certain ownership rights or may restrict withdrawals. See "FEDERAL
TAX STATUS" for more details.
32
<PAGE> 42
Selection of an Annuitant or Payee who is not the Owner may have tax
consequences. You should consult a tax advisor as to these consequences.
CHANGING THE OWNER OR BENEFICIARY
Prior to the Annuity Date and after the Cancellation Period, an Owner may
transfer ownership of the Contract subject to VFL's published rules at the time
of the change.
At any time before a death benefit is paid, the Owner may name a new
Beneficiary by Written Notice unless an irrevocable Beneficiary has previously
been named. When an irrevocable Beneficiary has been designated, the Owner must
provide the irrevocable Beneficiary's written consent to VFL before a new
Beneficiary is designated.
These changes take effect as of the day the Written Notice is received at
the Service Center and VFL is not liable for any payments made under the
Contract prior to the effectiveness of any change. For possible tax consequences
of these changes, see "FEDERAL TAX STATUS."
MISSTATEMENT OF AGE OR SEX
If the Age or sex of the Annuitant given in the application is misstated,
VFL will adjust the benefits it pays under the Contract to the amount that would
have been payable at the correct Age or sex. If VFL made any underpayments
because of any such misstatement, it shall pay the amount of such underpayment
plus interest at an annual effective rate of 3%, immediately to the Payee or
Beneficiary in one sum. If VFL makes any overpayments because of a misstatement
of Age or sex, it shall deduct from current or future payments due under the
Contract, the amount of such overpayment plus interest at an annual effective
rate of 3%.
CHANGE OF CONTRACT TERMS
Upon notice to the Owner, VFL may modify the Contract to:
1. conform the Contract or the operations of VFL or of the Variable
Account to the requirements of any law (or regulation issued by a
government agency) to which the Contract, VFL or the Variable Account is
subject;
2. assure continued qualification of the Contract as an annuity
contract or a Qualified Contract under the Code;
3. reflect a change (as permitted in the Contract) in the operation of
the Variable Account; or
4. provide additional Subaccounts and/or Guarantee Periods.
In the event of any such modification, VFL will make appropriate
endorsements to the Contract.
Only one of VFL's officers may modify the Contract or waive any of VFL's
rights or requirements under the Contract. Any modification or waiver must be in
writing. No agent may bind VFL by making any promise not contained in the
Contract.
33
<PAGE> 43
REPORTS TO OWNERS
Prior to the Annuity Date, VFL will send each Owner a report at least
annually, or more often as required by law, indicating: the number of
Accumulation or Annuity Units credited to the Contract and the dollar value of
such units; the Contract Value, Adjusted Contract Value and Surrender Value; any
purchase payments, withdrawals, or surrenders made, death benefits paid and
charges deducted since the last report; the current interest rate applicable to
each Guarantee Amount; and any other information required by law.
The reports, which will be mailed to Owners at their last known address,
will include any information that may be required by the SEC or the insurance
supervisory official of the jurisdiction in which the Contract is delivered. VFL
will also send any other reports, notices or documents required by law to be
furnished to Owners.
MISCELLANEOUS
NON-PARTICIPATING. The Contract does not participate in the surplus or
profits of VFL and VFL does not pay dividends on the Contract.
PROTECTION OF PROCEEDS. To the extent permitted by law, no benefits payable
under the Contract to a Beneficiary or Payee are subject to the claims of an
Owner's or a Beneficiary's creditors.
DISCHARGE OF LIABILITY. Any payments made by VFL under any Annuity Payment
Option or in connection with the payment of any withdrawal, surrender or death
benefit, shall discharge VFL's liability to the extent of each such payment.
PROOF OF AGE AND SURVIVAL. VFL reserves the right to require proof of the
Annuitant's Age prior to the Annuity Date. In addition, for life contingent
Annuity Options, VFL reserves the right to require proof of the Annuitant's
survival before any Annuity Payment Date.
CONTRACT APPLICATION. VFL issues the Contract in consideration of the
Owner's application and payment of the initial purchase payment. The entire
Contract is made up of the Contract, any attached endorsements or riders, and
the application. In the absence of fraud, VFL considers statements made in the
application to be representations and not warranties. VFL will not use any
statement in defense of a claim or to void the Contract unless it is contained
in the application. VFL will not contest the Contract.
YIELDS AND TOTAL RETURNS
From time to time, VFL may advertise or include in sales literature certain
performance related information for the Subaccounts, including yields and
average annual total returns. Certain Funds have been in existence prior to the
commencement of the offering of the Contracts. VFL may advertise or include in
sales literature the performance of the Subaccounts that invest in these Funds
for these prior periods. The performance information of any period prior to the
commencement of the offering of the Contracts is calculated as if the Contract
had been offered during those periods, using current charges and expenses.
34
<PAGE> 44
Performance information discussed herein is based on historic results and
does not indicate or project future performance. For a description of the
methods used to determine yield and total return for the Subaccounts, see the
Statement of Additional Information.
Effective yields and total returns for the Subaccounts are based on the
investment performance of the corresponding Funds. The performance of a Fund in
part reflects its expenses. See the prospectuses for the Funds for Fund expense
information.
The yield of the Money Market Subaccount refers to the annualized income
generated by an investment in the Subaccount over a specified seven-day period.
The yield is calculated by assuming that the income generated for that seven-day
period is generated each seven-day period over a 52-week period and is shown as
a percentage of the investment. The effective yield is calculated similarly but,
when annualized, the income earned by an investment in the Subaccount is assumed
to be reinvested. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
The yield of a Subaccount other than the Money Market Subaccount refers to
the annualized income generated by an investment in the Subaccount over a
specified 30-day or one-month period. The yield is calculated by assuming that
the income generated by the investment during that 30-day or one-month period is
generated each period over a 12-month period and is shown as a percentage of the
investment.
The total return of a Subaccount refers to return quotations assuming an
investment under a Contract has been held in the Subaccount for various periods
of time including, but not limited to, a period measured from the date the
Subaccount commenced operations. Average annual total return refers to total
return quotations that are annualized based on an average return over various
periods of time.
The average annual total return quotations represent the average annual
compounded rates of return that would equate an initial investment of $1,000
under a Contract to the redemption value of that investment as of the last day
of each of the periods for which total return quotations are provided. Average
annual total return information shows the average annual percentage change in
the value of an investment in the Subaccount from the beginning date of the
measuring period to the end of that period. This standardized version of average
annual total return reflects all historical investment results, less all charges
and deductions applied against the Subaccount (including any surrender charge
that would apply if an Owner terminated the Contract at the end of each period
indicated, but excluding any deductions for premium taxes). When a Subaccount,
other than the Money Market Subaccount, has been in operation for one, five and
ten years respectively, the standard version average annual total return for
these periods will be provided.
In addition to the standard version described above, total return
performance information computed on two different non-standard bases may be used
in advertisements or sales literature. Average annual total return information
may be presented, computed on the same basis as described above, except
deductions will not include the surrender charge. In addition, VFL may from time
to time disclose cumulative total return for Contracts funded by Subaccounts.
From time to time, yields, standard average annual total returns, and
non-standard total returns for the Funds may be disclosed, including such
disclosures for periods prior to the date the Variable Account commenced
operations.
Non-standard performance data will only be disclosed if the standard
performance data for the required periods is also disclosed. For additional
information regarding the
35
<PAGE> 45
calculation of other performance data, please refer to the Statement of
Additional Information.
In advertising and sales literature, the performance of each Subaccount may
be compared with the performance of other variable annuity issuers in general or
to the performance of particular types of variable annuities investing in mutual
funds, or investment portfolios of mutual funds with investment objectives
similar to the Subaccount. Lipper Analytical Services, Inc. ("Lipper"), Variable
Annuity Research Data Service ("VARDS") and Morningstar, Inc. ("Morningstar")
are independent services which monitor and rank the performance of variable
annuity issuers in each of the major categories of investment objectives on an
industry-wide basis.
Lipper's and Morningstar's rankings include variable life insurance issuers
as well as variable annuity issuers. VARDS rankings compare only variable
annuity issuers. The performance analyses prepared by Lipper, VARDS and
Morningstar each rank such issuers on the basis of total return, assuming
reinvestment of distributions, but do not take sales charges, redemption fees or
certain expense deductions at the separate account level into consideration. In
addition, VARDS prepares risk rankings, which consider the effects of market
risk on total return performance. This type of ranking provides data as to which
funds provide the highest total return within various categories of funds
defined by the degree of risk inherent in their investment objectives.
Advertising and sales literature may also compare the performance of each
Subaccount to the Standard & Poor's Index of 500 Common Stocks, a widely used
measure of stock performance. This unmanaged index assumes the reinvestment of
dividends but does not reflect any "deduction" for the expense of operating or
managing an investment portfolio. Other independent ranking services and indices
may also be used as a source of performance comparison.
VFL may also report other information including the effect of tax-deferred
compounding on a Subaccount's investment returns, or returns in general, which
may be illustrated by tables, graphs or charts.
36
<PAGE> 46
FEDERAL TAX STATUS
THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED AS TAX ADVICE
INTRODUCTION
The following summary provides a general description of the Federal income
tax considerations associated with the Contract and does not purport to be
complete or to cover all tax situations. This discussion is not intended as tax
advice. Counsel or other competent tax advisers should be consulted for more
complete information. This discussion is based upon VFL's understanding of the
present Federal income tax laws. No representation is made as to the likelihood
of continuation of the present Federal income tax laws or as to how they may be
interpreted by the Internal Revenue Service (the "IRS").
The Contract may be purchased on a tax-qualified basis ("Qualified
Contract") or non-tax-qualified basis ("Non-Qualified Contract"). Qualified
Contracts are designed for use by individuals whose premium payments are
comprised solely of proceeds from and/or contributions under retirement plans
that are intended to qualify as plans entitled to special income tax treatment
under Sections 401(a), 403(b), 408, 408A, or 459 of the Code. The ultimate
effect of Federal income taxes on the amounts held under a Contract, or annuity
payments, depends on the type of retirement plan, on the tax and employment
status of the individual concerned, and on VFL's tax status. In addition,
certain requirements must be satisfied in purchasing a Qualified Contract with
proceeds from a tax-qualified plan and receiving distributions from a Qualified
Contract in order to continue receiving favorable tax treatment. Some retirement
plans are subject to distribution and other requirements that are not
incorporated into our Contract administration procedures. Owners, participants
and Beneficiaries are responsible for determining that contributions,
distributions and other transactions with respect to the Contracts comply with
applicable law. Therefore, purchasers of Qualified Contracts should seek
competent legal and tax advice regarding the suitability of a Contract for their
situation. The following discussion assumes that Qualified Contracts are
purchased with proceeds from and/or contributions under retirement plans that
qualify for the intended special federal income tax treatment.
TAX STATUS OF THE CONTRACTS
DIVERSIFICATION REQUIREMENTS. The Code requires that the investments of the
Variable Account be adequately diversified in order for the Contracts to be
treated as annuity contracts for Federal income tax purposes. It is intended
that the Variable Account, through the Funds, will satisfy these diversification
requirements.
OWNER CONTROL. In certain circumstances, owners of variable annuity
contracts have been considered for Federal income tax purposes to be the owners
of the assets of the variable account supporting their contracts due to their
ability to exercise investment control over those assets. When this is the case,
the contract owners have been currently taxed on income and gains attributable
to the variable account assets. There is little guidance in this area, and some
features of the Contracts, such as the flexibility of an Owner to allocate
premium payments and transfer Contract Value, have not been explicitly addressed
in published rulings. While VFL believes that the Contracts do not give Owners
investment control over Variable Account assets, VFL reserves the right to
modify the
37
<PAGE> 47
Contracts as necessary to prevent an Owner from being treated as the owner of
the Variable Account assets supporting the Contract.
REQUIRED DISTRIBUTIONS. In order to be treated as an annuity contract for
Federal income tax purposes, the Code requires any Non-Qualified Contract to
contain certain provisions specifying how your interest in the Contract will be
distributed in the event of your death. The Non-Qualified Contracts contain
provisions that are intended to comply with these Code requirements, although no
regulations interpreting these requirements have yet been issued. We intend to
review such provisions and modify them if necessary to assure that they comply
with the applicable requirements when such requirements are clarified by
regulation or otherwise.
Other rules may apply to Qualified Contracts.
The following discussion assumes that the Contracts will qualify as annuity
contracts for Federal income tax purposes.
THE TREATMENT OF ANNUITIES
IN GENERAL. VFL believes that if you are a natural person you will not be
taxed on increases in the value of a Contract until a distribution occurs or
until annuity payments begin. (For these purposes, an agreement to assign or
pledge any portion of the Contract Value, and, in the case of a Qualified
Contract, any portion of an interest in the qualified plan, generally is treated
as a distribution.)
TAXATION OF NON-QUALIFIED CONTRACTS
NON-NATURAL PERSON. The Owner of any annuity contract who is not a natural
person generally must include in income any increase in the excess of the
Contract Value over the "investment in the contract" (generally, the premiums or
other consideration paid for the contract) during the taxable year. There are
some exceptions to this rule and a prospective Owner that is not a natural
person may wish to discuss these with a tax adviser. The following discussion
generally applies to Contracts owned by natural persons.
WITHDRAWALS. When a withdrawal from a Non-Qualified Contract occurs, the
amount received will be treated as ordinary income subject to tax up to an
amount equal to the excess (if any) of the Contract Account Value immediately
before the distribution over the Owner's investment in the Contract at that
time. In the case of a surrender under a Non-Qualified Contract, the amount
received generally will be taxable only to the extent it exceeds the Owner's
investment in the Contract.
MARKET VALUE ADJUSTMENTS. The tax treatment of market value adjustments is
uncertain. You should consult a tax advisor as to those consequences.
PENALTY TAX ON CERTAIN WITHDRAWALS. In the case of a distribution from a
Non-Qualified Contract, there may be imposed a federal tax penalty equal to ten
percent of the amount treated as income. In general, however, there is no
penalty on distributions:
- made on or after the taxpayer reaches age 59 1/2
- made on or after the death of an Owner;
- attributable to the taxpayer"s becoming disabled; or
38
<PAGE> 48
- made as part of a series of substantially equal periodic payments
for the life (or life expectancy) of the taxpayer.
Other exceptions may be applicable under certain circumstances and special
rules may be applicable in connection with the exceptions enumerated above. A
tax adviser should be consulted with regard to exceptions from the penalty tax.
Other tax penalties may apply to Qualified Contracts.
ANNUITY PAYMENTS. Although tax consequences may vary depending on the
Annuity Payment Option elected under an annuity contract, a portion of each
annuity payment is generally not taxed and the remainder is taxed as ordinary
income. The non-taxable portion of an annuity payment is generally determined in
a manner that is designed to allow an Owner to recover his or her investment in
the Contract ratably on a tax-free basis over the expected stream of annuity
payments, as determined when annuity payments start. Once an investment in the
Contract has been fully recovered, however, the full amount of each annuity
payment is subject to tax as ordinary income.
TAXATION OF DEATH BENEFIT PROCEEDS. Amounts may be distributed from a
Contract because of the Owner's or the Annuitant's death. Generally, such
amounts are includible in the income of the recipient as follows: (a) if
distributed in a lump sum, they are taxed in the same manner as a surrender of
the Contract, or (b) if distributed under a Payment Option, they are taxed in
the same way as annuity payments.
TRANSFERS, ASSIGNMENTS OR EXCHANGES OF A CONTRACT. A transfer or assignment
of ownership of a Contract, the designation of an Annuitant, the selection of
certain Annuity Dates, or the exchange of a Contract may result in certain tax
consequences to Owners that are not discussed herein. An Owner contemplating any
such transfer, assignment or exchange, should consult a tax advisor as to the
tax consequences.
WITHHOLDING. Annuity distributions are generally subject to withholding for
the recipient's federal income tax liability. Recipients can generally elect,
however, not to have tax withheld from distributions.
MULTIPLE CONTRACTS. All annuity contracts that are issued by VFL (or its
affiliates) to the same Owner during any calendar year are treated as one
annuity contract for purposes of determining the amount includible in such
Owner's income when a taxable distribution occurs.
TAXATION OF QUALIFIED CONTRACTS
The Contracts are designed for use with several types of qualified plans.
The tax rules applicable to participants in these qualified plans vary according
to the type of plan and the terms and conditions of the plan itself. Special
favorable tax treatment may be available for certain types of contributions and
distributions. Adverse tax consequences may result from contributions in excess
of specified limits; distributions prior to age 59 1/2 (subject to certain
exceptions); distributions that do not conform to specified commencement and
minimum distribution rules; and in other specified circumstances. Therefore, no
attempt is made to provide more than general information about the use of the
Contracts with the various types of qualified retirement plans. Owners,
Annuitants, Beneficiaries and Payees are cautioned that the rights of any person
to any benefits under these qualified retirement plans may be subject to the
terms and conditions of the plans themselves, regardless of the
39
<PAGE> 49
terms and conditions of the Contract, but VFL is not bound by the terms and
conditions of such plans to the extent such terms contradict the Contract,
unless VFL consents.
DISTRIBUTIONS. Annuity payments are generally taxed in the same manner as
under a Non-Qualified Contract. When a withdrawal from a Qualified Contract
occurs, a pro rata portion of the amount received is taxable, generally based on
the ratio of the Owner's investment in the Contract to the participant's total
accrued benefit balance under the retirement plan. For Qualified Contracts, the
investment in the contract can be zero.
Brief descriptions follow of the various types of qualified retirement
plans in connection with a Contract. We will endorse the Contract as necessary
to conform it to the requirements of such plan.
CORPORATE AND SELF-EMPLOYED PENSION AND PROFIT SHARING PLANS. Section
401(a) of the Code permits corporate employers to establish various types of
retirement plans for employees, and permits self-employed individuals to
establish these plans for themselves and their employees. These retirement plans
may permit the purchase of the Contracts to accumulate retirement savings under
the plans. Adverse tax or other legal consequences to the plan, to the
participant, or to both may result if this Contract is assigned or transferred
to any individual as a means to provide benefit payments, unless the plan
complies with all legal requirements applicable to such benefits prior to
transfer of the Contract. Employers intending to use the Contract with such
plans should seek competent advice.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
"Individual Retirement Annuity" or "IRA." These IRAs are subject to limits on
the amount that can be contributed, the deductible amount of the contribution,
the persons who may be eligible, and the time when distributions commence. Also,
distributions from certain other types of qualified retirement plans may be
"rolled over" or transferred on a tax-deferred basis into an IRA. There are
significant restrictions on rollover or transfer contributions from Savings
Incentive Match Plans (SIMPLE), under which certain employers may, provide
contributions to IRAs on behalf of their employees, subject to special
restrictions. Employers may establish Simplified Employee Pension (SEP) Plans to
provide IRA contributions on behalf of their employees. Sales of the Contract
for use with IRAs may be subject to special requirements of the IRS.
ROTH IRAS. Effective January 1, 1998, section 408A of the Code permits
certain eligible individuals to contribute to a Roth IRA. Contributions to a
Roth IRA, which are subject to certain limitations, are not deductible, and must
be made in cash or as a rollover or transfer from another Roth IRA or other IRA.
A rollover from or conversion of an IRA to a Roth IRA may be subject to tax, and
other special rules may apply. Distributions from a Roth IRA generally are not
taxed, except that, once aggregate distributions exceed contributions to the
Roth IRA, income tax and a 10% penalty tax may apply to distributions made (1)
before age 59 1/2 (subject to certain exceptions) or (2) during the five taxable
years starting with the year in which the first contribution is made to the Roth
IRA.
TAX SHELTERED ANNUITIES. Section 403(b) of the Code allows employees of
certain Section 501(c)(3) organizations and public schools to exclude from their
gross income the premium payments made, within certain limits, on a Contract
that will provide an annuity for the employee's retirement. These premium
payments may be subject to FICA (social security) tax.
40
<PAGE> 50
The following amounts may not be distributed from Code section 403(b)
annuity contracts prior to the employee's death, attainment of age 59 1/2,
separation from service, disability, or financial hardship: (1) elective
contributions made in years beginning after December 31, 1988; (2) earnings on
those contributions; and (3) earnings in such years on amounts held as of the
last year beginning before January 1, 1989. In addition, income attributable to
elective contributions may not be distributed in the case of hardship.
DEFERRED COMPENSATION PLANS. Section 457 of the Code provides for certain
deferred compensation plans. These plans may be offered with respect to service
for state governments, local governments, political subdivisions, agencies,
instrumentalities, certain affiliates of such entities and tax exempt
organizations. The plans may permit participants to specify the form of
investment for their deferred compensation account. With respect to
non-governmental plans, all investments are owned by the sponsoring employer and
are subject to the claims of the general creditors of the employer; and
depending on the terms of the particular plan, the employer may be entitled to
draw on the deferred amounts for purposes unrelated to its Section 457 plan
obligations.
WITHHOLDING
Distributions from Contracts generally are subject to withholding for the
Owner's federal income tax liability. The withholding rate varies according to
the type of distribution and the Owner's tax status. The Owner will be provided
the opportunity to elect not have tax withheld from distributions.
"Eligible rollover distributions" from section 401(a) plans and section
403(b) tax-sheltered annuities are subject to a mandatory federal income tax
withholding of 20%. An eligible rollover distribution is the taxable portion of
any distribution from such a plan, except certain distributions such as minimum
distributions required by the Code or distributions in a specified annuity form.
The 20% withholding does not apply, however, if the Owner chooses a "direct
rollover" from the plan to another tax-qualified plan or IRA.
POSSIBLE CHANGES IN TAXATION
Although the likelihood of legislative change is uncertain, there is always
the possibility that the tax treatment of the Contracts could change by
legislation or other means. It is also possible that any change could be
retroactive (that is, effective prior to the date of the change). A tax adviser
should be consulted with respect to legislative developments and their effect on
the Contract.
OTHER TAX CONSEQUENCES
As noted above, the foregoing comments about the Federal tax consequences
under the Contracts are not exhaustive, and special rules are provided with
respect to other tax situations not discussed in this prospectus. Further, the
Federal income tax consequences discussed herein reflect our understanding of
current law, and the law may change. Federal estate and state and local estate,
inheritance and other tax consequences of ownership or receipt of distributions
under a Contract depend on the individual circumstances of each Owner of
recipient of the distribution. A competent tax adviser should be consulted for
further information.
41
<PAGE> 51
OTHER INFORMATION
DISTRIBUTION OF THE CONTRACTS
CNA Investor Services, Inc. ("CNA/ISI"), which is located at CNA Plaza,
Chicago, Illinois 60685, is principal underwriter and distributor of the
Contracts. CNA/ISI is an affiliate of VFL, is registered with the SEC as a
broker-dealer, and is a member of the National Association of Securities
Dealers, Inc. VFL pays CNA/ISI for acting as principal underwriter under a
distribution agreement. The Contracts are offered on a continuous basis and VFL
does not anticipate discontinuing the offer.
Applications for Contracts are solicited by agents who are licensed by
applicable state insurance authorities to sell VFL's insurance contracts and who
are also registered representatives of a broker-dealer having a selling
agreement with CNA/ISI. Such broker-dealers will generally receive commissions
based on a percent of purchase payments made (up to a maximum of 7%). The
writing agent will receive a percentage of these commissions from the respective
broker-dealer, depending on the practice of that broker-dealer. Owners do not
pay these commissions.
VOTING PRIVILEGES
In accordance with current interpretations of applicable law, VFL votes
Fund shares held in the Variable Account at regular and special shareholder
meetings of the Funds in accordance with instructions received from persons
having voting interests in the corresponding Subaccounts. If, however, the 1940
Act or any regulation thereunder should be amended, or if the present
interpretation thereof should change, or VFL otherwise determines that it is
allowed to vote the shares in its own right, it may elect to do so.
The number of votes that an Owner or Annuitant has the right to instruct
are calculated separately for each Subaccount, and may include fractional votes.
Prior to the Annuity Date, the Owner holds a voting interest in each Subaccount
to which Variable Contract Value is allocated. After the Annuity Date, the Payee
has a voting interest in each Subaccount from which Variable Annuity Payments
are made.
For each Owner, the number of votes attributable to a Subaccount will be
determined by dividing the Owner's Subaccount Value by the Net Asset Value Per
Share of the Fund in which that Subaccount invests. For each Payee, the number
of votes attributable to a Subaccount is determined by dividing the liability
for future Variable Annuity Payments to be paid from that Subaccount by the Net
Asset Value Per Share of the Fund in which that Subaccount invests. This
liability for future payments is calculated on the basis of the mortality
assumptions, the selected Benchmark Rate of Return and the Annuity Unit Value of
that Subaccount on the date that the number of votes is determined. As Variable
Annuity Payments are made to the Payee, the liability for future payments
decreases as does the number of votes.
The number of votes available to an Owner or Payee are determined as of the
date coinciding with the date established by the Fund for determining
shareholders eligible to vote at the relevant meeting of the Fund's
shareholders. Voting instructions are solicited by written communication prior
to such meeting in accordance with procedures established for the Fund. Each
Owner or Payee having a voting interest in a Subaccount will receive proxy
materials and reports relating to any meeting of shareholders of the Funds in
which that Subaccount invests.
42
<PAGE> 52
Fund shares as to which no timely instructions are received and shares held
by VFL in a Subaccount as to which no Owner or Payee has a beneficial interest
are voted in proportion to the voting instructions that are received with
respect to all Contracts participating in that Subaccount. Voting instructions
to abstain on any item to be voted upon are applied to reduce the total number
of votes eligible to be cast on a matter. Under the 1940 Act, certain actions
affecting the Variable Account may require Contract Owner approval. In that
case, an Owner will be entitled to vote in proportion to his Variable Contract
Value.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate Accounts are a party
or to which the assets of the Variable Account are subject. VFL, as an insurance
company, is ordinarily involved in litigation including class action lawsuits.
In some class action and other lawsuits involving insurance companies,
substantial damages have been sought and/or material settlement payments have
been made. Although the outcome of any litigation cannot be predicted with
certainty, VFL believes that at the present time there are no pending or
threatened lawsuits that are reasonably likely to have a material adverse impact
on its ability to meet its obligations under the Contract or to the Variable
Account nor does VFL expect to incur significant losses from such actions.
COMPANY HOLIDAYS
VFL is closed on the following days in 1999: Memorial Day, the day after
Independence Day, Labor Day, Thanksgiving Day, the day after Thanksgiving Day,
Christmas Eve, and New Years Eve.
LEGAL MATTERS
All matters relating to Pennsylvania law pertaining to the Contracts,
including the validity of the Contracts and VFL's authority to issue the
Contracts, have been passed upon by Lynne Gugenheim, Esquire, Vice President and
Associate General Counsel of VFL. Sutherland, Asbill & Brennan LLP of
Washington, D.C. has provided advice on certain matters relating to the federal
securities laws.
EXPERTS
The balance sheets of VFL as of December 31, 1998, 1997 and 1996, and the
related statements of operations, stockholder's equity and cash flows for each
of the three years in the period ended December 31, 1998, have been audited by
Deloitte & Touche LLP, independent auditors, as set forth in their report
thereon and included herein. Such financial statements are included in this
prospectus in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
43
<PAGE> 53
ADDITIONAL INFORMATION ABOUT
VALLEY FORGE LIFE INSURANCE COMPANY
HISTORY AND BUSINESS
Valley Forge Life Insurance Company ("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 ("CNAF"). Loews Corporation owns approximately 84% of
the outstanding common stock of CNAF.
VFL sells a variety of individual and group insurance products. The
individual insurance products consist primarily of term and universal life
insurance policies and individual annuities. Group insurance products include
life, pension and accident and health, consisting primarily of major medical and
hospitalization. A new portfolio of variable products, including annuity and
universal life products, was marketed in 1997. These products offer
policyholders the option of allocating payments to one or more variable accounts
or to a guaranteed income account or both. Payments allocated to the variable
accounts are invested in corresponding investment portfolios where the
investment risk is borne by the policyholder while payments allocated to the
guaranteed income account earn a minimum guaranteed rate of interest for a
specified period of time for annuity contracts and one year for life products.
The operations, assets and liabilities of VFL and its parent, Assurance,
are managed, to a large extent, on a combined basis. Pursuant to a Reinsurance
Pooling Agreement, amended July 1, 1996, VFL cedes all of its business,
excluding its separate account business, to its parent, Assurance. This business
is then pooled with the business of Assurance, which excludes Assurance's
participating contracts and separate account business, and 10% of the combined
pool is assumed by VFL.
SELECTED FINANCIAL DATA (TO BE UPDATED BY AMENDMENT)
The following selected financial data for VFL should be read in conjunction
with the financial statements and notes thereto included in this prospectus.
SELECTED FINANCIAL DATA FOR THE PERIODS ENDED DECEMBER 31
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS OF DOLLARS) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Investment Income..................... $ 29,913 $ 29,312 $ 31,494 $ 22,759 $ 16,144
- ----------------------------------------------------------------------------------------------------------------
Net Operating Income (Excluding Realized
Investment Gains/Losses)................ $ 10,600 $ 13,618 $ 13,551 $ 10,408 $ 4,655
- ----------------------------------------------------------------------------------------------------------------
Net Income................................ $ 13,300 $ 16,719 $ 22,510 $ 7,482 $ 7,107
- ----------------------------------------------------------------------------------------------------------------
Total Assets.............................. $2,368,426 $1,980,802 $1,641,438 $1,447,122 $1,258,039
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE> 54
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[TO BE UPDATED BY AMENDMENT]
Valley Forge Life Insurance Company ("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 ("CNAF"). Loews Corporation owns approximately 84% of
the outstanding common stock of CNAF.
VFL sells a variety of individual and group insurance products. The
individual insurance products consist primarily of term and universal life
insurance policies and individual annuities. Group insurance products include
life, accident and health, consisting primarily of major medical and
hospitalization and pension products. A new portfolio of variable products,
including annuity and universal life products was marketed in 1997. These
products offer policyholders the option of allocating payments to one or more
variable accounts or to a guaranteed income account or both. Payments allocated
to the variable accounts are invested in corresponding investment portfolios
where the investment risk is borne by the policyholder while payments allocated
to the guaranteed income account earn a minimum guaranteed rate of interest for
a specified period of time for annuity contracts and one year for life products.
The operations, assets and liabilities of VFL and its parent, Assurance,
are managed, to a large extent, on a combined basis. Pursuant to a Reinsurance
Pooling Agreement, amended July 1, 1996, VFL cedes all of its business,
excluding its separate account business to its parent, Assurance. This business
is then pooled with the business of Assurance, which excludes Assurance's
participating contracts and separate account business, and 10% of the combined
pool is assumed by VFL.
RESULTS OF OPERATIONS
The following table summarizes key components of VFL's operating results
for each of the last three years:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands of dollars)
OPERATING REVENUES:
(excluding realized investment gains/losses):
Revenues:
Group premium............................................. $273,939 $272,914 $248,285
Individual premium........................................ 58,233 52,572 48,368
-------- -------- --------
Total premiums.......................................... 332,172 325,486 296,653
-------- -------- --------
Net investment income....................................... 29,913 29,312 31,494
Other....................................................... 6,872 8,217 4,818
-------- -------- --------
Total revenues.......................................... 368,957 363,015 332,965
Benefits and expenses....................................... 352,530 342,039 312,038
-------- -------- --------
Operating income before income tax........................ 16,427 20,976 20,927
Income tax expense.......................................... (5,827) (7,358) (7,376)
- --------------------------------------------------------------------------------------------
Net operating income
(excluding realized investment gains/losses) $ 10,600 $ 13,618 $ 13,551
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE> 55
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL FINANCIAL DATA:
Net operating income:
Group..................................................... $ 4,255 $ 5,409 $ 7,954
Individual................................................ 6,345 8,209 5,597
-------- -------- --------
Net operating income.................................... 10,600 13,618 13,551
Net realized investment gains............................. 2,730 3,101 8,959
- --------------------------------------------------------------------------------------------
Net income $ 13,330 $ 16,719 $ 22,510
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
VFL's revenues, excluding net realized investment gains/losses, increased
1.6% to $369.0 million for 1997 as compared to $363.0 million for 1996 and up
10.8% from $333.0 million for 1995. Premiums for 1997 increased 2.1% to $332.2
million as compared to $325.5 million for 1996 and up 12.0% from 1995 premiums
of $296.7 million. This increase is primarily due to the continued growth in
individual sales of ViaTerm, a term life insurance product, of $5.5 million.
Group premiums were up slightly for 1997 to $273.9 million as compared to $272.9
million for 1996. Increases in group accident and health premiums were offset by
decreases in group annuities and reinsurance premiums.
VFL's investment income increased from $29.3 million in 1996 to $29.9
million in 1997. Both years were lower than 1995's investment income of $31.5
million. The increase in 1997 can be attributed to a larger asset base of VFL's
investment portfolio, offset by a slightly lower average yield on VFL's
portfolio in 1997, as compared to 1996. The decrease in 1996 was mainly due to
negative cash flow experienced in 1996 resulting in a reduction in the total
investment portfolio.
FINANCIAL CONDITION
Assets totaled $2,368.4 million at December 31, 1997, an increase of 19.6%
over 1996. VFL's cash and invested assets of $570.5 million increased by $118.7
million, or 26.3%, over the 1996 level of $451.8 million.
VFL's stockholder's equity was $216.3 million at December 31, 1997,
compared to approximately $199.5 million and $195.5 million at December 31, 1996
and 1995, respectively. The increase in stockholder's equity in 1997 is due to
net income of $13.3 million and a $3.4 million increase in net unrealized
investment gains. The increase in stockholder's equity in 1996 was primarily due
to net income of $16.7 million offset by $12.7 million decrease in net
unrealized investment gains.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
STOCKHOLDER'S
ASSETS EQUITY
- ---------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands of dollars)
December 31, 1997.......................................... $2,368,426 $216,260
December 31, 1996.......................................... 1,980,802 199,540
December 31, 1995.......................................... 1,641,438 195,472
December 31, 1994.......................................... 1,447,122 156,196
December 31, 1993.......................................... 1,258,039 153,249
- ---------------------------------------------------------------------------------------
</TABLE>
46
<PAGE> 56
INVESTMENTS
The following table summarizes VFL's investments shown at cost or amortized
cost and carrying value for each of the last two years:
DISTRIBUTION OF INVESTMENTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
DECEMBER 31 1997 % 1996 %
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands of dollars)
Fixed maturities:
U.S. Treasury Securities and obligations of
government agencies........................ $299,066 55.4% $117,213 27.5%
Asset-backed securities...................... 68,612 12.7 113,376 26.6
Other debt securities........................ 98,589 18.3 90,843 21.4
-------- ----- -------- -----
Total fixed maturities..................... 466,267 86.4 321,432 75.5
Common stocks.................................. 981 0.2 1,073 0.3
Policy loans................................... 66,971 12.4 60,267 14.2
Other invested assets.......................... 579 0.1 -- --
Short-term investments......................... 4,597 0.9 42,757 10.0
- ------------------------------------------------------------------------------------------------------
Investments at Amortized Cost $539,395 100.0% $425,529 100.0%
======================================================================================================
Investments at Carrying Value* $545,968 $427,049
======================================================================================================
</TABLE>
* As reported in the Balance Sheet
The operations, assets and liabilities of VFL and Assurance are, to a large
extent, managed on a combined basis. The investment portfolio is managed to
maximize after-tax investment return while minimizing credit risks with
investments concentrated in high quality securities to support insurance
underwriting operations. The investment portfolios are segregated for the
purpose of supporting policy liabilities for universal life, annuities and other
interest sensitive products.
VFL's investments in fixed maturities are carried at a fair value of $471.7
million at December 31, 1997, compared with $321.1 million at December 31, 1996.
At December 31, 1997, net unrealized gains on fixed maturities amounted to
approximately $5.4 million. This compares with net unrealized losses of
approximately $.4 million at December 31, 1996. The gross unrealized gains and
losses for the fixed maturities portfolio at December 31, 1997 were $6.2 million
and $.8 million, respectively, compared to $3.2 million and $3.6 million,
respectively, at December 31, 1996. Such fluctuations from year-to-year are
primarily due to changes in interest rates.
VFL's investments in equity securities are carried at a fair value of $2.3
million at December 31, 1997, compared with $3.0 million at December 31, 1996.
At December 31, 1997, net unrealized gains on equity securities amounted to
approximately $1.3 million. This compares with net unrealized gains of
approximately $1.9 million at December 31, 1996. There were no unrealized losses
on equity securities as of December 31, 1997 and 1996.
VFL has the capacity to hold its fixed maturity portfolio to maturity.
However, securities may be sold as part of VFL's asset/liability management
strategies or to take advantage of investment opportunities generated by
changing interest rates, tax and credit considerations, or other similar
factors. Accordingly, the fixed maturities are classified as available-for-sale.
See Note 2 of the Financial Statements for further information.
47
<PAGE> 57
The following table summarizes the ratings of VFL's fixed maturity
portfolio at carrying value (market):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
DECEMBER 31 1997 % 1996 %
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands of dollars)
U.S. government and affiliated securities...... $300,676 63.8% $115,926 36.1%
Other AAA rated................................ 75,531 16.0 127,910 39.8
AA and A rated................................. 61,404 13.0 33,913 10.6
BBB rated...................................... 27,292 5.8 38,272 11.9
Below investment grade......................... 6,804 1.4 5,045 1.6
- ------------------------------------------------------------------------------------------------------
Total $471,707 100.0% $321,066 100.0%
======================================================================================================
</TABLE>
Included in VFL's fixed maturities at December 31, 1997, are $68.7 million
of asset-backed securities, consisting of approximately 65.0% in collateralized
mortgage obligations ("CMOs"), 28.2% in corporate asset-backed obligations, 6.4%
in corporate mortgage-backed pass-through certificates and 0.4% in U.S.
government and agency issued pass-through certificates. The majority of CMOs
held are actively traded in liquid markets and are priced by broker-dealers.
CMOs are subject to prepayment risk that tends to vary with changes in
interest rates. During periods of declining interest rates CMOs generally prepay
faster as the underlying mortgages are prepaid and refinanced by the borrowers
in order to take advantage of the lower rates. Conversely, during periods of
rising interest rates, prepayments are generally slow. VFL limits the risks
associated with interest rate fluctuations and prepayments by concentrating its
CMO investments in planned amortization classes with relatively short principal
repayment windows. At December 31, 1997, net unrealized gains on CMOs amounted
to approximately $.1 million, compared with unrealized losses of approximately
$.1 million at December 31, 1996. VFL avoids investments in complex mortgage
derivatives and does not have any investments in mortgage loans or real estate.
VFL invests from time to time in certain derivative financial instruments
primarily to reduce its exposure to market risk. See Notes 1 and 3 of VFL's
Financial Statements for further information regarding derivatives.
High yield securities are bonds rated below investment grade by bond rating
agencies, and other unrated securities which, in the opinion of management, are
below investment grade (below BBB). High yield securities generally involve a
greater degree of risk than that of investment grade securities. Returns are
expected to compensate for the added risk. The risk is also considered in the
interest rate assumptions in the underlying insurance products. VFL's
concentration in high yield bonds was approximately 0.3% of total assets as of
December 31, 1997 and 1996.
RISKS AND UNCERTAINTIES
The following section discusses risks and uncertainties to which VFL is
subject.
Credit Risk
Credit risk arises from the potential inability of counterparties to
perform on an obligation in accordance with the terms of the contract. VFL is
exposed to credit risk in its
48
<PAGE> 58
capacity as counterparty in financial and insurance contracts, reinsurance
arrangements and as a holder of securities. VFL accepts risk whenever a
counterparty is obligated to perform under a contract. As a holder of
securities, VFL is exposed to default by the issuer or to the possibility of
market price deterioration. As a purchaser of reinsurance, VFL has exposure that
a reinsurer may not be able to reimburse VFL under the terms of the reinsurance
agreement. VFL has established policies and procedures to manage credit risk,
including collateral requirements and master "netting arrangements."
Legal/Regulatory Risk
Legal/regulatory risk is the risk that changes in the legal or regulatory
environment in which VFL operates will create additional expenses not
anticipated by VFL in pricing its products. Regulatory initiatives, tax law
changes, new legal theories or insurance company insolvencies, through guaranty
fund assessments, may create costs for the insurer beyond those currently
recorded in the financial statements. VFL mitigates this risk by offering a wide
range of products and by operating throughout the United States, thus reducing
its exposure to any single product or region, and also by employing underwriting
practices which identify and minimize the adverse impact of this risk.
Impact of Year 2000 on VFL
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. All insurance subsidiaries of
CNAF, including VFL, utilize the same systems in conducting day-to-day
operations. VFL renovated or replaced many of its legacy systems and upgraded
its systems to accommodate business for the Year 2000 and beyond. In addition,
VFL is checking embedded systems in computer hardware and other infrastructure
such as elevators, heating and ventilating systems, and security systems.
VFL's cost to upgrade its systems will be included as part of the total
cost incurred by CNAF to replace and update its systems. VFL will be allocated
its proportionate share of this cost upon completion of the upgrade; however, a
reasonable estimate of this cost is not currently available. Based upon its
current assessment, CNAF estimates that the total cost to replace and upgrade
its systems to accommodate Year 2000 processing will be approximately $60 to $70
million. As of December 31, 1998, CNAF has spent approximately $59 million on
Year 2000 readiness matters. However, prior to 1997, CNAF did not specifically
separate technology charges for Year 2000 from other information technology
charges. In addition, while some hardware charges are included in the budget
figures, CNAF's hardware costs typically are included as part of ongoing
technology updates and not specifically as part of the Year 2000 project. All
funds spent and to be spent will be financed from CNAF's current operating
funds.
VFL believes that it will be able to resolve the Year 2000 issue in a
timely manner. As of December 31, 1998, VFL has certified internally all of its
internal applications and systems as being ready for the year 2000. However, due
to the interdependent nature of computer systems, there may be an adverse impact
on VFL if banks, independent agents, vendors, insurance agents, third party
administrators, various governmental agencies and other business partners fail
to successfully address the Year 2000. To mitigate this impact, VFL is
communicating with these various entities to coordinate Year 2000 conversion.
49
<PAGE> 59
Because of the interdependent nature of the issue, VFL cannot be sure that there
will not be a disruption in its business.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity requirements of VFL have been met by funds generated from
operating, investing and financing activities. VFL's principal operating cash
flow sources are premiums, investment income, receipts for investment contracts
sold and sales and maturities of investments. The primary operating cash flow
uses are payments for claims, policy benefits, payments on matured policyholder
contracts and operating expenses.
For the year ended December 31, 1997, VFL's operating activities generated
net positive cash flows of $20.5 million, compared with net negative cash flows
of $136.8 million in 1996 and $18.9 million in 1995. The net positive cash flows
from operations in 1997 are due, in large part, to the settlement of certain
receivables from affiliates and higher revenues generated by the increase in
premium volume. The deterioration in cash flow in 1996 was caused by significant
acquisition and other first-year expenses related to the large volume of new
business generated by VFL, as well as the delayed settlement of receivables from
affiliates.
VFL believes that future liquidity needs will be met primarily by cash
generated from operations. Net cash flows from operations are primarily invested
in marketable securities. Investment strategies employed by VFL consider the
cash flow requirements of the insurance products sold and the tax attributes of
the various types of marketable investments.
VFL's insurance ratings are pooled ratings with Assurance. The table below
reflects insurance ratings for VFL/Assurance as of December 31, 1997:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
FINANCIAL STRENGTH CLAIMS PAYING ABILITY
<CAPTION>
A.M. BEST STANDARD & POOR'S DUFF & PHELPS
<S> <C> <C> <C>
RATING...................... A AA- AA
</TABLE>
ACCOUNTING STANDARDS
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
This Statement provides standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. This Statement
has been amended and is now effective for transfers and servicing of financial
assets and extinguishment of liabilities occurring after December 31, 1996 or
1997, depending on the type of transaction. This Statement has not and is not
expected to have a significant impact on VFL.
Reporting Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes accounting standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose
50
<PAGE> 60
financial statements. This Statement requires that an enterprise (a) classify
items of other comprehensive income by their nature in a financial statement and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of a
statement of financial position. This Statement is effective for fiscal years
beginning after December 15, 1997. This Statement is not expected to result in a
significant change in VFL's disclosures.
Disclosures about Segments of an Enterprise and Related Information
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes standards for the way
that public business enterprises report information about operating segments in
interim and annual financial statements. It requires that those enterprises
report a measure of segment profit or loss, certain specific revenue and expense
items and segment assets, and that the enterprises reconcile the total of those
amounts to the general-purpose financial statements. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. This Statement is effective for financial statements for
periods beginning after December 15, 1997. VFL is currently evaluating the
effect of this Statement on its business segment disclosure.
Accounting by Insurance and Other Enterprises for Insurance-Related Assessments
In December 1997, the American Institute of Certified Public Accountants'
Accounting Standards Executive Committee issued Statement of Position ("SOP")
97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments," which provides guidance on accounting by entities that are subject
to insurance-related assessments. It requires that entities recognize
liabilities for insurance-related assessments when all of the following criteria
have been met: an assessment has been imposed or a probable assessment will be
imposed; the event obligating an entity to pay an imposed or probable assessment
has occurred on or before the date of the financial statements; and the amount
of the assessment can be reasonably estimated. This SOP is effective for
financial statements for fiscal years beginning after December 15, 1998. VFL is
currently evaluating the effects of this SOP on its accounting for
insurance-related assessments.
Employers' Disclosures about Pensions and Other Postretirement Benefits
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which standardizes disclosure
requirements for pension and other postretirement benefits to the extent
practicable, and requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis. The Statement also suggests combined formats for presentation of
pension and other postretirement benefit disclosures. The Statement changes
disclosure only and does not address measurement or recognition. It is effective
for fiscal years beginning after December 15, 1997. VFL has no employees,
however, expenses are allocated to VFL for services provided by Casualty
employees. VFL is currently evaluating the effects of this Statement on its
benefit plan disclosures.
FORWARD-LOOKING STATEMENTS
When included in management's discussion and analysis, the words "expects,"
"intends," "anticipates," "estimates" and analogous expressions are intended to
identify
51
<PAGE> 61
forward-looking statements. Such statements inherently are subject to a variety
of risks and uncertainties that could cause actual results to differ materially
from those projected. Such risks and uncertainties include, among others,
general economic and business conditions, competition, changes in financial
markets (credit, currency, commodities and stocks) changes in foreign,
political, social and economic conditions, regulatory initiatives and compliance
with governmental regulations, judicial decisions and rulings, and various other
matters, many of which are beyond VFL's control. See discussions elsewhere in
this report on how these risks may affect VFL. These forward-looking statements
speak only as of the date of this Report. VFL expressly disclaims any obligation
or undertaking to release publicly any updates or revisions to any
forward-looking statement contained herein to reflect any change in VFL's
expectations with regard thereto or any change in events, conditions or
circumstances on which any statement is based.
OTHER ADDITIONAL INFORMATION
EMPLOYEES
As of December 31, 1998, VFL had no employees as it has contracted with
Casualty for services provided by Casualty employees. Casualty has experienced
satisfactory labor relations and has never had work stoppages due to labor
disputes.
PROPERTIES
VFL does not own or directly lease any office space. VFL reimburses
Casualty for its proportionate share of office facilities.
CERTAIN AGREEMENTS
VFL is party to the Reinsurance Pooling Agreement with Assurance which was
previously mentioned and is also discussed in the Notes to VFL's Financial
Statements included in this Prospectus. In addition, VFL is party to the CNA
Intercompany Expense Agreement whereby expenses incurred by CNAF and each of its
subsidiaries are allocated to the appropriate company. All acquisition and
underwriting expenses allocated to VFL are further subject to the Reinsurance
Pooling Agreement with Assurance, so that acquisition and underwriting expenses
recognized by VFL approximates ten percent of the combined acquisition and
underwriting expenses of VFL and Assurance. For information regarding expenses
pursuant to the CNA Intercompany Expense Agreement see Note 8 of the Notes to
Financial Statements.
REGULATION
VFL is subject to the laws of the Commonwealth of Pennsylvania governing
insurance companies and to the regulations of the Pennsylvania Department of
Insurance (the "Insurance Department"). Regulation by the Insurance Department
includes periodic examination to determine, among other items, contract
liabilities and reserves so that the Insurance Department may certify that these
items are correct. VFL's books and accounts are subject to review by the
Insurance Department at all times.
In addition, VFL is subject to regulation under the insurance laws of all
jurisdictions in which it operates. The laws of the various jurisdictions
establish supervisory agencies
52
<PAGE> 62
with broad administrative powers with respect to various matters, including
licensing to transact business, overseeing trade practices, licensing agents,
approving contract forms, establishing reserve requirements, fixing maximum
interest rates on life insurance contract loans and minimum rates for
accumulation of surrender values, prescribing the form and content of required
financial statements and regulating the type and amounts of investments
permitted.
Further, many states regulate affiliated groups of insurers, such as VFL
and its affiliates, under insurance holding company legislation. Under such
laws, inter-company transfers of assets and dividend payments from insurance
subsidiaries may be subject to prior notice or approval, depending on the size
of the transfer payments in relation to the financial positions of the companies
involved.
Under insurance guaranty fund laws in most states, insurers doing business
therein can be assessed as a result of the insolvencies of other insurers. The
assessments are based on formulas, subject to prescribed limits, and are
intended to fund the benefits and continuation of coverage for policyholders of
the insolvent insurers. Most of these laws provide that an assessment may be
excused or deferred if it would threaten an insurer's own solvency.
Although the Federal government generally does not directly regulate the
business of insurance, Federal initiatives often have an impact on the business
in a variety of ways. Certain insurance products of VFL are subject to various
Federal securities laws and regulations. In addition, current and proposed
Federal measures that may significantly affect the insurance business include
regulation of insurance company solvency, employee benefit regulation, removal
of barriers preventing banks from engaging in the insurance business, tax law
changes affecting the taxation of insurance companies and the tax treatment of
insurance products and its impact on the relative desirability of various
personal investment vehicles.
Increased scrutiny of state regulated insurer solvency requirements by
certain members of the U.S. Congress resulted in the National Association of
Insurance Commissioners ("NAIC") developing industry minimum Risk-Based Capital
("RBC") requirements, establishing a formal state accreditation process designed
to more closely regulate for solvency, minimizing the diversity of approved
statutory accounting and actuarial practices, and increasing the annual
statutory statement disclosure requirements.
The RBC formulas are designed to identify an insurer's minimum capital
requirements based upon the inherent risks (e.g., asset default, credit and
underwriting) of its operations. In addition to the minimum capital
requirements, the RBC formula and related regulations identify various levels of
capital adequacy and corresponding actions that the state insurance departments
should initiate. The level of capital adequacy below which insurance departments
would take action is defined as VFL Action Level. As of December 31, 1997, VFL
has capital in excess of VFL Action Level.
53
<PAGE> 63
DIRECTORS AND EXECUTIVE OFFICERS
The name, age, positions and offices, term as director, and business
experience during the past five years for VFL's directors and executive officers
are listed in the following table:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
OFFICERS OF VFL
- ----------------------------------------------------------------------------------------------------
POSITION(S) HELD
NAME AND ADDRESS AGE WITH VFL PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Philip L. Engel 58 Director and President of CNA since September, 1992. Prior
CNA Plaza President thereto, Mr. Engel was Executive Vice
Chicago, IL 60685 President of CNA. Mr. Engel has served as a
Director of VFL since September, 1992.
- ----------------------------------------------------------------------------------------------------
Bernard L. Hengesbaugh 52 Chairman of the Chairman of the Board and Chief Executive
CNA Plaza Board, Chief Officer of CNA since February, 1999. Prior
Chicago, IL 60685 Executive thereto, Mr. Hengesbaugh served as Executive
Officer, and Vice President and Chief Operating Officer of
Director CNA since February, 1998. Prior thereto, Mr.
Hengesbaugh was Senior Vice President of CNA
since November, 1990. Mr. Hengesbaugh has
served as Director since February, 1999.
- ----------------------------------------------------------------------------------------------------
Peter E. Jokiel 51 Senior Vice Senior Vice President of CNA since November,
CNA Plaza President 1990. Chief Financial Officer of CNA from
Chicago, IL 60685 November, 1990 through October, 1997. Mr.
Jokiel served as a Director of VFL from July,
1992 through October, 1997.
- ----------------------------------------------------------------------------------------------------
Jonathan D. Kantor 43 Senior Vice Senior Vice President, Secretary and General
CNA Plaza President, Counsel of CNA since April, 1997. Group Vice
Chicago, IL 60685 Secretary, President of CNA since April, 1994. Prior
General Counsel thereto, Mr. Kantor was a partner at the law
and Director firm of Shea & Gould.* Mr. Kantor has served
as a Director of VFL since April, 1997.
- ----------------------------------------------------------------------------------------------------
W. James MacGinnitie 60 Senior Vice Senior Vice President and Chief Financial
CNA Plaza President, Chief Officer of CNA since October, 1997. From 1994
Chicago, IL 60685 Financial through 1997, Mr. MacGinnitie was a partner at
Officer and Ernst & Young. Prior thereto, Mr. MacGinnitie
Director was a principal with Tillinghast. Mr.
MacGinnitie has served as a Director of VFL
since October, 1997.
- ----------------------------------------------------------------------------------------------------
William H. Sharkey, Jr. 50 Senior Vice Senior Vice President of CNA since January,
CNA Plaza President and 1994. Prior thereto, Mr. Sharkey was Senior
Chicago, IL 60685 Director Vice President of Cigna Healthcare from
October, 1991 through February, 1994. Mr.
Sharkey has served as a Director of VFL since
November, 1994.
- ----------------------------------------------------------------------------------------------------
</TABLE>
54
<PAGE> 64
Each director is elected to serve until the next annual meeting of
stockholders or until his or her successor is elected and shall have qualified.
Some directors hold various executive positions with insurance company
affiliates of VFL. Executive officers serve at the discretion of the Board of
Directors.
* Shea & Gould declared bankruptcy in 1995.
EXECUTIVE COMPENSATION (TO BE UPDATED BY AMENDMENT)
The following table includes compensation paid by CNAF and its subsidiaries
for services rendered in all capacities for the years indicated for the Chief
Executive Officer and the next four most highly compensated Executive Officers
as of December 31, 1997. These officers also serve as executive officers of VFL;
therefore, an applicable portion of their compensation (4.45%) is charged to
VFL.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG-TERM
---------------------- COMPENSATION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(A) BONUS(B) PAYMENTS(C) COMPENSATION(D)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
</TABLE>
Notes
55
<PAGE> 65
EMPLOYMENT CONTRACTS
VFL is a wholly-owned subsidiary of Assurance. Assurance is a wholly-owned
subsidiary of Casualty which is wholly-owned by CNAF. Loews Corporation owns
approximately 85% of the outstanding common stock of CNAF. All employees of the
CNA Insurance Companies are employed by Casualty, with the exception of Dennis
H. Chookaszian and Philip L. Engel who are employees of CNAF.
CNAF is party to employment agreements (the "Agreements") with each of
Dennis H. Chookaszian and Philip L. Engel. The Agreements are for a three-year
term at an annual Base Salary of $950,000 for Mr. Chookaszian and $800,000 for
Mr. Engel. The Agreements provide for the adoption by the Board of an Incentive
Compensation Plan which will provide Mr. Chookaszian and Mr. Engel with an
opportunity to earn a bonus based on performance and attainment of specified
corporate goals. In all other respect, the agreements contain substantially the
same terms as the prior agreements as approved by the Board in February of 1992.
A brief summary of the Plan as adopted by the CNA Board is set forth herein.
Each of the Agreements requires CNAF to provide long-term disability
coverage and permits the employee to participate in other benefit programs
offered by VFL to its employees. In the event of death or disability, the
employee is entitled to be paid the Base Salary to the end of the month in which
such death or disability occurs and a prorated amount based on assumed
attainment of the incentive compensation in effect at the time. Any incentive
compensation paid is included in the computation of pensionable earnings under
VFL's retirement plans. The employee may participate in the Qualified and
Supplemental Savings Plan established by CNAF wherein CNAF pays a matching
percentage of 70% of the first 6% of the employee's contributions. This matching
amount is also included in the computation of pensionable earnings.
CNAF may terminate each Agreement without cause at any time, in which event
CNAF is required to continue to make payments to the employee for a period of
three years from the date of termination at a fixed rate based on Base Salary
and the incentive compensation in effect at the time of such termination. Each
Agreement contemplates negotiation of a renewal for an additional three year
period at the expiration of its term on December 31, 1998 and provides that if
the parties have not reached an agreement before March 31, 1999 at a Base Salary
and opportunity for incentive compensation of not less than the amount of Base
Salary and incentive compensation provided for the year 1998 at substantially
the same terms as the expiring agreement, then the employment shall be
considered terminated by CNAF and the employee shall be entitled to termination
pay for a period of three years based on the combined Base Salary and the
assumed incentive compensation for 1998. If a renewal is not negotiated before
December 31, 1998, the Executives shall become employees-at-will for a three
month period at an actual salary representing the combined Base Salary and
assumed Incentive Compensation for the year 1998.
The Incentive Compensation Committee of CNAF has granted Mr. Chookaszian
and Mr. Engel, subject to shareholder approval of the Incentive Compensation
Plan, allocations under the Incentive Compensation Plan entitling each of them
to awards thereunder of a maximum of $1,650,000 for Mr. Chookaszian and $500,000
for Mr. Engel for the year 1997. A maximum of $1,850,000 for 1998 has been
granted to Mr. Chookaszian and a maximum of $600,000 for the year 1998, has been
granted to Mr. Engel. The actual awards to Messrs. Chookaszian and Engel would
be subject to the attainment of specific
56
<PAGE> 66
performance goals in relation to after-tax income CNAF, excluding realized
investment gains and losses.
RETIREMENT PLANS
PENSION PLAN TABLE
NORMAL RETIREMENT IN 1997
<TABLE>
<CAPTION>
ESTIMATED ANNUAL PENSION FOR
REPRESENTATIVE YEARS OF CREDITED SERVICE
- -----------------------------------------------------------------------------------------------------
AVERAGE
ANNUAL
COMPENSATION 15 20 25 30 35
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 400,000........... $116,618 $ 155,491 $ 194,364 $ 206,570 $ 218,777
500,000........... 146,618 195,491 244,364 259,904 275,444
600,000........... 176,618 235,491 294,364 313,237 332,111
700,000........... 206,618 275,491 344,364 366,571 388,778
800,000........... 236,618 315,491 394,364 419,904 445,445
900,000........... 266,618 355,491 444,364 473,238 502,112
1,000,000........... 296,618 395,491 494,364 526,571 558,779
1,100,000........... 326,618 435,491 544,364 579,905 615,446
1,200,000........... 356,618 475,491 594,364 633,238 672,113
1,300,000........... 386,618 515,491 644,364 686,572 728,780
1,400,000........... 416,618 555,491 694,364 739,905 785,447
1,500,000........... 446,618 595,491 744,364 793,219 842,114
1,600,000........... 476,618 635,491 794,364 846,572 898,781
1,700,000........... 506,618 675,491 844,364 899,906 955,448
1,800,000........... 536,618 715,491 894,364 953,239 1,012,115
1,900,000........... 566,618 755,491 944,364 1,006,573 1,068,782
2,000,000........... 596,618 795,491 994,364 1,059,906 1,125,449
2,100,000........... 626,618 835,491 1,044,364 1,113,240 1,182,116
2,200,000........... 656,618 875,491 1,094,364 1,166,573 1,238,783
2,300,000........... 686,618 915,491 1,144,364 1,219,907 1,295,450
2,400,000........... 716,618 955,491 1,194,364 1,273,240 1,352,117
2,500,000........... 746,618 995,491 1,244,364 1,326,574 1,408,784
2,600,000........... 776,618 1,035,491 1,294,364 1,379,907 1,465,451
2,700,000........... 806,618 1,075,491 1,344,364 1,433,241 1,522,118
2,800,000........... 836,618 1,115,491 1,394,364 1,486,574 1,578,785
2,900,000........... 866,618 1,155,491 1,444,364 1,539,908 1,635,452
- -----------------------------------------------------------------------------------------------------
</TABLE>
The amounts in the table reflect deductions for estimated Social Security
payments.
Mr. Chookaszian, Mr. Engel, Ms. Murphy, Ms. Tocklin and Mr. Jokiel have 22,
32, 20, 22 and 16 years of credited service, respectively.
Casualty provides funded, tax qualified, non-contributory retirement plans
for all salaried employees, including executive officers (the "Retirement
Plans") and an unfunded, non-qualified, non-contributory benefits equalization
plan for all eligible salaried employees, including executive officers, (the
"Supplemental Retirement Plan") which provides for the accrual and payment of
benefits which are not available under tax qualified plans such as the
Retirement Plans. The following description of the Retirement Plans gives effect
to benefits provided under the Supplemental Retirement Plan.
The Retirement Plans provide for retirement benefits based upon average
final compensation (i.e., based upon the highest average sixty consecutive
months compensation and years of credited service with Casualty). Compensation
under the Retirement Plans
57
<PAGE> 67
consists of salary paid by Casualty and its subsidiaries included under
"Salary", "Bonus", and "Long-Term Compensation Payouts" in the Summary
Compensation Table above. The table shows estimated annual benefits payable upon
retirement under the Retirement Plans for various compensation levels and years
of credited service, based upon normal retirement in 1997 and a straight life
annuity form of benefit. In addition to a straight life annuity, the Plans also
allow the participant to elect payment to be made in a Joint and Contingent (or
Survivor) Annuitant form where the Contingent (or Survivor) Annuitant would
receive payment at 50%, 66 2/3% or 100% of the participant's benefit amount.
58
<PAGE> 68
INDEPENDENT AUDITORS' REPORT
[TO BE FILED BY AMENDMENT]
59
<PAGE> 69
FINANCIAL STATEMENTS OF VALLEY FORGE LIFE INSURANCE COMPANY
[TO BE FILED BY AMENDMENT]
60
<PAGE> 70
GLOSSARY
ACCUMULATION UNIT: A unit of measure we use to calculate Variable Contract
Value.
ADJUSTED CONTRACT VALUE: The Contract Value plus or minus any applicable
Market Value Adjustment, less purchase payment tax charges not previously
deducted, less the annual administration fee.
AGE: The age of any person on the birthday nearest the date for which we
determine Age.
ANNUITANT: The person or persons whose life (or lives) determines the
Annuity Payments payable under the Contract and whose death determines the death
benefit. With regard to joint and survivorship Annuity Payment Options, the
maximum number of joint Annuitants is two and provisions referring to the death
of an Annuitant mean the death of the last surviving Annuitant. Provisions
relating to an action by the Annuitant mean, in the case of joint Annuitants,
both Annuitants acting jointly.
ANNUITY DATE: The date on which we apply Surrender Value or Adjusted
Contract Value to purchase Annuity Units or to initiate Fixed Annuitization.
ANNUITY PAYMENT: One of several periodic payments we make to the Payee
under an Annuity Payment Option.
ANNUITY PAYMENT DATE: The date each month, quarter, semi-annual period, or
year as of which VFL computes Annuity Payments. The Annuity Payment Date(s) is
shown on the Contract.
ANNUITY PAYMENT OPTION: The form of Annuity Payments you select under the
Contract. The Annuity Payment Option is shown on the Contract.
ANNUITY UNIT: A unit of measure we use to calculate Variable Annuity
Payments.
BENCHMARK RATE OF RETURN: An annual rate of return shown on the Contract
that we use to determine the degree of fluctuation in the amount of Variable
Annuity Payments in response to fluctuations in the net investment return of
selected Subaccounts. We assume (among other things) that the assets in the
Variable Account supporting the Contract will have a net annual investment
return over the anticipated Annuity Payment period equal to that rate of return.
BENEFICIARY: The person(s) to whom we will pay the death benefit if
Annuitant dies prior to the Annuity Date.
CANCELLATION PERIOD: The period described on the cover page of the Contract
during which you may return the Contract for a refund.
THE CODE: The Internal Revenue Code of 1986, as amended.
CONTINGENT ANNUITANT: The person that the Owner designates in the
application who becomes the Annuitant in the event that the Annuitant dies
before the Annuity Date while the Owner is still alive.
CONTINGENT BENEFICIARY: The person(s) to whom we will pay the death benefit
if the Beneficiary (or Beneficiaries) is not living.
61
<PAGE> 71
CONTRACT ANNIVERSARY: The same date in each Contract Year as the Contract
Effective Date.
CONTRACT EFFECTIVE DATE: The date on which VFL issues the Contract and upon
which the Contract becomes effective. The Contract Effective Date is shown on
the Contract and is used to determine Contract Years and Contract Anniversaries.
CONTRACT YEAR: A twelve-month period beginning on the Contract Effective
Date or on a Contract Anniversary.
CONTRACT VALUE: The total amount invested under the Contract. It is the sum
of Variable Contract Value and the Guaranteed Interest Option Value.
DUE PROOF OF DEATH: Proof of death satisfactory to VFL. Due Proof of Death
may consist of the following if acceptable to VFL:
(a) a certified copy of the death record;
(b) a certified copy of a court decree reciting a finding of death; or
(c) any other proof satisfactory to VFL.
FIXED ANNUITY PAYMENT: An Annuity Payment that the General Account supports
and which does not vary in amount as a function of the investment return of the
Variable Account from one Annuity Payment Date to the next.
FUND: Any open-end management investment company or investment portfolio
thereof or unit investment trust or series thereof, in which a Subaccount
invests.
GENERAL ACCOUNT: VFL's assets, other than those allocated to the Variable
Account or any other separate account of VFL.
GIO ACCOUNT: Valley Forge Life Insurance Company Guaranteed Interest Option
Separate Account.
GUARANTEE AMOUNT: The amount equal to that part of any Net Purchase Payment
that you allocate to, or any amount you transfer to the GIO Account for a
designated Guarantee Period with a particular expiration date plus any interest
thereon and less the amount of any withdrawals (including any applicable
surrender charges and any applicable premium payment tax charge) or transfers
therefrom.
GUARANTEE PERIOD: A specific number of years for which VFL agrees to credit
a particular effective annual rate of interest.
GUARANTEED INTEREST OPTION: An investment option under the Contract
supported by the GIO Account. It is not part of nor dependent upon the Variable
Account's investment performance.
GUARANTEED INTEREST OPTION VALUE: The sum of all Guarantee Amounts.
GUARANTEED INTEREST RATE: Unless a Market Value Adjustment is made, an
effective annual rate of interest that VFL will pay on a Guarantee Amount.
MARKET VALUE ADJUSTMENT: A positive or negative adjustment made to any
portion of a Guarantee Amount upon the surrender, withdrawal, transfer or
application to an Annuity
62
<PAGE> 72
Payment Option of such portion of the Guarantee Amount prior to 30 days before
the expiration of the Guarantee Period applicable to that Guarantee Amount.
NET ASSET VALUE PER SHARE: The value per share of any Fund on any Valuation
Day. The method of computing the Net Asset Value Per Share is described in the
prospectus for the Funds.
NET PURCHASE PAYMENT: A purchase payment less any premium payment tax
charge deducted from the purchase payment.
NON-QUALIFIED CONTRACT: A Contract that is not a "qualified contract."
OWNER: The person or persons who owns (or own) the Contract and who is
(are) entitled to exercise all rights and privileges provided in the Contract.
The maximum number of joint Owners is two. Provisions relating to action by the
Owner mean, in the case of joint Owners, both Owners acting jointly. In the
context of a Contract issued on a group basis, Owners refers to holders of
certificates under a group Contract.
PAYEE: The person entitled to receive Annuity Payments under the Contract.
The Annuitant is the Payee unless the Owner designates a different person as
Payee.
QUALIFIED CONTRACT: A Contract that is issued in connection with a
retirement plan that qualifies for special federal income tax treatment under
Sections 401, 403(b), 408, 408A or 457 of the Code.
SEC: The U.S. Securities and Exchange Commission.
SERVICE CENTER: The offices of VFL's administrative department at P.O. Box
305139, Nashville, Tennessee 37230-5139 (1-800-808-4537). Any overnight
deliveries should be sent to us at:
CNA Insurance Company
100 CNA Drive
Attention: Variable POS/Correspondence Team
Nashville, TN 37214
SUBACCOUNT: A subdivision of the Variable Account, the assets of which are
invested in a corresponding Fund.
SUBACCOUNT VALUE: The amount equal to that part of any Net Purchase Payment
allocated to the Subaccount and any amount transferred to that Subaccount,
adjusted by interest income, dividends, net capital gains or losses (actually
realized or not yet realized) and decreased by withdrawals (including any
applicable surrender charges and any applicable premium payment tax charge) and
any amounts transferred out of that Subaccount.
SUCCESSOR OWNER: Any Owner named in the application to follow the original
Owner should the original Owner die, provided the original Owner is not also the
Annuitant.
SURRENDER VALUE: The Adjusted Contract Value less any applicable surrender
charges.
VALUATION DAY: For each Subaccount, each day on which the New York Stock
Exchange is open for business except for certain holidays listed in the
prospectus and days that a Subaccount's corresponding Fund does not value its
shares.
63
<PAGE> 73
VALUATION PERIOD: The period that starts at the close of regular trading on
the New York Stock Exchange on any Valuation Day and ends at the close of
regular trading on the next succeeding Valuation Day.
VARIABLE ACCOUNT: Valley Forge Life Insurance Company Variable Annuity
Separate Account.
VARIABLE CONTRACT VALUE: The sum of all Subaccount Values.
VARIABLE ANNUITY PAYMENT: An Annuity Payment that may vary in amount from
one Annuity Payment Date to the next as a function of the investment experience
of one or more Subaccounts selected by the Owner to support such payments.
VFL: Valley Forge Life Insurance Company.
WRITTEN NOTICE: A notice or request submitted in writing in a form
satisfactory to VFL that the Owner signs and VFL receives at the Service Center.
64
<PAGE> 74
APPENDIX A
CONDENSED FINANCIAL INFORMATION
The Variable Account commenced operations in 1997. Following are the number
of Accumulation Units outstanding and their values at inception, at December 31,
1997 and December 31, 1998. This information should be read in conjunction with
the financial statements, including related notes, for the Variable Annuity
Separate Account (as well as the independent auditor's report thereon) which are
included in the Statement of Additional Information ("SAI"). The SAI, having the
same date as this prospectus and providing additional information about the
Contract and the Variable Account, has been filed with the SEC and is
incorporated herein by reference.
The audited financial statements of VFL (as well as the independent
auditor's report thereon) appear elsewhere herein.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
FEDERATED
FEDERATED HIGH FIDELITY FIDELITY
PRIME FEDERATED INCOME VIP VIP II FIDELITY ALGER ALGER
MONEY UTILITY BOND EQUITY- ASSET VIP II FIDELITY AMERICAN AMERICAN
FUND II FUND II FUND II INCOME MANAGER INDEX 500 CONTRAFUND SMALL CAP GROWTH
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unit value at
inception........... $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
Unit value at
December 31, 1997... $ 10.00 $ 14.29 $ 10.95 $ 24.28 $ 18.01 $114.39 $ 19.94 $ 43.75 $ 42.76
Units outstanding at
December 31, 1997... 861,083.8 3,546.7 17,395.3 20,427.1 14,845.4 4,920.8 16,502.8 4,473.8 5,832.2
Unit value at
December 31, 1998... $ 1.00 $ 15.27 $ 10.92 $ 25.42 $ 18.16 $141.25 $ 24.44 $ 43.97 $ 53.22
Units outstanding at
December 31, 1998... 5,562,204 110,914 289,997 167,760 124,340 75,681 151,918 36,417 102,309
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
ALGER MFS SOGEN VANECK VANECK
AMERICAN MFS GROWTH MFS OVERSEAS WORLDWIDE WORLDWIDE
MID-CAP EMERGING MFS WITH LIMITED MFS VARIABLE HARD EMERGING
GROWTH GROWTH RESEARCH INCOME MATURITY TOTAL RETURN PORTFOLIO ASSETS MARKETS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unit value at
inception........... $ 10.00 $ 10.00 $ 10.00 $10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
Unit value at
December 31, 1997... $ 24.18 $ 16.14 $ 15.79 $16.44 $ 10.01 $ 16.63 $ 9.77 $ 15.72 $ 11.00
Units outstanding at
December 31, 1997... 1,754.7 8,776.2 9,906.0 13,322.2 8,162.4 15,625.0 77,061.7 574.9 1,535.5
Unit value at
December 31, 1998... $ 28.87 $ 21.47 $ 19.05 $20.11 $ 10.16 $ 18.12 $ 10.07 $ 9.20 $ 7.12
Units outstanding at
December 31, 1998... 40,631 136,181 88,093 118,618 101,531 104,481 202,429 15,342 56,387
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
A-1
<PAGE> 75
APPENDIX B
The Market Value Adjustment is computed by multiplying the amount being
surrendered, withdrawn, transferred or applied to an Annuity Payment Option, by
the Market Value Adjustment factor. The Market Value Adjustment factor is
calculated as follows:
Market Value Adjustment = Amount multiplied by
1+A (N/12)
[(---) -1]
1+B
Where:
"Amount" is the amount being surrendered, withdrawn, transferred or
applied to an Annuity Payment Option less any applicable annual
administration fees or transfer processing fees;
"a" is the Guaranteed Interest Rate currently being credited to the
"Amount"; and
"b" is the Guaranteed Interest Rate that is currently being offered
for a Guarantee Period of duration equal to the time remaining to the
expiration of the Guarantee Period for the Guarantee Amount from which the
"Amount" is taken. Where the time remaining to the expiration of the
Guarantee Period is not 1, 3, 5, 7, or 10 years, "b" is the rate found by
linear interpolation of the rate for the Guarantee Period having the
duration closest to the time remaining or, if the time remaining is less
than 1 year, "b" is the rate for a 1 year period; and
"n" is the number of complete months remaining before the expiration
of the Guarantee Period for the Guarantee Amount from which the "Amount" is
taken.
As an example of calculating "b" by linear interpolation, if the time
remaining to the expiration of the Guarantee Period is 4.5 years, the
interpolated Guaranteed Interest Rate is equal to the sum of one-fourth of the
three-year Guaranteed Interest Rate and three-fourths of the five-year
Guaranteed Interest Rate. If the three-year Guaranteed Interest Rate is 3.6% and
the five-year Guaranteed Interest Rate is 4%, the interpolated Guaranteed
Interest Rate equals 3.9%--that is, 3.6% multiplied by 0.25 plus 4% multiplied
by 0.75.
The Market Value Adjustment is computed as in the following examples:
1. Assume that the Owner selects a 7 year Guarantee Period and that VFL is
crediting a 3.75% effective annual interest rate on the amount allocated or
transferred to such Guarantee Period. Assume also that 55 months into the 7-year
Period (seven months into the fifth year), the Owner withdraws $7,500.
If at the time of the withdrawal VFL is offering a 3.4% effective annual
rate of interest on Guarantee Periods of 3 years and a 3.0% effective annual
rate of interest on Guarantee Periods of 1 year, then:
a = 0.03750
b = 0.03283 = (0.034 * 17/24) + (0.03 * 7/24) = linear interpolation
between the 3 year rate and the 1 year rate
(1.03750) (29/12)
The MVA factor = [---------] -1 = 0.01096
(1.03283)
B-1
<PAGE> 76
MVA = $7,500.00 * 0.01096 = $82.20 Amount received = $7,500 + $82.20 =
$7,582.20
If at the time of the withdrawal VFL is offering a 5.75% effective annual
rate of interest on Guarantee Periods of 3 years and a 6.5% effective annual
rate of interest on Guarantee Periods of 1 year, then:
a = 0.03750
b = 0.05969 = (0.0575 * 17/24) + (0.065 * 7/24) = linear interpolation
between the 3 year rate and the 1 year rate
(1.03750) (29/12)
The MVA factor = [---------] -1 = -0.04986
(1.05969)
MVA = $7,500.00 * -0.04986 = -$373.95
Amount received = $7,500 - $373.95 = $7,126.05
B-2
<PAGE> 77
APPENDIX C
Assume that an Owner makes purchase payments on the first day of certain
Contract Years as shown in the table below. Assume also that the Owner withdraws
$7,500 during the seventh month of Contract Year five and $5,000 at the
beginning of Contract Years thirteen and fifteen. Assume that the Annuitant is
younger than age 76 for all twenty years. All "beginning of year death benefits"
are computed as of the first day of the Contract Year except for the figure for
Contract Year 5 which is computed as of the seventh month of that year (i.e., as
of the time of the $7,500 withdrawal).
EXPLANATIONS:
The Death Benefit at the beginning of Contract Years 1 through 4 is
determined from the Contract Value at the end of the prior Contract Year plus
the purchase payment made at the beginning of the year for which the computation
is being made.
The Death Benefit at the end of month 7 of Contract Year 5 is determined
from the prior year's Contract Value plus the purchase payment made at the
beginning of that year, minus the $7,500 withdrawn in the seventh month minus a
$318.75 surrender charge assessed in connection with the withdrawal.
The Death Benefit at the beginning of Contract Years 6 through 10 is
determined from the Contract Value at the end of the prior Contract Year plus
the purchase payment made at the beginning of the Year for which the computation
is being made. Since the first day of Contract Year 6 is a minimum death benefit
floor computation anniversary, a new death benefit floor amount is set at
$8,506.
The Death Benefit at the beginning of Contract Year 11 is determined solely
from the prior Year's Contract Value. Since this is a minimum death benefit
floor computation anniversary, a new death benefit floor amount is set at
$42,610.
The Death Benefit at the beginning of Contract Year 12 is determined from
the minimum death benefit which is the most recently reset death benefit floor
amount of $42,610. This is so because the Contract Value declined and no
purchase payments or withdrawals occurred since the prior reset of the death
benefit floor amount.
The Death Benefit at the beginning of Contract Year 13 is determined from
the minimum death benefit which is the most recently reset death benefit floor
amount of $42,610 adjusted for the $5,000 withdrawal. The $36,762 results from
$42,610 being multiplied by $31,432/$36,432.
The Death Benefit at the beginning of Contract Year 14 is the minimum death
benefit which is the most recently reset death benefit floor amount adjusted for
the $5,000 withdrawal made since that floor amount was set, or $36,762.
The Death Benefit at the beginning of Contract Year 15 is the minimum death
benefit which is the most recently reset death benefit floor amount of $42,610
adjusted for both $5,000 withdrawals made since that floor amount was set. The
$28,372 results from $42,610 being multiplied by $31,432/$36,432, and this
result multiplied by $16,908/$21,908.
The Death Benefit at the beginning of Contract Year 16 is the minimum death
benefit which is the most recently reset death benefit floor amount of $42,610
adjusted for both $5,000 withdrawals made since that floor amount was set. The
$28,372 results from
C-1
<PAGE> 78
$42,610 being multiplied by $31,432/$36,432, and this result multiplied by
$16,908/$21,908. Even though this is a death benefit floor computation
anniversary, the death benefit floor amount is not reset since the Contract
Value has not exceeded its previous high of $42,610 occurring in Contract Year
10. No purchase payments or withdrawals were made.
The Death Benefit at the beginning of Contract Year 17 through 20 is the
minimum death benefit which is the most recently reset death benefit floor
amount of $42,610 adjusted for both $5,000 withdrawals made since that floor
amount was set and adjusted further for the $10,000 purchase payment made on the
first day of Contract Year 17.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
ACCUMULATED
BEGINNING NET END OF YEAR BEGINNING YEAR
OF CONTRACT PURCHASE PURCHASE ACCUMULATION END OF YEAR DEATH
YEAR PAYMENTS WITHDRAWALS PAYMENTS UNIT VALUE CONTRACT VALUE BENEFIT
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 $ 2,000 $ 0 $ 2,000 10.50000 $ 2,100 $ 2,000
- ----------------------------------------------------------------------------------------------------
2 $ 2,000 $ 0 $ 4,000 11.23500 $ 4,387 $ 4,100
- ----------------------------------------------------------------------------------------------------
3 $ 2,500 $ 0 $ 6,500 12.13380 $ 7,438 $ 6,887
- ----------------------------------------------------------------------------------------------------
4 $ 3,000 $ 0 $ 9,500 13.34718 $11.482 $10.438
- ----------------------------------------------------------------------------------------------------
5 $ 4,000 $7,500 $ 6,000 14.81537 $ 8,506 $ 7,663
- ----------------------------------------------------------------------------------------------------
6 $ 5,000 $ 0 $11,000 16.59321 $15,127 $13,506
- ----------------------------------------------------------------------------------------------------
7 $ 5,000 $ 0 $16,000 18.25254 $22,139 $20,127
- ----------------------------------------------------------------------------------------------------
8 $ 5,000 $ 0 $21,000 19.71274 $29,310 $27,139
- ----------------------------------------------------------------------------------------------------
9 $ 5,000 $ 0 $26,000 20.89550 $36,369 $34,310
- ----------------------------------------------------------------------------------------------------
10 $ 5,000 $ 0 $31,000 21.52237 $42,610 $41,369
- ----------------------------------------------------------------------------------------------------
11 $ 0 $ 0 $31,000 20.44625 $40,480 $42,610
- ----------------------------------------------------------------------------------------------------
12 $ 0 $ 0 $31,000 18.40162 $36,432 $42,610
- ----------------------------------------------------------------------------------------------------
13 $ 0 $5,000 $26,000 15.64138 $26,717 $36,762
- ----------------------------------------------------------------------------------------------------
14 $ 0 $ 0 $26,000 12.82593 $21,908 $36,762
- ----------------------------------------------------------------------------------------------------
15 $ 0 $5,000 $21,000 13.46723 $17,753 $28,372
- ----------------------------------------------------------------------------------------------------
16 $ 0 $ 0 $21,000 14.14059 $18,641 $28,372
- ----------------------------------------------------------------------------------------------------
17 $10,000 $ 0 $31,000 14.14059 $28,641 $38,372
- ----------------------------------------------------------------------------------------------------
18 $ 0 $ 0 $31,000 13.43356 $27,209 $38,372
- ----------------------------------------------------------------------------------------------------
19 $ 0 $ 0 $31,000 13.43356 $27,209 $38,372
- ----------------------------------------------------------------------------------------------------
20 $ 0 $ 0 $31,000 13.97090 $28,297 $38,372
- ----------------------------------------------------------------------------------------------------
</TABLE>
C-2
<PAGE> 79
STATEMENT OF ADDITIONAL INFORMATION
FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY CONTRACT
ISSUED BY
VALLEY FORGE LIFE INSURANCE COMPANY
AND
VALLEY FORGE LIFE INSURANCE COMPANY VARIABLE ANNUITY
SEPARATE ACCOUNT
THIS STATEMENT OF ADDITIONAL INFORMATION, DATED MAY 1, 1999 IS NOT A
PROSPECTUS. THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ IN
CONJUNCTION WITH THE PROSPECTUS DATED MAY 1, 1999 FOR THE VALLEY FORGE LIFE
INSURANCE COMPANY FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY CONTRACT WHICH IS
REFERRED TO HEREIN.
THE PROSPECTUS SETS FORTH INFORMATION THAT A PROSPECTIVE INVESTOR SHOULD
KNOW BEFORE PURCHASING A CONTRACT. FOR A COPY OF THE PROSPECTUS, SEND A WRITTEN
REQUEST TO THE SERVICE CENTER AT P.O. BOX 305139, NASHVILLE, TENNESSEE
37230-5139 OR BY TELEPHONE 1-800-262-1755.
<PAGE> 80
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PERFORMANCE INFORMATION..................................... 1
Money Market Subaccount Yields........................... 1
Other Subaccount Yields.................................. 2
Average Annual Total Returns............................. 3
Other Total Returns...................................... 4
Effect of the Annual Administration Fee on Performance
Data................................................... 4
VARIABLE ANNUITY PAYMENTS................................... 4
Annuity Unit Value....................................... 4
Illustration of Calculation of Annuity Unit Value........ 5
Illustration of Variable Annuity Payments................ 5
VALUATION DAYS.............................................. 5
OTHER INFORMATION........................................... 5
FINANCIAL STATEMENTS........................................ 5
</TABLE>
i
<PAGE> 81
PERFORMANCE INFORMATION
From time to time, the Company may disclose yields, total returns, and
other performance data pertaining to the Contracts for a Subaccount. Such
performance data will be computed, or accompanied by performance data computed,
in accordance with the standards defined by the SEC.
Because of the charges and deductions imposed under a Contract, the yield
for the Subaccounts will be lower than the yield for their respective Funds. The
calculation of yields, total returns and other performance data do not reflect
the effect of any premium tax that may be applicable to a particular Contract.
Premium taxes currently range generally from 0% to 3.5% of the annuity
considerations (purchase payments) based on the jurisdiction is which the
Contract is sold.
MONEY MARKET SUBACCOUNT YIELDS
From time to time, sales literature or advertisements may quote the current
annualized yield of the Money Market Subaccount for a seven-day period in a
manner that does not take into consideration any realized or unrealized gains or
losses on shares of the Money Market Fund or on that Fund's portfolio
securities.
This current annualized yield is computed by determining the net change
(exclusive of realized gains and losses on the sale of securities and unrealized
appreciation and depreciation) at the end of the seven-day period in the value
of a hypothetical account under a Contract having a balance of one unit of the
Money Market Subaccount at the beginning of the period, dividing such net change
in account value by the value of the hypothetical account at the beginning of
the period to determine the base period return, and annualizing this quotient on
a 365-day basis. The net change in account value reflects: 1) net income from
the Subaccount attributable to the hypothetical account; and 2) charges and
deductions imposed under the Contract that are attributable to the hypothetical
account. The charges and deductions include the per unit charges for the
hypothetical account for: 1) the annual administration fee; 2) the mortality and
expense risk charge; and 3) the asset-based administration charge. For purposes
of calculating current yields for a Contract, an average per unit annual
administration fee is used based on the $30 annual administration fee deducted
for the prior Contract Year of the Contract Anniversary. Current Yield is
calculated according to the following formula:
Current Yield = ((NCS - ES)/UV) X (365/7)
Where:
<TABLE>
<S> <C> <C>
NCS = the net change in the value of the Money Market Subaccount
(exclusive of realized gains or losses on the sale of
securities and unrealized appreciation and depreciation) for
the seven-day period attributable to a hypothetical account
having a balance of 1 Subaccount unit.
ES = Per unit expenses attributable to the hypothetical account
for the seven-day period.
UV = The unit value for the first day of the seven-day period.
</TABLE>
Effective Yield = (1 + (NCS - ES)/UV) 365/7 - 1
Where:
<TABLE>
<S> <C> <C>
NCS = the net change in the value of the Money Market Subaccount
(exclusive of realized gains or losses on the sale of
securities and unrealized appreciation and depreciation) for
the seven-day period attributable to a hypothetical account
having a balance of 1 Subaccount unit.
ES = per unit expenses attributable to the hypothetical account
for the seven-day period.
UV = the unit value for the first day of the seven-day period.
</TABLE>
1
<PAGE> 82
Because of the charges and deductions imposed under the Contract, the yield
for the Money Market Subaccount is lower than the yield for the Money Market
Fund.
The current and effective yields on amounts held in the Money Market
Subaccount normally fluctuate on a daily basis. THEREFORE, THE DISCLOSED YIELD
FOR ANY GIVEN PAST PERIOD IS NOT AN INDICATION OR REPRESENTATION OF FUTURE
YIELDS OR RATES OF RETURN. The Money Market Subaccount's actual yield is
affected by changes in interest rates on money market securities, average
portfolio maturity of the Money Market Fund, the types and quality of portfolio
securities held by the Fund and the Fund's operating expenses. Yields on amounts
held in the Money Market Subaccount may also be presented for periods other than
a seven-day period.
Yield calculations do not take into account the surrender charge under the
Contract equal to 4% to 7% of certain purchase payments during the five full
years between the date of receipt of the purchase payment and the date of
surrender or withdrawal.
OTHER SUBACCOUNT YIELDS
From time to time, sales literature or advertisements may quote the current
annualized yield of one or more of the Subaccounts (except the Money Market
Subaccount) for a Contract for 30-day or one-month periods. The annualized yield
of a Subaccount refers to income generated by the Subaccount during a 30-day or
one-month period and is assumed to be generated each period over a 12-month
period.
The yield is computed by 1) dividing the net investment income of the Fund
attributable to the Subaccount units less Subaccount expenses for the period; by
2) the maximum offering price per unit on the last day of the period times the
daily average number of units outstanding for the period; by 3) compounding that
yield for a six-month period; and by 4) multiplying that result by 2. Expenses
attributable to the Subaccount include the annual administration fee, the
asset-based administration charge and the mortality and expense risk charge. The
yield calculation assumes an annual administration fee of $30 per year per
Contract deducted for the prior Contract Year as of the Contract Anniversary.
For purposes of calculating the 30-day or one-month yield, an average
administration fee based on the average Variable Account Value is used to
determine the amount of the charge attributable to the Subaccount for the 30-day
or one-month period. The 30-day or one-month yield is calculated according to
the following formula:
Yield = 2 X (((NI - ES)/(U X UV) + 1) 6 - 1)
Where:
<TABLE>
<S> <C> <C>
NI = net income of the Fund for the 30-day or one-month period
attributable to the Subaccount's units.
ES = expenses of the Subaccount for the 30-day or one-month
period.
U = the average number of units outstanding.
UV = the unit value at the close (highest) of the last day in the
30-day or one-month period.
</TABLE>
Because of the charges and deductions imposed under the Contracts, the
yield for the Subaccount is lower than the yield for the corresponding Fund.
The yield on the amounts held in the Subaccounts normally fluctuates over
time. THEREFORE, THE DISCLOSED YIELD FOR ANY GIVEN PAST PERIOD IS NOT AN
INDICATION OR REPRESENTATION OF FUTURE YIELDS OR RATES OF RETURN. A subaccount's
actual yield is affected by the types and quality of the securities held by the
corresponding Fund and that Fund's operating expenses.
2
<PAGE> 83
Yield calculations do not take into account the surrender charge under the
Contract equal to 4% to 7% of certain purchase payments during the five full
years between the date of receipt of the purchase payment and the date of
surrender or withdrawal.
AVERAGE ANNUAL TOTAL RETURNS
From time to time, sales literature or advertisements may quote standard
average annual total returns for one or more of the Subaccounts for Various
periods of time.
When a Subaccount or Fund has been in operation for 1, 5, and 10 years,
respectively, the standard average annual total return for these periods will be
provided. Average annual total returns for other periods of time may, from time
to time, also be disclosed.
Standard average annual total returns represent the average annual
compounded rates of return that would equate an initial investment of $1,000
under a Contract to the redemption value of that investment as of the last day
of each of the periods. The ending date for each period for which total return
quotations are provided will be for the most recent calendar quarter-end
practicable, considering the type of the communication and the media through
which it is communicated.
Standard average annual total returns are calculated using Subaccount unit
values which the Company calculates on each Valuation Day based on the
performance of the Subaccount's underlying Fund, the deductions for the
mortality and expense risk charge, and the deductions for the asset-based
administration charge and the annual administration fee. The calculation assumes
that the annual administration fee is $30 per year per Contract deducted for the
prior Contract Year as of the Contract Anniversary. For purposes of calculating
standard average annual total return, an average per-dollar per-day annual
administration fee attributable to the hypothetical account for the period is
used. The calculation also assumes surrender of the Contract at the end of the
period for the return quotation. Standard average annual total returns will
therefore reflect a deduction of the surrender charge for any period less than
six years. The standard average annual total return is calculated according to
the following formula:
<TABLE>
<S> <C> <C>
TR = ((ERV/P 1/N) - 1
Where:
TR = the average annual total return net of Subaccount recurring
charges.
ERV = the ending redeemable value (net of any applicable surrender
charge) of the hypothetical account at the end of the
period.
P = a hypothetical initial payment of $1,000.
N = the number of years in the period.
</TABLE>
From time to time, sales literature or advertisements any quote standard
average annual total returns for periods prior to the date the Variable Account
commenced operations. Such performance information for the Subaccounts is
calculated based on the performance of the various Funds and the assumption that
the Subaccounts were in existence for the same periods as those indicated for
the Funds, with the level of Contract charges that were in effect at the
inception of the Subaccounts.
Fund total return information used to calculate the standard average annual
total returns of the Subaccounts for periods prior to the inception of the
Subaccounts has been provided by the Funds. The Funds are not affiliated with
the Company. While the Company has no reason to doubt the accuracy of these
figures provided by the Funds, the Company has not independently verified the
accuracy of these figures.
3
<PAGE> 84
OTHER TOTAL RETURNS
From time to time, sales literature or advertisements may also quote
average annual total returns that do not reflect the surrender charge. These are
calculated in exactly the same way as standard average annual total returns
described above, except that the ending redeemable value of the hypothetical
account for the period is replaced with an ending value for the period that does
not take into account any charges on amounts surrendered or withdrawn.
The company may disclose cumulative total returns in conjunction with the
standard formats described above. The cumulative total returns will be
calculated using the following formula:
<TABLE>
<S> <C> <C>
CTR = (ERV/P) - 1
Where:
CTR = The cumulative total return net of Subaccount recurring
charges for the period.
ERV = The ending redeemable value of the hypothetical investment
at the end of the period.
P = A hypothetical single payment of $1,000.
</TABLE>
EFFECT OF THE ANNUAL ADMINISTRATION FEE ON PERFORMANCE DATA
The Contract provides for a $30 annual administration fee to be deducted
annually for each prior Contract Year as of the Contract Anniversary, from the
Subaccount Values and Guarantee Amounts based on the proportion that each bears
to the Contract Value. For purposes of reflecting the change in yield and total
return quotations, the charge is converted into a per-dollar per-day charge
based on the average Subaccount Value and Guarantee Amount of all Contracts on
the last day of the period for which quotations are provided. The per-dollar
per-day average charge will then be adjusted to reflect the basis upon which the
particular quotation is calculated.
VARIABLE ANNUITY PAYMENTS
ANNUITY UNIT VALUE
The value of an Annuity Unit is calculated at the same time that the value
of an Accumulation Unit is calculated and is based on the same values for Fund
shares and other assets and liabilities. (See "Annuity Payments" in the
Prospectus.) The Annuity Unit Value for each Subaccount's first Valuation Period
was set at $10. The Annuity Unit Value for a Subaccount for each subsequent
Valuation Period is equal to (a) multiplied by (b) divided by (c) where:
(a) is the Net Investment Factor for the Valuation Period for which the
Annuity Unit Value is being calculated;
(b) is the Annuity Unit Value for the preceding Valuation Period; and
(c) is a daily Benchmark Rate of Return factor (for the 3% benchmark rate
of return) adjusted for the number of days in the Valuation Period.
The Benchmark Rate of Return factor is equal to one plus 3%, or 1.03. The
annual factor can be translated into a daily factor of 1.00008098.
4
<PAGE> 85
The following illustrations show, by use of hypothetical examples, the
method of determining the Annuity Unit Value and the amount of several Variable
Annuity Payments based on one Subaccount.
ILLUSTRATION OF CALCULATION OF ANNUITY UNIT VALUE
<TABLE>
<C> <S> <C>
1. Annuity Unit Value for immediately preceding Valuation
Period...................................................... 10.00000000
2. Net Investment factor....................................... 1.00036164
3. Daily factor to compensate for Benchmark Rate of Return of
3%.......................................................... 1.00008099
4. Adjusted Net Investment Factor (2)/(3)...................... 1.00028063
5. Annuity Unit Value for current Valuation Period (4)X(1)..... 10.00280630
</TABLE>
ILLUSTRATION OF VARIABLE ANNUITY PAYMENTS
(ASSUMING NO PREMIUM TAX IS APPLICABLE)
<TABLE>
<C> <S> <C>
1. Number of Accumulation Units at Annuity Date................ 1,000.00
2. Accumulation Unit Value..................................... 12.55548000
3. Adjusted Contract Value (1)X(2)............................. $ 12,555.48
4. First monthly Annuity Payment per $1,000 of adjusted
Contract Value.............................................. 9.63
5. First monthly Annuity Payment (3)X(4)/1,000................. $ 120.91
6. Annuity Unit Value.......................................... 10.00280630
7. Number of Annuity Units (5)/(6)............................. 12.08760785
8. Assume Annuity Unit value for second month equal to......... 10.04000000
9. Second Monthly Annuity Payment (7)X(8)...................... $ 121.36
10. Assume Annuity Unit Value for third month equal to.......... 10.05000000
11. Third Monthly Annuity Payment (7)X(10)...................... $ 121.48
</TABLE>
VALUATION DAYS
As defined in the prospectus, for each Subaccount a Valuation Day is each
day on which the New York Stock Exchange is open for business, except for
certain holidays listed in the prospectus and days that a Subaccount's
corresponding Fund does not value its shares.
OTHER INFORMATION
A registration statement has been filed with the SEC under the Securities
Act of 1933, as amended, with respect to the Contracts discussed in this
Statement of Additional Information. Not all the information set forth in the
registration statement, amendments and exhibits thereto has been included in
this Statement of Additional Information. Statements contained in this Statement
of Additional Information concerning the content of the Contracts and other
legal instruments are summaries. For a complete statement of the terms of these
documents, reference should be made to the instruments filed with the SEC.
FINANCIAL STATEMENTS
Financial statements of the Company are presented in the prospectus. The
following financial statements are of the Valley Forge Life Insurance Company
Variable Annuity Separate Account.
5
<PAGE> 86
[THIS PAGE INTENTIONALLY LEFT BLANK]
6
<PAGE> 87
STATEMENT OF ASSETS AND LIABILITIES
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FEDERATED FEDERATED FEDERATED FIDELITY FIDELITY
PRIME MONEY UTILITY HIGH INCOME EQUITY- ASSET FIDELITY FIDELITY
DECEMBER 31, 1997 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 $861,084 $50,683 $190,479
Variable Insurance Products
Fund $495,969
Variable Insurance Products
Fund II $267,366 $562,885 $329,066
The Alger American Fund
MFS Variable Insurance Trust
SoGen Variable Funds, Inc.
Van Eck Worldwide Insurance
Trust
-------- ------- -------- -------- -------- -------- --------
TOTAL INVESTMENTS 861,084 50,683 190,479 495,969 267,366 562,885 329,066
-------- ------- -------- -------- -------- -------- --------
TOTAL ASSETS 861,084 50,683 190,479 495,969 267,366 562,885 329,066
-------- ------- -------- -------- -------- -------- --------
LIABILITIES - - - - - - -
- -------------------------------------------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY--NET ASSETS $861,084 $50,683 $190,479 $495,969 $267,366 $562,885 $329,066
=========================================================================================================================
</TABLE>
See accompanying Notes to Financial Statements
7
<PAGE> 88
STATEMENT OF ASSETS AND LIABILITIES
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MFS SOGEN VAN ECK VAN ECK
ALGER ALGER MFS GROWTH MFS MFS OVERSEAS WORLDWIDE WORLDWIDE
SMALL ALGER MID-CAP EMERGING MFS WITH LIMITED TOTAL VARIABLE HARD EMERGING
CAP GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY RETURN FUND ASSETS MARKETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$195,731 $249,383 $42,427
$141,648 $156,415 $219,017 $81,706 $259,844
$752,892
$9,037 $16,890
- -------- -------- ------- -------- -------- -------- ------- -------- -------- ------ -------
195,731 249,383 42,427 141,648 156,415 219,017 81,706 259,844 752,892 9,037 16,890
- -------- -------- ------- -------- -------- -------- ------- -------- -------- ------ -------
195,731 249,383 42,427 141,648 156,415 219,017 81,706 259,844 752,892 9,037 16,890
- -------- -------- ------- -------- -------- -------- ------- -------- -------- ------ -------
- - - - - - - - - - -
- -------- -------- ------- -------- -------- -------- ------- -------- -------- ------ -------
$195,731 $249,383 $42,427 $141,648 $156,415 $219,017 $81,706 $259,844 $752,892 $9,037 $16,890
========================================================================================================================
<CAPTION>
ALGER
SMALL
CAP TOTAL
- -------- ----------
<S> <C>
$1,102,246
495,969
1,159,317
$195,731 487,541
858,630
752,892
25,927
- -------- ----------
195,731 4,882,522
- -------- ----------
195,731 4,882,522
- -------- ----------
- -
- -------- ----------
$195,731 $4,882,522
========
</TABLE>
See accompanying Notes to Financial Statements
8
<PAGE> 89
STATEMENT OF OPERATIONS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FEDERATED FEDERATED FEDERATED FIDELITY FIDELITY
FOR THE PERIOD FROM INCEPTION TO PRIME MONEY UTILITY HIGH INCOME EQUITY- ASSET FIDELITY FIDELITY
DECEMBER 31, 1997 FUND II FUND II BOND FUND II INCOME MANAGER INDEX 500 CONTRAFUND
<S> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
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>
Investment income:
Dividend income $ 21,053 $ 82 $ 1,192 $ - $ - $ - $ -
----------- -------- --------- --------- --------- -------- ---------
21,053 82 1,192 - - - -
----------- -------- --------- --------- --------- -------- ---------
Expenses:
Mortality and expense risk
and administration charges 5,938 150 647 1,842 1,397 1,805 917
----------- -------- --------- --------- --------- -------- ---------
5,938 150 647 1,842 1,397 1,805 917
----------- -------- --------- --------- --------- -------- ---------
NET INVESTMENT INCOME
(LOSS) 15,115 (68) 545 (1,842) (1,397) (1,805) (917)
----------- -------- --------- --------- --------- -------- ---------
Investment gains (losses):
Net realized gains (losses) - 85 1,461 18,226 11,160 9,302 3,732
Net unrealized gains (losses) - 4,190 3,915 6,272 1,593 19,813 4,074
----------- -------- --------- --------- --------- -------- ---------
NET REALIZED AND
UNREALIZED INVESTMENT
GAINS (LOSSES) - 4,275 5,376 24,498 12,753 29,115 7,806
- -------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN
PARTICIPANTS' EQUITY RESULTING
FROM OPERATIONS $ 15,115 $ 4,207 $ 5,921 $ 22,656 $ 11,356 $ 27,310 $ 6,889
=========================================================================================================================
</TABLE>
See accompanying Notes to Financial Statements
9
<PAGE> 90
STATEMENT OF OPERATIONS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MFS SOGEN VAN ECK VAN ECK
ALGER ALGER MFS GROWTH MFS MFS OVERSEAS WORLDWIDE WORLDWIDE
SMALL ALGER MID-CAP EMERGING MFS WITH LIMITED TOTAL VARIABLE HARD EMERGING
CAP GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY RETURN FUND ASSETS MARKETS TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FEB.
APR. 3, JUN. 17, 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 $ - $ - $ 5,132 $ 3,140 $ - $ - $- $ - $30,739
- -------- ------- ------- ------ ------ ------- ------- ------- -------- ----- ------- -------
51 - 89 - - 5,132 3,140 - - - - 30,739
- -------- ------- ------- ------ ------ ------- ------- ------- -------- ----- ------- -------
661 621 199 692 969 792 470 1,259 8,364 20 94 26,837
- -------- ------- ------- ------ ------ ------- ------- ------- -------- ----- ------- -------
661 621 199 692 969 792 470 1,259 8,364 20 94 26,837
- -------- ------- ------- ------ ------ ------- ------- ------- -------- ----- ------- -------
(610) (621) (110) (692) (969) 4,340 2,670 (1,259) (8,364) (20) (94) 3,902
- -------- ------- ------- ------ ------ ------- ------- ------- -------- ----- ------- -------
5,548 732 1,490 122 3,145 2,986 1,202 5,264 7,592 11 (404) 71,654
(13,637) (8,997) (1,453) 3,958 5,519 5,310 (1,986) 11,648 (34,846) (189) (4,665) 519
- -------- ------- ------- ------ ------ ------- ------- ------- -------- ----- ------- -------
)
(8,089 (8,265) 37 4,080 8,664 8,296 (784) 16,912 (27,254) (178) (5,069) 72,173
- ---------------------------------------------------------------------------------------------------------------------------------
(8,699)
$ $(8,886) $ (73) $3,388 $7,695 $12,636 $ 1,886 $15,653 $(35,618) $(198) $(5,163) $76,075
=================================================================================================================================
</TABLE>
See accompanying Notes to Financial Statements
10
<PAGE> 91
STATEMENT OF CHANGES IN NET ASSETS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FEDERATED FEDERATED FEDERATED FIDELITY FIDELITY
FOR THE PERIOD FROM INCEPTION TO PRIME MONEY UTILITY HIGH INCOME EQUITY- ASSET FIDELITY FIDELITY
DECEMBER 31, 1997 FUND II FUND II BOND FUND II INCOME MANAGER INDEX 500 CONTRAFUND
<S> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
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 (loss) $ 15,115 $ (68) $ 545 $ (1,842) $ (1,397) $ (1,805) $ (917)
Net realized gains (losses) - 85 1,461 18,226 11,160 9,302 3,732
Net unrealized gains (losses) - 4,190 3,915 6,272 1,593 19,813 4,074
----------- -------- --------- --------- --------- -------- ---------
Change in net assets
resulting from operations 15,115 4,207 5,921 22,656 11,356 27,310 6,889
From capital transactions:
Net premiums 3,534,379 22,534 116,421 427,889 186,728 444,865 146,548
Withdrawals (6,610) - (507) (701) (12) (704) -
Transfers among sub-accounts
and with the Guaranteed
Interest Option Separate
Account -- net (2,681,800) 23,942 68,644 46,125 69,294 91,414 175,629
----------- -------- --------- --------- --------- -------- ---------
Change in net assets resulting
from capital transactions 845,969 46,476 184,558 473,313 256,010 535,575 322,177
Increase in net assets during
period 861,084 50,683 190,479 495,969 267,366 562,885 329,066
Net assets at beginning of
period - - - - - - -
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD $ 861,084 $ 50,683 $ 190,479 $ 495,969 $ 267,366 $562,885 $ 329,066
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER UNIT AT END
OF PERIOD $ 1.00 $ 14.29 $ 10.95 $ 24.28 $ 18.01 $ 114.39 $ 19.94
=========================================================================================================================
UNITS OUTSTANDING AT END OF
PERIOD 861,083.8 3,546.7 17,395.3 20,427.1 14,845.4 4,920.8 16,502.8
=========================================================================================================================
</TABLE>
See accompanying Notes to Financial Statements
11
<PAGE> 92
STATEMENT OF CHANGES IN NET ASSETS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MFS SOGEN VAN ECK VAN ECK
ALGER ALGER MFS GROWTH MFS MFS OVERSEAS WORLDWIDE WORLDWIDE
SMALL ALGER MID-CAP EMERGING MFS WITH LIMITED TOTAL VARIABLE HARD EMERGING
CAP GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY RETURN FUND ASSETS MARKETS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FEB.
APR. 3, JUN. 17, 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>
$ (610) $ (621) $ (110) $ (692) $ (969) $ 4,340 $ 2,670 $ (1,259) $ (8,364) $ (20) $ (94)
5,548 732 1,490 122 3,145 2,986 1,202 5,264 7,592 11 (404)
(13,637) (8,997) (1,453) 3,958 5,519 5,310 (1,986) 11,648 (34,846) (189) (4,665)
- -------- -------- ------- -------- -------- -------- ------- -------- -------- ------ -------
(8,699) (8,886) (73) 3,388 7,695 12,636 1,886 15,653 (35,618) (198) (5,163)
186,908 203,646 38,097 99,654 121,533 124,921 75,938 186,723 819,873 4,326 19,999
- - - - - - (960) (786) (959) - -
17,522 54,623 4,403 38,606 27,187 81,460 4,842 58,254 (30,404) 4,909 2,054
- -------- -------- ------- -------- -------- -------- ------- -------- -------- ------ -------
204,430 258,269 42,500 138,260 148,720 206,381 79,820 244,191 788,510 9,235 22,053
195,731 249,383 42,427 141,648 156,415 219,017 81,706 259,844 752,892 9,037 16,890
- - - - - - - - - - -
- ------------------------------------------------------------------------------------------------------------------------
$195,731 $249,383 $42,427 $141,648 $156,415 $219,017 $81,706 $259,844 $752,892 $9,037 $16,890
- ------------------------------------------------------------------------------------------------------------------------
$ 43.75 $ 42.76 $24.18 $ 16.14 $ 15.79 $ 16.44 $ 10.01 $ 16.63 $ 9.77 $15.72 $ 11.00
========================================================================================================================
4,473.8 5,832.2 1,754.7 8,776.2 9,906.0 13,322.2 8,162.4 15,625.0 77,061.7 574.9 1,535.5
========================================================================================================================
<CAPTION>
- --------
APR. 3,
1997
- --------
<S> <C>
$ (610 $ 3,902
5,548 71,654
(13,637 519
- -------- ----------
(8,699 76,075
186,908 6,760,982
- (11,239)
17,522 (1,943,296)
- -------- ----------
204,430 4,806,447
195,731 4,882,522
- -
- --------
$195,731 $4,882,522
- --------
$ 43.75
========
4,473.8
========
</TABLE>
See accompanying Notes to Financial Statements
12
<PAGE> 93
NOTES TO FINANCIAL STATEMENTS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
PERIOD FROM INCEPTION TO DECEMBER 31, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 operations 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 84% of the outstanding common stock of CNA.
The Variable Account currently offers 17 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 Mid-Cap
Growth Portfolio
MFS VARIABLE INSURANCE TRUST:
MFS Emerging Growth
Series
MFS Research Series
MFS Growth With Income
Series
MFS Total Return Series
SOGEN VARIABLE FUNDS, INC.:
SoGen Overseas Variable Fund
VAN ECK WORLDWIDE INSURANCE
TRUST:
Van Eck Worldwide Hard
Assets Fund
Van Eck Worldwide
Emerging Markets Fund
The Guaranteed Interest Option Separate Account ("GIO Account") is also a
separate account of VFL, that 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. Contractholders 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. The GIO
Account, however, unlike the Variable Account, is not registered as an
investment company under the
13
<PAGE> 94
NOTES TO FINANCIAL STATEMENTS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
PERIOD FROM INCEPTION TO DECEMBER 31, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1940 Act. As a result, 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 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 portfolio managers of the funds which 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 by the Variable Account and the cost of such shares, which are determined
using the average cost method.
CONTRACTHOLDER VARIABLE ACCOUNT ACTIVITY -- Variable 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 Variable 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 principles ("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.
14
<PAGE> 95
NOTES TO FINANCIAL STATEMENTS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
PERIOD FROM INCEPTION TO DECEMBER 31, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 3. INVESTMENTS
- --------------------------------------------------------------------------------
At December 31, 1997, the investments of the respective subaccounts of the
Variable Annuity Separate Account are as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
INSURANCE SERIES:
Federated Prime Money Fund II 861,084 $861,084 $861,084
Federated Utility Fund II 3,547 46,493 50,683
Federated High Income Bond Fund II 17,395 186,564 190,479
VARIABLE INSURANCE PRODUCTS FUND:
Equity-Income 20,427 489,697 495,969
VARIABLE INSURANCE PRODUCTS FUND II:
Asset Manager 14,845 265,773 267,366
Index 500 4,921 543,072 562,885
Contrafund 16,503 324,992 329,066
THE ALGER AMERICAN FUND:
Small Capitalization 4,474 209,368 195,731
Growth 5,832 258,380 249,383
MidCap Growth 1,755 43,880 42,427
MFS VARIABLE INSURANCE TRUST:
Emerging Growth 8,776 137,690 141,648
Research 9,906 150,896 156,415
Growth With Income 13,322 213,707 219,017
Limited Maturity 8,162 83,692 81,706
Total Return 15,625 248,196 259,844
SOGEN VARIABLE FUNDS, INC.:
Overseas 77,062 787,738 752,892
VAN ECK WORLDWIDE INSURANCE TRUST:
Hard Assets 575 9,226 9,037
Emerging Markets 1,536 21,555 16,890
</TABLE>
15
<PAGE> 96
NOTES TO FINANCIAL STATEMENTS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
PERIOD FROM INCEPTION TO DECEMBER 31, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 December 31, 1997, were as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PURCHASES SALES
- ---------------------------------------------------------------------------------
<S> <C> <C>
INSURANCE SERIES:
Federated Prime Money Fund II $3,550,031 $2,710,000
Federated Utility Fund II 131,884 85,557
Federated High Income Bond Fund II 226,400 42,489
VARIABLE INSURANCE PRODUCTS FUND:
Equity-Income 675,097 203,626
VARIABLE INSURANCE PRODUCTS FUND II:
Asset Manager 429,770 175,157
Index 500 646,677 112,906
Contrafund 366,624 45,364
THE ALGER AMERICAN FUND:
Small Capitalization 327,651 123,882
Growth 391,931 134,284
MidCap Growth 55,923 13,622
MFS VARIABLE INSURANCE TRUST:
Emerging Growth 319,665 182,097
Research 181,534 33,784
Growth With Income 231,099 25,510
Limited Maturity 135,099 55,749
Total Return 466,510 223,577
SOGEN VARIABLE FUNDS, INC.:
Overseas 994,765 214,619
VAN ECK WORLDWIDE INSURANCE TRUST:
Hard Assets 10,106 892
Emerging Markets 26,885 4,925
</TABLE>
16
<PAGE> 97
NOTES TO FINANCIAL STATEMENTS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
PERIOD FROM INCEPTION TO DECEMBER 31, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
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 (four of which can be applied to 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 the funds'
prospectuses, that the funds satisfy the requirement of the regulations.
17
<PAGE> 98
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Contractholders of Valley Forge Life Insurance Company Variable Annuity
Separate Account and
The Board of Directors of Valley Forge Life Insurance Company:
We have audited the accompanying statement of assets and liabilities of
Valley Forge Life Insurance Company Variable Annuity Separate Account (a
separate account of the Valley Forge Life Insurance Company, which is a
wholly-owned subsidiary of Continental Assurance Company, which is a
wholly-owned subsidiary of Continental Casualty Company, which is wholly-owned
by CNA Financial Corporation, an affiliate of Loews Corporation) as of December
31, 1997, and the related statements of operations and changes in net assets for
the period from inception through December 31, 1997. These financial statements
are the responsibility of management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 held at December 31, 1997. 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 audit provides 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 the Valley Forge Life
Insurance Company Variable Annuity Separate Account as of December 31, 1997, and
the results of its operations and the changes in its net assets for the period
from inception through December 31, 1997, in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Chicago, Illinois
February 23, 1998
18
<PAGE> 99
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
Financial statements for Valley Forge Life Insurance Company (the
"Company") are included in Part A. Financial Statements for Valley
Forge Life Insurance Company Variable Annuity Separate Account (the
"Variable Account") are included in Part B.
(b) Exhibits
(1) (a) Certified resolution of the board of directors of the
Company dated October 18, 1995, establishing the Variable
Account.*
(2) Not applicable.
(3) Form of underwriting agreement between the Company and CNA
Investor Services, Inc. ("CNA/ISI").**
(4) (a) Form of Flexible Premium Deferred Variable Annuity
Contract (the "Contract").*
(b) Form of Qualified Plan Endorsement.*
(c) Form of IRA Endorsement.*
(d) Form of Nursing Home Confinement, Terminal Medical
Condition, Total Disability Endorsement.*
(5) Contract Application.***
(6) (a) Articles of Incorporation of the Company.*
(b) By-Laws of the Company.*
(7) Not applicable.
(8) (a) Form of Participation Agreement between the Company and
Insurance Management Series.**
(b) Form of Participation Agreement between the Company and
Variable Insurance Products Fund.**
(c) Form of Participation Agreement between the Company and
The Alger American Fund.**
<PAGE> 100
(d) Form of Participation Agreement between the Company
and MFS Variable Insurance Trust. **
(e) Form of Participation Agreement between the Company
and SoGen Variable Funds, Inc. **
(f) Form of Participation Agreement between the Company
and Van Eck Worldwide Insurance Trust.**
(9) Opinion and Consent of Lynne Gugenheim, Esquire.***
(10) (a) Consent of Sutherland, Asbill & Brennan, LLP ***
(b) Consent of Deloitte & Touche LLP. ***
(11) Not applicable.
(12) Not applicable.
(13) Not applicable.
(14) Financial Data Schedule for Electronic Filers.***
* Incorporated herein by reference to filing of Form N-4EL
Registration on February 20, 1996
** Incorporated herein by reference to filing of Form N-4EL/A
Registration on September 4, 1996
*** To be filed by amendment.
ITEM 25. DIRECTORS AND OFFICERS OF THE COMPANY
Incorporated herein by reference to the section titled "Directors and
Executive Officers" of the prospectus filed as Part A of this
registration statement.
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
The registrant is a segregated asset account of the Company and is therefore
owned and controlled by the Company. The Company is a stock life insurance
company of which all of the voting securities are owned by Continental
Assurance Company. Continental Assurance Company is owned by Continental
Casualty Company, a stock casualty insurance company organized under the
Illinois Insurance Code, the home office of which is located at CNA Plaza,
Chicago, Illinois 60685. All of the voting securities of Continental Casualty
Company are owned by CNA Financial Corporation, a Delaware Corporation, 667
Madison Avenue, New York, New York 10021-8087, with interests in insurance,
hotels, watches and other timing devices, drilling rigs and tobacco, owned
approximately 84% of the outstanding voting securities of CNA Financial
Corporation as of April 15, 1998. Laurence A. Tisch, the Chairman of the
Board, Co-Chief Executive Officer and a director of Loews Corporation and Chief
Executive Office and a director of CNA Financial Corporation and his brother,
Preston R. Tisch, President, Co-Chief Executive Officer and a director of CNA
Financial and Loews corporation, owned, in aggregate, approximately 31% of the
outstanding common stock of Loews Corporation as of March 31, 1997. Therefore,
they may be deemed to be parents of Loews Corporation and thus of CNA Financial
Corporation, Continental Casualty Company and the Company, within the meaning
of the federal securities laws. Various companies and other entities
controlled by CNA Financial Corporation may be considered to be under common
control with the registrant or the Company. Such other companies and entities,
together with the identity of their controlling persons (where applicable),
are set forth below:
PRIMARY SUBSIDIARIES OF CNA
<TABLE>
<CAPTION>
PLACE OF
COMPANY INCORPORATION
- ------- -------------
<S> <C>
AMS Services, Inc. and subsidiaries (10) Delaware
Alexsis, Inc. and subsidiaries (4) Maryland
American Casualty Company of Reading, Pennsylvania (ACCO) Pennsylvania
Boston Old Colony Insurance Company Massachusetts
Claims Administration Corp. Maryland
CNA Casualty of California California
CNA Surety Corporation Delaware
Columbia Casualty Company Illinois
Commercial Insurance Company of Newark, N.J. New Jersey
Continental Assurance Company (CAC) Illinois
Continental Casualty Company (CCC) Illinois
Continental Lloyd's Insurance Company Texas
Continental Reinsurance Corporation California
Firemen's Insurance Company of Newark, New Jersey New Jersey
Kansas City Fire and Marine Insurance Company Missouri
National Fire Insurance Company of Hartford (NFI) Connecticut
National-Ben Franklin Insurance Company of Illinois Illinois
Niagara Fire Insurance Company Delaware
Pacific Insurance Company California
The Buckeye Union Insurance Company Ohio
The Continental Corporation, Inc. (CIC) New York
The Continental Insurance Company New Hampshire
The Continental Insurance Company of New Jersey New Jersey
Convida Holdings, Ltd and subsidiary (1) Bahamas
The Fidelity and Casualty Company of New York New Hampshire
The Glens Falls Insurance Company Delaware
The Mayflower Insurance Company, Ltd. Indiana
Transcontinental Insurance Company New York
Transcontinental Technical Services, Inc. (ServCo) Illinois
Transportation Insurance Company Illinois
Valley Forge Insurance Company Pennsylvania
Valley Forge Life Insurance Company Pennsylvania
Western National Warranty Corporation and subsidiary (1) Arizona
</TABLE>
All other Subsidiaries, when aggregated, are not considered significant.
-2-
<PAGE> 101
ITEM 27. NUMBER OF CONTRACTOWNERS
As of April , 1999, the Separate Account had contractowners.
ITEM 28. INDEMNIFICATION
The registrant has no officers, directors or employees. The depositor
and the registrant do not indemnify the officers, directors of
employees of the depositor. CNA-Financial Corporation, ("CNAFC") a
parent of the depositor, indemnifies the depositor's officers,
directors and employees in their capacity as such. Most of the
depositor's officers, directors and employees are also officers,
directors and/or employees of CNAFC.
CNAFC indemnifies any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of CNAFC) by
reason of the fact that he is or was a director, officer, employee, or
agent of CNAFC, or was serving at the request of CNAFC as a director,
office, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including
attorney's fees), judgments, fines, and amounts paid in settlement
actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests
of CNAFC, and, with respect to any criminal action or proceeding, had
no reasonable cause to believe his conduct was unlawful.
CNAFC indemnifies any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit
by or in the right of CNAFC to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or
agent of CNAFC, or was serving at the request of CNAFC as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including
attorney's fees) actually and reasonably incurred by him in connection
with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of CNAFC. No indemnification is made,
however, in respect of any claim, issue or matter as to which such
person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to CNAFC unless and only to
the extent that a court determines that, despite the adjudication of
-3-
<PAGE> 102
liability but in view of all of the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the court
deems proper.
To the extent that any person referred to above is successful on the merits or
otherwise in defense of any action, suit or proceeding referred to above, or in
defense of any claim, issue or matter therein, CNAFC will indemnify such person
against expenses (including attorney's fees) actually and reasonably incurred
by him in connection therewith. CNAFC may advance to such a person, expenses
incurred in defending a civil or criminal action, suit or proceeding as
authorized by CNAFC's board of directors upon receipt of an undertaking by (or
on behalf of) such person to repay the amount advanced unless it is ultimately
determined that he is entitled to be indemnified.
Indemnification and advancement of expenses described above (unless pursuant to
a court order) is only made as authorized in the specific case upon a
determination that such indemnification or advancement of expenses is proper in
the circumstances because he has met the applicable standard of conduct. Such
determination must be made by a majority vote of a quorum of CNAFC's board of
directors who are not parties to the action, suit or proceeding or by
independent legal counsel in a written opinion or by CNAFC's stockholders.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection
with the securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
- 4 -
<PAGE> 103
ITEM 29. PRINCIPAL UNDERWRITER
(a) CNA/ISI is the registrant's principal underwriter and also
serves as the principal underwriter of certain variable life
insurance contracts issued by the Company and certain variable
annuity contracts and variable life insurance contracts issued by
affiliates of the Company.
(b) Officers and Directors of CNA/ISI.
Kevin M. Hogan, CLU
CNA Plaza, 34S
Chicago, Illinois 60685
1/98-Present President, CNA Investor Services, Inc.
Vice President, Continental Casualty Company
8/94-1/98 President, CNA Investor Services, Inc.
Assistant Vice President, Continental Casualty Company
10/86-8/94 Assistant Vice President, Continental Casualty
Company, Home Office Human Resources
Ronald S. Chapon, CFP
CNA Plaza, 34 South
Chicago, Illinois 60685
5/80-Present Vice President, CNA Investor Services, Inc.
(c) Not applicable
Item 30. LOCATION BOOKS AND RECORDS
All of the accounts, books, records or other documents required to be
kept by Section 31(a) of the Investment Company Act of 1940 and rules
thereunder, are maintained by the Company at CNA Plaza, Chicago,
Illinois 60685, or 100 CNA Drive, Nashville, Tennessee 37214-3439, by
Financial Administration Services, Inc. at 1290 Silas Deane Highway,
P.O. Box 290794, Wethersfield, Connecticut 06129-0794, and by
CNA/ISI at CNA Plaza, Chicago, Illinois 60685.
ITEM 31. MANAGEMENT SERVICES
All management contracts are discussed in Part A or Part B of this
filing.
ITEM 32. UNDERTAKINGS
(a) The registrant undertakes that it will file a post-effective
amendment to this registration statement as frequently as is
necessary to ensure that the audited financial statements in the
registration statement are never more than 16 months old for as
long as purchase payments under the Contracts offered herein are
being accepted.
- 5 -
<PAGE> 104
(b) The registrant undertakes that it will include either (1) as part
of any application to purchase a Contract offered by the
prospectus, a space that an applicant can check to request a
statement of additional information, or (2) a post card or
similar written communications affixed to or included in the
prospectus that the applicant can remove to send for a
statement of additional information.
(c) The registrant undertakes to deliver any statement of additional
information and any financial statements required to be made
available under this Form N-4 promptly upon written or oral
request to the Company at the address or phone number listed in
the prospectus.
(d) Valley Forge Life Insurance Company hereby represents that the
fees and charges deducted under the Contract, in the aggregate,
are reasonable in relation to the Services rendered, the
expenses expected to be incurred, and the risks assumed by the
Valloy Forge Life Insurance Company.
<PAGE> 105
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the registrant has caused this registration statement to be signed on its
behalf, in the City of Chicago, and the State of Illinois, on this 26th day of
February, 1999
VALLEY FORGE LIFE INSURANCE COMPANY VARIABLE ANNUITY SEPARATE ACCOUNT
(Registrant)
Attest: S/JONATHAN D. KANTOR By: S/W. JAMES MACGINNITIE
-------------------- ----------------------
Jonathan D. Kantor W. James MacGinnitie
Senior Vice President, Senior Vice President,
Secretary and General Counsel Acting Chief Financial
Officer, Director
VALLEY FORGE LIFE INSURANCE COMPANY
(Depositor)
Attest: S/JONATHAN D. KANTOR By: S/W. JAMES MACGINNITIE
-------------------- ----------------------
Jonathan D. Kantor W. James MacGinnitie
Senior Vice President, Senior Vice President
Secretary and General Counsel Chief Financial
Officer, Director
As required by the Securities Act of 1933, this registration statement has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
S/PHILIP L. ENGEL President, Director February 26, 1999
- -----------------------
Philip L. Engel
/s/PETER E. JOKIEL Senior Vice President February 26, 1999
- -----------------------
Peter E. Jokiel
</TABLE>
<PAGE> 106
<TABLE>
<S> <C> <C>
S/BERNARD L. HENGESBAUGH Chairman of the Board,
- -------------------------- Chief Executive Officer, February 26, 1999
Bernard L. Hengesbaugh Director
S/JONATHAN D. KANTOR Senior Vice President February 26, 1999
- -------------------------- General Counsel, Secretary,
Jonathan D. Kantor Director
S/ W. JAMES MACGINNITIE Senior Vice President, Chief February 26, 1999
- -------------------------- Financial Officer and Director
W. James Macginnitie
S/WILLIAM H. SHARKEY, JR. Senior Vice President, February 26, 1999
- ------------------------- Director
William H. Sharkey, Jr.
</TABLE>
