<PAGE> 1
STATEMENT OF ADDITIONAL INFORMATION
FLEXIBLE PREMIUM DEFERRED VARIABLE AND
FIXED ANNUITY CONTRACT
ISSUED BY
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
AND
VALLEY FORGE LIFE INSURANCE COMPANY
THIS IS NOT A PROSPECTUS. THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS DATED MAY 1, 2000, FOR THE FLEXIBLE
PREMIUM DEFERRED VARIABLE AND FIXED ANNUITY CONTRACT WHICH IS DESCRIBED HEREIN.
THE PROSPECTUS CONCISELY SETS FORTH INFORMATION THAT A PROSPECTIVE INVESTOR
OUGHT TO KNOW BEFORE INVESTING. FOR A COPY OF THE PROSPECTUS CALL OR WRITE THE
COMPANY AT: 100 CNA DRIVE, NASHVILLE, TN 37214, (800) 262-1755.
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED MAY 1, 2000.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
COMPANY..................................................... 3
EXPERTS..................................................... 3
LEGAL OPINIONS.............................................. 3
DISTRIBUTION................................................ 3
Reduction of the Withdrawal Charge........................ 3
CALCULATION OF PERFORMANCE INFORMATION...................... 4
Total Return.............................................. 4
Historical Unit Values.................................... 4
Reporting Agencies........................................ 5
Performance Information................................... 5
FEDERAL TAX STATUS.......................................... 11
General................................................... 11
Diversification........................................... 11
Multiple Contracts........................................ 12
Partial 1035 Exchanges.................................... 12
Contracts Owned by Other than Natural Persons............. 12
Tax Treatment of Assignments.............................. 13
Death Benefits............................................ 13
Income Tax Withholding.................................... 13
Tax Treatment of Withdrawals -- Non-Qualified Contracts... 13
Qualified Plans........................................... 13
Tax Treatment of Withdrawals -- Qualified Contracts....... 16
Tax-Sheltered Annuities -- Withdrawal Limitations......... 17
ANNUITY PROVISIONS.......................................... 18
Variable Annuity.......................................... 18
Fixed Annuity............................................. 18
Annuity Unit.............................................. 18
Net Investment Factor..................................... 18
Expense Guarantee......................................... 18
FINANCIAL STATEMENTS........................................ 19
</TABLE>
2
<PAGE> 3
COMPANY
Valley Forge Life Insurance Company (the "Company"), is a wholly-owned
subsidiary of Continental Assurance Company ("Assurance"). Assurance is a
wholly-owned subsidiary of Continental Casualty Company ("Casualty"), which is
wholly-owned by CNA Financial Corporation ("CNA"). Loews Corporation owns
approximately 86% of the outstanding common stock of CNA as of December 31,
1999.
The Company is principally engaged in the sale of life insurance and
annuities. It is licensed in the District of Columbia, Guam, Puerto Rico and all
states except New York, where it is only admitted as a reinsurer.
The Company is a Pennsylvania corporation that provides life and health
insurance, retirement plans, and related financial services to individuals and
groups.
EXPERTS
The financial statements for Valley Forge Life Insurance Company as of
December 31, 1999 and 1998 and for each of the three years in the period ended
December 31, 1999 included in the Statement of Additional Information which is
part of this registration statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and have been
so included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
The financial statements for each of the subaccounts that comprise the
Valley Forge Life Insurance Company Variable Annuity Separate Account as of and
for the year ended December 31, 1999 (for the two years ended December 31, 1999
with respect to the statements of changes in net assets) included in the
Statement of Additional Information which is part of this registration statement
and have been audited by Deloitte & Touche LLP, independent auditors, as stated
in their report appearing in the registration statement, and have been so
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
LEGAL OPINIONS
Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut has provided
advice on certain matters relating to the federal securities and income tax laws
in connection with the Contracts.
All matters relating to Pennsylvania law pertaining to the Contracts,
including the validity of the Contracts and the Company's authority to issue
Contracts, have been passed upon by G. Stephen Wastek, Esquire, Director and
Senior Counsel.
DISTRIBUTION
CNA Investor Services, Inc. ("CNAISI") acts as the distributor. CNAISI is
an affiliate of the Company. The offering is on a continuous basis.
REDUCTION OF THE WITHDRAWAL CHARGE. The amount of the withdrawal charge on
the contracts may be reduced or eliminated when sales of the contracts are made
to individuals or to a group of individuals in a manner that results in savings
of sales expenses. The entitlement to reduction of the withdrawal charge will be
determined by the Company after examination of all the relevant factors such as:
1. The size and type of group to which sales are to be made.
Generally, the sales expenses for a larger group are less than for a
smaller group because of the ability to implement large numbers of
contracts with fewer sales contacts.
2. The total amount of purchase payments to be received. Per contract
sales expenses are likely to be less on larger purchase payments than on
smaller ones.
3
<PAGE> 4
3. Any prior or existing relationship with the Company. Per contract
sales expenses are likely to be less when there is a prior existing
relationship because of the likelihood of implementing the contract with
fewer sales contacts.
4. Other circumstances, of which the Company is not presently aware,
which could result in reduced sales expenses.
If, after consideration of the foregoing factors, the Company determines
that there will be a reduction in sales expenses, the Company may provide for a
reduction of the withdrawal charge.
The withdrawal charge may be eliminated when the contracts are issued to an
officer, director or employee of the Company or any of its affiliates.
In no event will any reduction or elimination of the withdrawal charge be
permitted where the reduction or elimination will be unfairly discriminatory to
any person.
CALCULATION OF PERFORMANCE INFORMATION
TOTAL RETURN. From time to time, the Company may advertise performance
data. Such data will show the percentage change in the value of an accumulation
unit based on the performance of an investment option over a period of time,
usually a calendar year, determined by dividing the increase (decrease) in value
for that unit by the accumulation unit value at the beginning of the period.
Any such advertisement will include total return figures for the time
periods indicated in the advertisement. Such total return figures will reflect
the deduction of a 1.40% product expense charge, the contract maintenance
charge, the expenses for the underlying investment option being advertised and
any applicable withdrawal charges.
The hypothetical value of a contract purchased for the time periods
described in the advertisement will be determined by using the actual
accumulation unit values for an initial $1,000 purchase payment, and deducting
any applicable withdrawal charge to arrive at the ending hypothetical value. The
average annual total return is then determined by computing the fixed interest
rate that a $1,000 purchase payment would have to earn annually, compounded
annually, to grow to the hypothetical value at the end of the time periods
described. The formula used in these calculations is:
P (1 + T)(n) = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the time periods used (or
fractional portion thereof) of a hypothetical $1,000 payment
made at the beginning of the time periods used.
The Company may also advertise performance data which will be calculated in
the same manner as described above but which will not reflect the deduction of
any withdrawal charge or contract maintenance charge. The deduction of any
withdrawal charge or contract maintenance charge would reduce any percentage
increase or make greater any percentage decrease.
Owners should note that the investment results of each investment option
will fluctuate over time, and any presentation of the investment option's total
return for any period should not be considered as a representation of what an
investment may earn or what an owner's total return may be in any future period.
HISTORICAL UNIT VALUES. The Company may also show historical accumulation
unit values in certain advertisements containing illustrations. These
illustrations will be based on actual accumulation unit values.
4
<PAGE> 5
In addition, the Company may distribute sales literature which compares the
percentage change in accumulation unit values for any of the investment options
against established market indices such as the Standard & Poor's 500 Composite
Stock Price Index, the Dow Jones Industrial Average or other management
investment companies which have investment objectives similar to the investment
option being compared. The Standard & Poor's 500 Composite Stock Price Index is
an unmanaged, unweighted average of 500 stocks, the majority of which are listed
on the New York Stock Exchange. The Dow Jones Industrial Average is an
unmanaged, weighted average of thirty blue chip industrial corporations listed
on the New York Stock Exchange. Both the Standard & Poor's 500 Composite Stock
Price Index and the Dow Jones Industrial Average assume quarterly reinvestment
of dividends.
REPORTING AGENCIES. The Company may also distribute sales literature which
compares the performance of the accumulation unit values of the contracts with
the unit values of variable annuities issued by other insurance companies. Such
information will be derived from the Lipper Variable Insurance Products
Performance Analysis Service, the VARDS Report or from Morningstar.
The Lipper Variable Insurance Products Performance Analysis Service is
published by Lipper Analytical Services, Inc., a publisher of statistical data
which currently tracks the performance of almost 4,000 investment companies. The
rankings compiled by Lipper may or may not reflect the deduction of asset-based
insurance charges. The Company's sales literature utilizing these rankings will
indicate whether or not such charges have been deducted. Where the charges have
not been deducted, the sales literature will indicate that if the charges had
been deducted, the ranking might have been lower.
The VARDS Report is a monthly variable annuity industry analysis compiled
by Variable Annuity Research & Data Service of Roswell, Georgia and published by
Financial Planning Resources, Inc. The VARDS rankings may or may not reflect the
deduction of asset-based insurance charges. In addition, VARDS prepares risk
adjusted rankings, which consider the effects of market risk on total return
performance. This type of ranking may address the question as to which funds
provide the highest total return with the least amount of risk. Other ranking
services may be used as sources of performance comparison, such as
CDA/Weisenberger.
Morningstar rates a variable annuity against its peers with similar
investment objectives. Morningstar does not rate any variable annuity that has
less than three years of performance data.
PERFORMANCE INFORMATION. The accumulation units invest in the portfolios
of Federated Insurance Series, The Alger American Fund, First Eagle SoGen
Variable Funds, Inc., Van Eck Worldwide Insurance Trust, Variable Insurance
Products Fund and Variable Insurance Products Fund II, MFS Variable Insurance
Trust, Janus Aspen Series, Alliance Variable Products Series Fund, American
Century Variable Portfolios, Inc., Franklin Templeton Variable Insurance
Products Trust, Lazard Retirement Series and The Universal Institutional Funds,
Inc. In order to demonstrate how the investment experience of the these
portfolios affect accumulation unit values, performance information was
developed. The information is based upon the historical experience of the
portfolios and is for the periods shown.
Future performance of the portfolios will vary and the results shown are
not necessarily representative of future results. Performance for periods ending
after those shown may vary substantially from the examples shown. The
performance of the portfolios is calculated for a specified period of time by
assuming an initial purchase payment of $1,000 allocated to the portfolio.
Performance figures for the accumulation units will reflect the product expense
charges as well as the portfolio expenses. There are also performance figures
for the accumulation units which reflect the product expense charges, contract
maintenance charge, the portfolio expenses, and assume that you make a
withdrawal at the end of the period and therefore the withdrawal charge is
reflected. The percentage increases (decreases) are determined by subtracting
the initial purchase payment from the ending value and dividing the remainder by
the beginning value. The performance may also show figures when no withdrawal is
assumed.
5
<PAGE> 6
The following charts reflect performance information for the Investment
Options of the Variable Account for the periods shown. Chart 1 reflects
performance information commencing from the date the Variable Account first
invested in the Investment Option. Chart 2 reflects performance information
commencing from the inception date of the underlying Investment Option (which
date may precede the inception date that the Variable Account first invested in
the underlying Investment Option).
CHART 1 TOTAL RETURN FOR THE PERIODS ENDED DECEMBER 31, 1999:
COLUMN A (REFLECTS ALL CHARGES)
<TABLE>
<CAPTION>
VARIABLE ACCOUNT
INCEPTION DATE SINCE
IN PORTFOLIO 1 YR 3 YRS 5 YRS 10 YRS INCEPTION
---------------- ------ ------- ----- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Federated High Income Bond Fund
II............................... 11/04/96 -6.24% -1.68% NA NA -2.49%
Federated Prime Money Fund II...... 11/04/96 -4.60% -3.05% NA NA -4.14%
Federated Utility Fund II.......... 11/04/96 -6.80% 5.26% NA NA 4.05%
Fidelity VIP Equity-Income......... 11/04/96 -2.55% 7.11% NA NA 4.69%
Fidelity VIP II Asset Manager...... 11/04/96 1.81% 8.39% NA NA 5.95%
Fidelity VIP II Contrafund......... 11/04/96 13.88% 16.89% NA NA 14.14%
Fidelity VIP II Index 500.......... 11/04/96 10.44% 17.80% NA NA 14.45%
Alger American Growth.............. 11/04/96 22.57% 25.56% NA NA 21.26%
Alger American MidCap Growth....... 11/04/96 20.83% 16.25% NA NA 12.91%
Alger American Small
Capitalization................... 11/04/96 31.44% 13.63% NA NA 11.09%
Alger American Leverage AllCap..... 05/01/00 NA NA NA NA NA
MFS Emerging Growth................ 11/04/96 61.96% 31.95% NA NA 26.49%
MFS Growth With Income............. 11/04/96 -2.22% 10.42% NA NA 7.90%
MFS Research....................... 11/04/96 13.69% 13.53% NA NA 10.65%
MFS Total Return................... 11/04/96 -5.53% 3.72% NA NA 1.77%
First Eagle SoGen Overseas
Variable......................... 11/04/96 33.10% 4.83% NA NA 3.16%
Van Eck Worldwide Emerging
Markets.......................... 11/04/96 83.56% -3.06% NA NA -3.94%
Van Eck Worldwide Hard Assets...... 11/04/96 10.89% -12.24% NA NA -12.64%
Janus Aspen Series Capital
Appreciation..................... 08/31/99 NA NA NA NA 165.10%
Janus Aspen Series Growth.......... 08/31/99 NA NA NA NA 87.99%
Janus Aspen Series Balanced........ 08/31/99 NA NA NA NA 45.88%
Janus Aspen Series Flexible
Income........................... 08/31/99 NA NA NA NA -1.79%
Janus Aspen Series International
Growth........................... 08/31/99 NA NA NA NA 278.10%
Janus Aspen Series Worldwide
Growth........................... 08/31/99 NA NA NA NA 178.83%
</TABLE>
6
<PAGE> 7
CHART 1 TOTAL RETURN FOR THE PERIODS ENDED DECEMBER 31, 1999 (CONTINUED):
COLUMN B (REFLECTS ALL CHARGES EXCEPT WITHDRAWAL CHARGE)
<TABLE>
<CAPTION>
SINCE
1 YR 3 YRS 5 YRS 10 YRS INCEPTION
------ ------- ----- ------ ---------
<S> <C> <C> <C> <C> <C>
Federated High Income Bond Fund II............ 0.82% 4.60% NA NA 4.85%
Federated Prime Money Fund II................. 2.59% 3.14% NA NA 3.07%
Federated Utility Fund II..................... 0.21% 11.98% NA NA 11.88%
Fidelity VIP Equity-Income.................... 4.78% 13.94% NA NA 12.57%
Fidelity VIP II Asset Manager................. 9.48% 15.31% NA NA 13.93%
Fidelity VIP II Contrafund.................... 22.45% 24.35% NA NA 22.73%
Fidelity VIP II Index 500..................... 18.76% 25.32% NA NA 23.06%
Alger American Growth......................... 31.80% 33.58% NA NA 30.39%
Alger American MidCap Growth.................. 29.93% 23.67% NA NA 21.41%
Alger American Small Capitalization........... 41.33% 20.88% NA NA 19.46%
MFS Emerging Growth........................... 74.15% 40.37% NA NA 36.01%
MFS Growth With Income........................ 5.14% 17.47% NA NA 16.02%
MFS Research.................................. 22.24% 20.78% NA NA 18.97%
MFS Total Return.............................. 1.58% 10.34% NA NA 9.43%
First Eagle SoGen Overseas Variable........... 43.12% 11.52% NA NA 10.92%
Van Eck Worldwide Emerging Markets............ 97.37% 3.12% NA NA 3.29%
Van Eck Worldwide Hard Assets................. 19.24% -6.63% NA NA -6.07%
Janus Aspen Series Capital Appreciation....... 64.57% NA NA NA 185.06%
Janus Aspen Series Growth..................... 41.89% 31.90% NA NA 102.14%
Janus Aspen Series Balanced................... 24.92% 25.77% NA NA 56.86%
Janus Aspen Series Flexible Income............ 0.13% 5.85% NA NA 5.60%
Janus Aspen Series International Growth....... 79.63% 34.33% NA NA 306.56%
Janus Aspen Series Worldwide Growth........... 62.06% 35.34% NA NA 199.82%
</TABLE>
7
<PAGE> 8
CHART 2 TOTAL RETURN FOR THE PERIODS ENDED DECEMBER 31, 1999:
<TABLE>
<CAPTION>
COLUMN A (REFLECTS ALL CHARGES)
-----------------------------------------------------------
PORTFOLIO
INCEPTION SINCE
DATE 1 YR 3 YRS 5 YRS 10 YRS INCEPTION
--------- ------- ------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Federated High Income Bond Fund
II............................... 03/01/94 -6.24% -1.68% 3.40% NA -0.82%
Federated Prime Money Fund II...... 11/21/94 -4.60% -3.05% -2.03% NA -4.10%
Federated Utility Fund II.......... 02/10/94 -6.80% 5.26% 7.87% NA 3.05%
Fidelity VIP Equity-Income......... 10/09/86 -2.55% 7.11% 11.51% 13.14% 4.43%
Fidelity VIP II Asset Manager...... 09/06/89 1.81% 8.39% 9.18% 12.09% 3.93%
Fidelity VIP II Contrafund......... 01/03/95 13.88% 16.89% NA NA 17.45%
Fidelity VIP II Index 500.......... 08/27/92 10.44% 17.80% 20.06% NA 11.02%
Alger American Growth.............. 01/09/89 22.57% 25.56% 22.60% 21.21% 12.85%
Alger American MidCap Growth....... 05/03/93 20.83% 16.25% 18.09% NA 14.32%
Alger American Small
Capitalization................... 09/21/88 31.44% 13.63% 14.81% 16.50% 10.76%
Alger American Leveraged AllCap.... 01/25/95 33.90% 13.37% NA NA 55.50%
MFS Emerging Growth................ 07/24/95 61.96% 31.95% NA NA 25.02%
MFS Growth With Income............. 10/09/95 -2.22% 10.42% NA NA 11.29%
MFS Research....................... 07/26/95 13.69% 13.53% NA NA 12.61%
MFS Total Return................... 01/03/95 -5.53% 3.72% 8.05% NA 5.80%
First Eagle SoGen Overseas
Variable......................... 02/03/97 33.10% 4.83% NA NA 4.08%
Van Eck Worldwide Emerging
Markets.......................... 12/27/95 83.56% -3.06% NA NA 0.57%
Van Eck Worldwide Hard Assets...... 09/01/89 10.89% -12.24% -4.33% 1.92% -4.53%
Janus Aspen Series Capital
Appreciation..................... 05/02/97 53.05% NA NA NA 44.13%
Janus Aspen Series Growth.......... 09/13/93 31.96% 23.99% 21.59% NA 13.89%
Janus Aspen Series Balanced........ 09/13/93 16.17% 18.22% 16.72% NA 10.54%
Janus Aspen Series Flexible
Income........................... 09/13/93 -6.88% -0.51% 3.79% NA -0.56%
Janus Aspen Series International
Growth........................... 05/02/94 67.05% 26.27% 24.74% NA 17.47%
Janus Aspen Series Worldwide
Growth........................... 09/13/93 50.72% 27.22% 25.07% NA 18.86%
Alliance Premier Growth............ 06/26/92 19.48% 27.00% 18.64% NA 10.38%
Alliance Growth and Income......... 01/14/91 -8.56% 1.84% 5.72% NA -0.03%
American Century VP Income &
Growth........................... 10/30/97 8.14% NA NA NA 13.51%
American Century VP Value.......... 05/01/96 -18.97% -5.36% NA NA -4.18%
Templeton Developing Markets
Securities*...................... 03/01/96 38.55% -13.26% NA NA -14.29%
Templeton Asset Strategy**......... 08/24/88 -4.70% -4.26% 1.29% 5.64% -1.27%
Lazard Retirement Equity........... 03/19/98 -4.37% NA NA NA -1.94%
Lazard Retirement Small Cap........ 11/04/97 -5.46% NA NA NA -9.54%
Morgan Stanley International
Magnum........................... 01/02/97 13.36% NA NA NA 2.32%
Morgan Stanley Emerging Markets.... 10/01/96 79.31% 4.18% NA NA 1.45%
</TABLE>
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<PAGE> 9
CHART 2 TOTAL RETURN FOR THE PERIODS ENDED DECEMBER 31, 1999 (CONTINUED):
<TABLE>
<CAPTION>
COLUMN B (REFLECTS ALL CHARGES EXCEPT WITHDRAWAL CHARGE)
-----------------------------------------------------------
SINCE
1 YR 3 YRS 5 YRS 10 YRS INCEPTION
-------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Federated High Income Bond Fund II.... 0.82%.. 4.60% 8.86% NA 6.64%
Federated Prime Money Fund II......... 2.59%.. 3.14% 3.13% NA 3.11%
Federated Utility Fund II............. 0.21%.. 11.98% 13.56% NA 10.81%
Fidelity VIP Equity-Income............ 4.78%.. 13.94% 17.39% 13.14% 12.29%
Fidelity VIP II Asset Manager......... 9.48%.. 15.31% 14.94% 12.09% 11.75%
Fidelity VIP II Contrafund............ 22.45%.. 24.35% NA NA 26.30%
Fidelity VIP II Index 500............. 18.76%.. 25.32% 26.39% NA 19.37%
Alger American Growth................. 31.80%.. 33.58% 29.07% 21.21% 21.35%
Alger American MidCap Growth.......... 29.93%.. 23.67% 24.32% NA 22.92%
Alger American Small Capitalization... 41.33%.. 20.88% 20.86% 16.50% 19.09%
Alger American Leveraged AllCap....... 38.04%.. 20.60% NA NA 67.17%
MFS Emerging Growth................... 74.15%.. 40.37% NA NA 34.43%
MFS Growth With Income................ 5.14%.. 17.47% NA NA 19.67%
MFS Research.......................... 22.24%.. 20.78% NA NA 21.09%
MFS Total Return...................... 1.58%.. 10.34% 13.75% NA 13.76%
First Eagle SoGen Overseas Variable... 43.12%.. 11.52% NA NA 11.92%
Van Eck Worldwide Emerging Markets.... 97.37%.. 3.12% NA NA 8.14%
Van Eck Worldwide Hard Assets......... 19.24%.. -6.63% 0.71% 1.92% 2.65%
Janus Aspen Series Capital
Appreciation........................ 64.57%.. NA NA NA 54.98%
Janus Aspen Series Growth............. 41.89%.. 31.90% 28.00% NA 22.46%
Janus Aspen Series Balanced........... 24.92%.. 25.77% 22.88% NA 18.86%
Janus Aspen Series Flexible Income.... 0.13%.. 5.85% 9.27% NA 6.92%
Janus Aspen Series International
Growth.............................. 79.63%.. 34.33% 31.32% NA 26.32%
Janus Aspen Series Worldwide Growth... 62.06%.. 35.34% 31.66% NA 27.81%
Alliance Premier Growth............... 28.47%.. 35.10% 24.90% NA 18.69%
Alliance Growth and Income............ -1.67%.. 8.34% 11.30% NA 7.49%
American Century VP Income & Growth... 16.28%.. NA NA NA 22.05%
American Century VP Value............. -12.87%... 0.68% NA NA 3.04%
Templeton Developing Markets
Securities*......................... 48.98%.. -7.73% NA NA -7.84%
Templeton Asset Strategy**............ 2.47%.. 1.85% 6.63% 5.64% 6.16%
Lazard Retirement Equity.............. 2.83%.. NA NA NA 5.44%
Lazard Retirement Small Cap........... 1.66%.. NA NA NA -2.74%
Morgan Stanley International Magnum... 21.89%.. NA NA NA 10.02%
Morgan Stanley Emerging Markets....... 92.81%.. 10.83% NA NA 9.09%
</TABLE>
9
<PAGE> 10
CHART 2 TOTAL RETURN FOR THE PERIODS ENDED DECEMBER 31, 1999 (CONTINUED):
<TABLE>
<CAPTION>
COLUMN C ANNUAL
PERCENTAGE CHANGE CALENDAR
YEAR RETURN
---------------------------
1998 1999
----------- -----------
<S> <C> <C>
Federated High Income Bond Fund II.......................... 1.19% 0.82%
Federated Prime Money Fund II............................... 3.41% 2.59%
Federated Utility Fund II................................... 12.26% 0.21%
Fidelity VIP Equity-Income.................................. 10.48% 4.78%
Fidelity VIP II Asset Manager............................... 15.67% 9.48%
Fidelity VIP II Contrafund.................................. 28.23% 22.45%
Fidelity VIP II Index 500................................... 26.47% 18.76%
Alger American Growth....................................... 45.91% 31.80%
Alger American MidCap Growth................................ 28.40% 29.93%
Alger American Small Capitalization......................... 13.85% 41.33%
Alger American Leveraged AllCap............................. 48.43% 17.94%
MFS Emerging Growth......................................... 32.21% 74.15%
MFS Growth With Income...................................... 20.54% 5.14%
MFS Research................................................ 21.60% 22.24%
MFS Total Return............................................ 10.62% 1.58%
First Eagle SoGen Overseas Variable......................... 0.66% 43.12%
Van Eck Worldwide Emerging Markets.......................... -36.22% 97.37%
Van Eck Worldwide Hard Assets............................... -29.71% 19.24%
Janus Aspen Series Capital Appreciation..................... 55.82% 64.57%
Janus Aspen Series Growth................................... 33.69% 41.89%
Janus Aspen Series Balanced................................. 32.34% 24.92%
Janus Aspen Series Flexible Income.......................... 7.53% 0.13%
Janus Aspen Series International Growth..................... 15.54% 79.63%
Janus Aspen Series Worldwide Growth......................... 27.05% 62.06%
Alliance Premier Growth..................................... 45.69% 28.47%
Alliance Growth and Income.................................. 8.00% -1.67%
American Century VP Income & Growth......................... 23.97% 16.28%
American Century VP Value................................... -4.29% -12.87%
Templeton Developing Markets Securities*.................... -23.78% 48.98%
Templeton Asset Strategy**.................................. -1.18% 2.47%
Lazard Retirement Equity.................................... NA 2.83%
Lazard Retirement Small Cap................................. -4.65% 1.66%
Morgan Stanley International Magnum......................... 6.62% 21.89%
Morgan Stanley Emerging Markets............................. -25.69% 92.81%
</TABLE>
-------------------------
* Previously, Templeton Developing Markets Fund. Effective May 1, 2000, the
Templeton Developing Markets Securities Fund merged into the Templeton
Developing Markets Equity Fund. Performance shown reflects historical
performance and inception date of the Templeton Developing Markets Securities
Fund.
** Previously, Templeton Asset Allocation Fund. Effective May 1, 2000, the
Templeton Asset Strategy Fund merged into the Templeton Global Asset
Allocation Fund. Performance shown reflects historical performance and
inception dates of the Templeton Asset Strategy Fund.
10
<PAGE> 11
FEDERAL TAX STATUS
NOTE: THE FOLLOWING DESCRIPTION IS BASED UPON THE COMPANY'S UNDERSTANDING
OF CURRENT FEDERAL INCOME TAX LAW APPLICABLE TO ANNUITIES IN GENERAL. THE
COMPANY CANNOT PREDICT THE PROBABILITY THAT ANY CHANGES IN SUCH LAWS WILL BE
MADE. PURCHASERS ARE CAUTIONED TO SEEK COMPETENT TAX ADVICE REGARDING THE
POSSIBILITY OF SUCH CHANGES. THE COMPANY DOES NOT GUARANTEE THE TAX STATUS OF
THE CONTRACTS. PURCHASERS BEAR THE COMPLETE RISK THAT THE CONTRACTS MAY NOT BE
TREATED AS "ANNUITY CONTRACTS" UNDER FEDERAL INCOME TAX LAWS. IT SHOULD BE
FURTHER UNDERSTOOD THAT THE FOLLOWING DISCUSSION IS NOT EXHAUSTIVE AND THAT
SPECIAL RULES NOT DESCRIBED HEREIN MAY BE APPLICABLE IN CERTAIN SITUATIONS.
MOREOVER, NO ATTEMPT HAS BEEN MADE TO CONSIDER ANY APPLICABLE STATE OR OTHER TAX
LAWS.
GENERAL. Section 72 of the Code governs taxation of annuities in general.
An Owner is not taxed on increases in the value of a Contract until distribution
occurs, either in the form of a lump sum payment or as annuity payments under
the Annuity Option selected. For a lump sum payment received as a total
withdrawal, the recipient is taxed on the portion of the payment that exceeds
the cost basis of the Contract. For Non-Qualified Contracts, this cost basis is
generally the purchase payments, while for Qualified Contracts there may be no
cost basis. The taxable portion of the lump sum payment is taxed at ordinary
income tax rates.
For annuity payments, a portion of each payment in excess of an exclusion
amount is includible in taxable income. The exclusion amount for payments based
on a fixed annuity option is determined by multiplying the payment by the ratio
that the cost basis of the Contract (adjusted for any period or refund feature)
bears to the expected return under the Contract. The exclusion amount for
payments based on a variable annuity option is determined by dividing the cost
basis of the Contract (adjusted for any period certain or refund guarantee) by
the number of years over which the annuity is expected to be paid. Payments
received after the investment in the Contract has been recovered (i.e., when the
total of the excludable amount equals the investment in the Contract) are fully
taxable. The taxable portion is taxed at ordinary income tax rates. For certain
types of Qualified Plans there may be no cost basis in the Contract within the
meaning of Section 72 of the Code. Owners, Annuitants and Beneficiaries under
the Contracts should seek competent financial advice about the tax consequences
of any distributions.
The Company is taxed as a life insurance company under the Code. For
federal income tax purposes, the Separate Account is not a separate entity from
the Company, and its operations form a part of the Company.
DIVERSIFICATION. Section 817(h) of the Code imposes certain
diversification standards on the underlying assets of variable annuity
contracts. The Code provides that a variable annuity contract will not be
treated as an annuity contract for any period (and any subsequent period) for
which the investments are not, in accordance with regulations prescribed by the
United States Treasury Department ("Treasury Department"), adequately
diversified. Disqualification of the Contract as an annuity contract would
result in the imposition of federal income tax to the Owner with respect to
earnings allocable to the Contract prior to the receipt of payments under the
Contract. The Code contains a safe harbor provision which provides that annuity
contracts such as the Contract meet the diversification requirements if, as of
the end of each quarter, the underlying assets meet the diversification
standards for a regulated investment company and no more than fifty-five percent
(55%) of the total assets consist of cash, cash items, U.S. Government
securities and securities of other regulated investment companies.
On March 2, 1989, the Treasury Department issued Regulations (Treas.
Reg.1.817-5), which established diversification requirements for the investment
options underlying variable contracts such as the Contract. The Regulations
amplify the diversification requirements for variable contracts set forth in the
Code and provide an alternative to the safe harbor provision described above.
Under the Regulations, an investment option will be deemed adequately
diversified if: (1) no more than 55% of the value of the total assets of the
option is represented by any one investment; (2) no more than 70% of the value
of the total assets of the option is represented by any two investments; (3) no
more than 80% of the value of the total assets of the option is
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represented by any three investments; and (4) no more than 90% of the value of
the total assets of the option is represented by any four investments.
The Code provides that, for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable contracts
by Section 817(h) of the Code have been met, "each United States government
agency or instrumentality shall be treated as a separate issuer."
The Company intends that all investment options underlying the Contracts
will be managed in such a manner as to comply with these diversification
requirements.
The Treasury Department has indicated that the diversification Regulations
do not provide guidance regarding the circumstances in which Owner control of
the investments of the Separate Account will cause the Owner to be treated as
the owner of the assets of the Separate Account, thereby resulting in the loss
of favorable tax treatment for the Contract. At this time it cannot be
determined whether additional guidance will be provided and what standards may
be contained in such guidance.
The amount of Owner control which may be exercised under the Contract is
different in some respects from the situations addressed in published rulings
issued by the Internal Revenue Service in which it was held that the policy
owner was not the owner of the assets of the separate account. It is unknown
whether these differences, such as the Owner's ability to transfer among
investment choices or the number and type of investment choices available, would
cause the Owner to be considered as the owner of the assets of the Separate
Account resulting in the imposition of federal income tax to the Owner with
respect to earnings allocable to the Contract prior to receipt of payments under
the Contract.
In the event any forthcoming guidance or ruling is considered to set forth
a new position, such guidance or ruling will generally be applied only
prospectively. However, if such ruling or guidance was not considered to set
forth a new position, it may be applied retroactively resulting in the Owners
being retroactively determined to be the owners of the assets of the Separate
Account.
Due to the uncertainty in this area, the Company reserves the right to
modify the Contract in an attempt to maintain favorable tax treatment.
MULTIPLE CONTRACTS. The Code provides that multiple non-qualified annuity
contracts which are issued within a calendar year to the same contract owner by
one company or its affiliates are treated as one annuity contract for purposes
of determining the tax consequences of any distribution. Such treatment may
result in adverse tax consequences including more rapid taxation of the
distributed amounts from such combination of contracts. For purposes of this
rule, contracts received in a Section 1035 exchange will be considered issued in
the year of the exchange. Owners should consult a tax adviser prior to
purchasing more than one non-qualified annuity contract in any calendar year.
PARTIAL 1035 EXCHANGES. Section 1035 of the Code provides that an annuity
contract may be exchanged in a tax-free transaction for another annuity
contract. Historically, it was presumed that only the exchange of an entire
contract, as opposed to a partial exchange, would be accorded tax-free status.
In 1998 in Conway vs. Commissioner, the Tax Court held that the direct transfer
of a portion of an annuity contract into another annuity contract qualified as a
non-taxable exchange. On November 22, 1999, the Internal Revenue Service filed
an Action on Decision which indicated that it acquiesced in the Tax Court
decision in Conway. However, in its acquiescence with the decision of the Tax
Court, the Internal Revenue Service stated that it will challenge transactions
where taxpayers enter into a series of partial exchanges and annuitizations as
part of a design to avoid application of the 10% premature distribution penalty
or other limitations imposed on annuity contracts under the Code. In the absence
of further guidance from the Internal Revenue Service it is unclear what
specific types of partial exchange designs and transactions will be challenged
by the Internal Revenue Service. Due to the uncertainty in this area, owners
should consult their own tax advisers prior to entering into a partial exchange
of an annuity contract.
CONTRACTS OWNED BY OTHER THAN NATURAL PERSONS. Under Section 72(u) of the
Code, the investment earnings on premiums for the Contracts will be taxed
currently to the Owner if the Owner is a non-natural person, e.g., a corporation
or certain other entities. Such Contracts generally will not be treated as
annuities for
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federal income tax purposes. However, this treatment is not applied to a
Contract held by a trust or other entity as an agent for a natural person nor to
Contracts held by Qualified Plans. Purchasers should consult their own tax
counsel or other tax adviser before purchasing a Contract to be owned by a
non-natural person.
TAX TREATMENT OF ASSIGNMENTS. An assignment, pledge, or other transfer of
a Contract may be a taxable event. Owners should therefore consult competent tax
advisers should they wish to assign, pledge, or transfer their Contracts.
DEATH BENEFITS. Any death benefits paid under the Contract are taxable to
the beneficiary. The rules governing the taxation of payments from an annuity
contract, as discussed above, generally apply to the payment of death benefits
and depend on whether the death benefits are paid as a lump sum or as annuity
payments. Estate taxes may also apply.
INCOME TAX WITHHOLDING. All distributions or the portion thereof which is
includible in the gross income of the Owner are subject to federal income tax
withholding. Generally, amounts are withheld from periodic payments at the same
rate as wages and at the rate of 10% from non-periodic payments. However, the
Owner, in most cases, may elect not to have taxes withheld or to have
withholding done at a different rate.
Certain distributions from retirement plans qualified under Section 401 or
Section 403(b) of the Code, which are not directly rolled over to another
eligible retirement plan or individual retirement account or individual
retirement annuity, are subject to a mandatory 20% withholding for federal
income tax. The 20% withholding requirement generally does not apply to: a) a
series of substantially equal payments made at least annually for the life or
life expectancy of the participant or joint and last survivor expectancy of the
participant and a designated beneficiary or for a specified period of 10 years
or more; or b) distributions which are required minimum distributions; or c) the
portion of the distributions not includible in gross income (i.e. returns of
after-tax contributions); or d) hardship distributions. Participants should
consult their own tax counsel or other tax adviser regarding withholding
requirements.
TAX TREATMENT OF WITHDRAWALS -- NON-QUALIFIED CONTRACTS. Section 72 of the
Code governs treatment of distributions from annuity contracts. It provides that
if the Contract Value exceeds the aggregate purchase payments made, any amount
withdrawn will be treated as coming first from the earnings and then, only after
the income portion is exhausted, as coming from the principal. Withdrawn
earnings are includible in gross income. It further provides that a ten percent
(10%) penalty will apply to the income portion of any premature distribution.
However, the penalty is not imposed on amounts received: (a) after the taxpayer
reaches age 59 1/2; (b) after the death of the Owner; (c) if the taxpayer is
totally disabled (for this purpose disability is as defined in Section 72(m)(7)
of the Code); (d) in a series of substantially equal periodic payments made not
less frequently than annually for the life (or life expectancy) of the taxpayer
or for the joint lives (or joint life expectancies) of the taxpayer and his or
her Beneficiary; (e) under an immediate annuity; or (f) which are allocable to
purchase payments made prior to August 14, 1982.
With respect to (d) above, if the series of substantially equal periodic
payments is modified before the later of your attaining age 59 1/2 or 5 years
from the date of the first periodic payment, then the tax for the year of the
modification is increased by an amount equal to the tax which would have been
imposed (the 10% penalty tax) but for the exception, plus interest for the tax
years in which the exception was used.
The above information does not apply to Qualified Contracts. However,
separate tax withdrawal penalties and restrictions may apply to such Qualified
Contracts. (See "Tax Treatment of Withdrawals -- Qualified Contracts" below.)
QUALIFIED PLANS. The Contracts offered herein are designed to be suitable
for use under various types of Qualified Plans. Taxation of participants in each
Qualified Plan varies with the type of plan and terms and conditions of each
specific plan. Owners, Annuitants and Beneficiaries are cautioned that benefits
under a Qualified Plan may be subject to the terms and conditions of the plan
regardless of the terms and conditions of the Contracts issued pursuant to the
plan. Some retirement plans are subject to distribution and other requirements
that are not incorporated into the Company's administrative procedures. The
Company is not bound by the terms and conditions of such plans to the extent
such terms conflict with the terms of a Contract, unless the Company
specifically consents to be bound. Owners, Annuitants and Beneficiaries are
responsible
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for determining that contributions, distributions and other transactions with
respect to the Contracts comply with applicable law.
A variable annuity contract will not provide any additional tax deferral if
it is used to fund a Qualified Plan that is tax deferred. However, the contract
has features and benefits other than tax deferral that may make it an
appropriate investment for a Qualified Plan. Following are general descriptions
of the types of Qualified Plans with which the Contracts may be used. Such
descriptions are not exhaustive and are for general informational purposes only.
The tax rules regarding Qualified Plans are very complex and will have differing
applications depending on individual facts and circumstances. Each purchaser
should obtain competent tax advice prior to purchasing a Contract issued under a
Qualified Plan.
Contracts issued pursuant to Qualified Plans include special provisions
restricting Contract provisions that may otherwise be available as described
herein. Generally, Contracts issued pursuant to Qualified Plans are not
transferable except upon withdrawal or annuitization. Various penalty and excise
taxes may apply to contributions or distributions made in violation of
applicable limitations. Furthermore, certain withdrawal penalties and
restrictions may apply to withdrawals from Qualified Contracts. (See "Tax
Treatment of Withdrawals -- Qualified Contracts" below.)
On July 6, 1983, the Supreme Court decided in Arizona Governing Committee
v. Norris that optional annuity benefits provided under an employer's deferred
compensation plan could not, under Title VII of the Civil Rights Act of 1964,
vary between men and women. The Contracts sold by the Company in connection with
certain Qualified Plans will utilize annuity tables which do not differentiate
on the basis of sex. Such annuity tables will also be available for use in
connection with certain non-qualified deferred compensation plans.
A. TAX-SHELTERED ANNUITIES
Section 403(b) of the Code permits the purchase of "tax-sheltered
annuities" by public schools and certain charitable, educational and scientific
organizations described in Section 501(c)(3) of the Code. These qualifying
employers may make contributions to the Contracts for the benefit of their
employees. Such contributions are not includible in the gross income of the
employees until the employees receive distributions from the Contracts. The
amount of contributions to the tax-sheltered annuity is limited to certain
maximums imposed by the Code. Furthermore, the Code sets forth additional
restrictions governing such items as transferability, distributions,
nondiscrimination and withdrawals. (See "Tax Treatment of Withdrawals --
Qualified Contracts" and "Tax-Sheltered Annuities -- Withdrawal Limitations"
below.) Any employee should obtain competent tax advice as to the tax treatment
and suitability of such an investment.
B. INDIVIDUAL RETIREMENT ANNUITIES
Section 408(b) of the Code permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity"
("IRA"). Under applicable limitations, certain amounts may be contributed to an
IRA which will be deductible from the individual's taxable income. These IRAs
are subject to limitations on eligibility, contributions, transferability and
distributions. (See "Tax Treatment of Withdrawals -- Qualified Contracts"
below.) Under certain conditions, distributions from other IRAs and other
Qualified Plans may be rolled over or transferred on a tax-deferred basis into
an IRA. Sales of Contracts for use with IRAs are subject to special requirements
imposed by the Code, including the requirement that certain informational
disclosure be given to persons desiring to establish an IRA. Purchasers of
Contracts to be qualified as Individual Retirement Annuities should obtain
competent tax advice as to the tax treatment and suitability of such an
investment.
Roth IRAs
Section 408A of the Code provides that beginning in 1998, individuals may
purchase a new type of non-deductible IRA, known as a Roth IRA. Purchase
payments for a Roth IRA are limited to a maximum of $2,000 per year and are not
deductible from taxable income. Lower maximum limitations apply to individuals
with adjusted gross incomes between $95,000 and $110,000 in the case of single
taxpayers, between $150,000
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and $160,000 in the case of married taxpayers filing joint returns, and between
$0 and $10,000 in the case of married taxpayers filing separately. An overall
$2,000 annual limitation continues to apply to all of a taxpayer's IRA
contributions, including Roth IRA and non-Roth IRAs.
Qualified distributions from Roth IRAs are free from federal income tax. A
qualified distribution requires that an individual has held the Roth IRA for at
least five years and, in addition, that the distribution is made either after
the individual reaches age 59 1/2, on the individual's death or disability, or
as a qualified first-time home purchase, subject to a $10,000 lifetime maximum,
for the individual, a spouse, child, grandchild, or ancestor. Any distribution
which is not a qualified distribution is taxable to the extent of earnings in
the distribution. Distributions are treated as made from contributions first and
therefore no distributions are taxable until distributions exceed the amount of
contributions to the Roth IRA. The 10% penalty tax and the regular IRA
exceptions to the 10% penalty tax apply to taxable distributions from a Roth
IRA.
Amounts may be rolled over from one Roth IRA to another Roth IRA.
Furthermore, an individual may make a rollover contribution from a non-Roth IRA
to a Roth IRA, unless the individual has adjusted gross income over $100,000 or
the individual is a married taxpayer filing a separate return. The individual
must pay tax on any portion of the IRA being rolled over that represents income
or a previously deductible IRA contribution.
Purchasers of Contracts to be qualified as a Roth IRA should obtain
competent tax advice as to the tax treatment and suitability of such an
investment.
SIMPLE IRAs
Section 408(p) of the Code permits certain employers (generally those with
less that 100 employees) to establish a retirement program for employees using
Savings Incentive Match Plan Retirement Annuities ("SIMPLE IRA"). SIMPLE IRA
programs can only be established with the approval of and adoption by the
employer of the Contract Owner of the SIMPLE IRA. Contributions to SIMPLE IRAs
will be made pursuant to a salary reduction agreement in which an Owner would
authorize his/her employer to deduct a certain amount from his/her pay and
contribute it directly to the SIMPLE IRA. The Owner's employer will also make
contributions to the SIMPLE IRA in amounts based upon certain elections of the
employer. The only contributions that can be made to a SIMPLE IRA are salary
reduction contributions and employer contributions as described above, and
rollover contributions from other SIMPLE IRAs. Purchasers of Contracts to be
qualified as SIMPLE IRAs should obtain competent tax advice as to the tax
treatment and suitability of such an investment.
C. PENSION AND PROFIT-SHARING PLANS
Sections 401(a) and 401(k) of the Code permit employers, including
self-employed individuals, to establish various types of retirement plans for
employees. These retirement plans may permit the purchase of the Contracts to
provide benefits under the Plan. Contributions to the Plan for the benefit of
employees will not be includible in the gross income of the employees until
distributed from the Plan. The tax consequences to participants may vary
depending upon the particular plan design. However, the Code places limitations
and restrictions on all Plans including on such items as: amount of allowable
contributions; form, manner and timing of distributions; transferability of
benefits; vesting and nonforfeitability of interests; nondiscrimination in
eligibility and participation; and the tax treatment of distributions, and
withdrawals. (See "Tax Treatment of Withdrawals Qualified Contracts" below.)
Purchasers of Contracts for use with Pension or Profit Sharing Plans should
obtain competent tax advice as to the tax treatment and suitability of such an
investment.
D. GOVERNMENT AND TAX-EXEMPT ORGANIZATION'S DEFERRED COMPENSATION PLANS UNDER
SECTION 457
Under Code provisions, employees and independent contractors performing
services for state and local governments and other tax-exempt organizations may
participate in Deferred Compensation Plans under Section 457 of the Code. The
amounts deferred under a Plan which meets the requirements of Section 457 of the
Code are not taxable as income to the participant until paid or otherwise made
available to the participant
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or beneficiary. As a general rule, the maximum amount which can be deferred in
any one year is the lesser of $8,000 or 33 1/3 percent of the participant's
includible compensation. However, in limited circumstances, the plan may provide
for additional catch-up contributions in each of the last three years before
normal retirement age. Furthermore, the Code provides additional requirements
and restrictions regarding eligibility and distributions.
All of the assets and income of a Plan established by a governmental
employer after August 20, 1996, must be held in trust for the exclusive benefit
of participants and their beneficiaries. For this purpose, custodial accounts
and certain annuity contracts are treated as trusts. Plans that were in
existence on August 20, 1996 may be amended to satisfy the trust and exclusive
benefit requirements any time prior to January 1, 1999, and must be amended not
later than that date to continue to receive favorable tax treatment. The
requirement of a trust does not apply to amounts under a Plan of a tax exempt
(non-governmental) employer. In addition, the requirement of a trust does not
apply to amounts under a Plan of a governmental employer if the Plan is not an
eligible plan within the meaning of Section 457(b) of the Code. In the absence
of such a trust, amounts under the plan will be subject to the claims of the
employer's general creditors.
In general, distributions from a Plan are prohibited under Section 457 of
the Code unless made after the participating employee:
- attains age 70 1/2,
- separates from service,
- dies, or
- suffers an unforeseeable financial emergency as defined in the Code.
Under present federal tax law, amounts accumulated in a Plan under Section
457 of the Code cannot be transferred or rolled over on a tax-deferred basis
except for certain transfers to other Plans under Section 457.
TAX TREATMENT OF WITHDRAWALS -- QUALIFIED CONTRACTS. In the case of a
withdrawal under a Qualified Contract, a ratable portion of the amount received
is taxable, generally based on the ratio of the individual's cost basis to the
individual's total accrued benefit under the retirement plan. Special tax rules
may be available for certain distributions from a Qualified Contract. Section
72(t) of the Code imposes a 10% penalty tax on the taxable portion of any
distribution from qualified retirement plans, including Contracts issued and
qualified under Code Sections 401 (Pension and Profit-Sharing Plans),
403(b)(Tax-Sheltered Annuities) and 408 and 408A (Individual Retirement
Annuities). This penalty is increased to 25% instead of 10% for SIMPLE IRAs if
distribution occurs within the first two years after the Owner first
participated in the SIMPLE IRA. To the extent amounts are not includible in
gross income because they have been rolled over to an IRA or to another eligible
Qualified Plan, no tax penalty will be imposed. The tax penalty will not apply
to the following distributions: (a) if distribution is made on or after the date
on which the Owner or Annuitant (as applicable) reaches age 59 1/2; (b)
distributions following the death or disability of the Owner or Annuitant (as
applicable) (for this purpose disability is as defined in Section 72(m) (7) of
the Code); (c) after separation from service, distributions that are part of
substantially equal periodic payments made not less frequently than annually for
the life (or life expectancy) of the Owner or Annuitant (as applicable) or the
joint lives (or joint life expectancies) of such Owner or Annuitant (as
applicable) and his or her designated Beneficiary; (d) distributions to an Owner
or Annuitant (as applicable) who has separated from service after he has
attained age 55; (e) distributions made to the Owner or Annuitant (as
applicable) to the extent such distributions do not exceed the amount allowable
as a deduction under Code Section 213 to the Owner or Annuitant (as applicable)
for amounts paid during the taxable year for medical care; (f) distributions
made to an alternate payee pursuant to a qualified domestic relations order; (g)
distributions made on account of an IRS levy upon the Qualified Contract; (h)
distributions from an Individual Retirement Annuity for the purchase of medical
insurance (as described in Section 213(d)(1)(D) of the Code) for the Owner or
Annuitant (as applicable) and his or her spouse and dependents if the Owner or
Annuitant (as applicable) has received unemployment compensation for at least 12
weeks (this exception will no longer apply after the Owner or Annuitant (as
applicable) has been re-employed for at least 60 days); (i) distributions from
an Individual Retirement Annuity made to the Owner or Annuitant (as applicable)
to the extent such
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distributions do not exceed the qualified higher education expenses (as defined
in Section 72(t)(7) of the Code) of the Owner or Annuitant (as applicable) for
the taxable year; and (j) distributions from an Individual Retirement Annuity
made to the Owner or Annuitant (as applicable) which are qualified first-time
home buyer distributions (as defined in Section 72(t)(8)of the Code.) The
exceptions stated in (d) and (f) above do not apply in the case of an Individual
Retirement Annuity. The exception stated in (c) above applies to an Individual
Retirement Annuity without the requirement that there be a separation from
service.
With respect to (c) above, if the series of substantially equal periodic
payments is modified before the later of your attaining age 59 1/2 or 5 years
from the date of the first periodic payment, then the tax for the year of the
modification is increased by an amount equal to the tax which would have been
imposed (the 10% penalty tax) but for the exception, plus interest for the tax
years on which the exception was used.
Generally, distributions from a qualified plan must begin no later than
April 1st of the calendar year following the later of (a) the year in which the
employee attains age 70 1/2, or (b) the calendar year in which the employee
retires. The date set forth in (b) does not apply to an Individual Retirement
Annuity. Required distributions must be over a period not exceeding the life
expectancy of the individual or the joint lives or life expectancies of the
individual and his or her designated beneficiary. If the required minimum
distributions are not made, a 50% penalty tax is imposed as to the amount not
distributed. There are no required distributions from a Roth IRA prior to the
death of the owner.
TAX-SHELTERED ANNUITIES -- WITHDRAWAL LIMITATIONS. The Code limits the
withdrawal of amounts attributable to contributions made pursuant to a salary
reduction agreement (as defined in Section 403(b)(11) of the Code) to
circumstances only when the Owner: (1) attains age 59 1/2; (2) separates from
service; (3) dies; (4) becomes disabled (within the meaning of Section 72(m)(7)
of the Code); or (5) in the case of hardship. However, withdrawals for hardship
are restricted to the portion of the Owner's Contract Value which represents
contributions made by the Owner and does not include any investment results. The
limitations on withdrawals became effective on January 1, 1989 and apply only to
salary reduction contributions made after December 31, 1988, to income
attributable to such contributions and to income attributable to amounts held as
of December 31, 1988. The limitations on withdrawals do not affect transfers
between Tax-Sheltered Annuity Plans. Owners should consult their own tax counsel
or other tax adviser regarding any distributions.
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ANNUITY PROVISIONS
VARIABLE ANNUITY. A variable annuity is an annuity with payments which:
(1) are not predetermined as to dollar amount; and (2) will vary in amount with
the net investment results of the applicable investment option(s) of the
separate account. At the annuity calculation date, the contract value in each
investment option will be applied to the applicable annuity tables. The annuity
table used will depend upon the annuity option chosen. The dollar amount of
annuity payments after the first is determined as follows:
(1) the dollar amount of the first annuity payment is divided by the
value of an annuity unit as of the annuity calculation date. This
establishes the number of annuity units for each monthly payment. The
number of annuity units remains fixed during the annuity payment period.
(2) the fixed number of annuity units per payment in each subaccount
is multiplied by the annuity unit value as of the annuity calculation date.
This result is the dollar amount of the payment.
The total dollar amount of each variable annuity payment is the sum of all
investment option variable annuity payments.
The Company determines the amount of variable annuity payments, including
the first, no more than ten (10) business days prior to the payment date. The
payment date must be the same day each month as the date selected for the
annuity date, i.e. the first or the fifteenth.
FIXED ANNUITY. A fixed annuity is a series of payments made during the
annuity period which are guaranteed as to dollar amount by the Company and do
not vary with the investment experience of the separate account. The general
account value as of the annuity calculation date will be used to determine the
fixed annuity monthly payment. The first monthly annuity payment will be based
upon the annuity option elected and the appropriate annuity option table. Fixed
annuity payments will remain level.
ANNUITY UNIT. The value of an annuity unit for each investment option was
arbitrarily set initially at $10. This was done when the first investment option
shares were purchased. The investment option annuity unit value for any business
day is determined by multiplying the investment option annuity unit value for
the immediately preceding business day by the product of the Net Investment
Factor for the business day for which the annuity unit value is being
calculated, and an amount equivalent to the daily assumed investment factor.
NET INVESTMENT FACTOR. The Net Investment Factor for any investment option
for any business day is determined by dividing:
(a) the accumulation unit value as of the close of the current
business day, by
(b) the accumulation unit value as of the close of the immediately
preceding business day.
The Net Investment Factor may be greater or less than one, as the annuity
unit value may increase or decrease.
EXPENSE GUARANTEE. The Company guarantees that the dollar amount of each
annuity payment after the first annuity payment will not be affected by
variations in actual mortality or expense experience.
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FINANCIAL STATEMENTS
The financial statements of the Company included herein should be
considered only as bearing upon the ability of the Company to meet its
obligations under the contracts. The financial statements of the Variable
Account are also included herein.
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INDEPENDENT AUDITORS' REPORT
To 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 the
subaccounts of Valley Forge Life Insurance Company Variable Annuity Separate
Account (the "Account") as of December 31, 1999, the statements of operations
for the year ended December 31, 1999, and changes in net assets for the two
years ended December 31, 1999. The subaccounts that collectively comprise the
Account are the Federated Prime Money Fund II, Federated Utility Fund II,
Federated High Income Bond Fund II, Fidelity Variable Insurance Products Fund
Equity-Income Portfolio, Fidelity Variable Insurance Products Fund II Asset
Manager Portfolio, Fidelity Variable Insurance Products Fund II Index 500
Portfolio, Fidelity Variable Insurance Products Fund II Contrafund Portfolio,
The Alger American Fund Small Capitalization Portfolio, The Alger American
Growth Portfolio, The Alger American MidCap Growth Portfolio, MFS Emerging
Growth Series, MFS Research Series, MFS Growth with Income Series, MFS Limited
Maturity Series, MFS Total Return Series, SoGen Overseas Variable Fund, Van Eck
Worldwide Hard Assets, Van Eck Emerging Markets Fund, Janus Aspen Capital
Appreciation Portfolio, Janus Aspen Growth Portfolio, Janus Aspen Balanced
Portfolio, Janus Aspen Flexible Income Portfolio, Janus Aspen International
Growth Portfolio and Janus Aspen World Wide Growth Portfolio. These financial
statements are the responsibility of the Account's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits 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
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned at December 31, 1999. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of each of the subaccounts that comprise the
Account as of December 31, 1999, the results of their operations for the year
ended December 31, 1999, and the changes in their net assets for the two years
ended December 31, 1999, are in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Chicago, Illinois
February 24, 2000
20
<PAGE> 21
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
FEDERATED FIDELITY
PRIME FEDERATED FEDERATED FIDELITY ASSET FIDELITY FIDELITY
MONEY UTILITY HIGH INCOME EQUITY-INCOME MANAGER INDEX 500 CONTRAFUND
DECEMBER 31, 1999 FUND II FUND II BOND FUND II PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------------- ----------- ---------- ------------ ------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at
market value (See
Supplemental cost
information
below)............. $29,703,202 $3,355,716 $4,861,406 $8,012,656 $5,992,679 $24,349,701 $11,949,857
----------- ---------- ---------- ---------- ---------- ----------- -----------
Total
Assets..... 29,703,202 3,355,716 4,861,406 8,012,656 5,992,679 24,349,701 11,949,857
----------- ---------- ---------- ---------- ---------- ----------- -----------
LIABILITIES:
Payable for fund
withdrawals and
surrenders......... (34,878) (107,868) (4,173) (51,065) (105,715) (94,018) (120,178)
----------- ---------- ---------- ---------- ---------- ----------- -----------
Total
liabilities.. (34,878) (107,868) (4,173) (51,065) (105,715) (94,018) (120,178)
----------- ---------- ---------- ---------- ---------- ----------- -----------
Net assets... $29,668,324 $3,247,848 $4,857,233 $7,961,591 $5,886,964 $24,255,683 $11,829,679
=========== ========== ========== ========== ========== =========== ===========
Supplemental cost
information:
Investments, at
cost:............ $29,668,324 $3,262,612 $5,061,507 $7,724,362 $5,835,260 $20,734,923 $ 9,927,803
=========== ========== ========== ========== ========== =========== ===========
<CAPTION>
THE ALGER
AMERICAN
SMALL
CAPITALIZATION
DECEMBER 31, 1999 PORTFOLIO
----------------- --------------
<S> <C>
ASSETS:
Investments, at
market value (See
Supplemental cost
information
below)............. $ 3,931,611
-----------
Total
Assets..... 3,931,611
-----------
LIABILITIES:
Payable for fund
withdrawals and
surrenders......... --
-----------
Total
liabilities.. --
-----------
Net assets... $ 3,931,611
===========
Supplemental cost
information:
Investments, at
cost:............ $ 2,998,780
===========
</TABLE>
<TABLE>
<CAPTION>
JANUS JANUS
JANUS ASPEN JANUS JANUS ASPEN JANUS ASPEN ASPEN
VAN ECK SERIES ASPEN ASPEN SERIES SERIES SERIES VAN ECK
EMERGING CAPITAL SERIES SERIES FLEXIBLE INTERNATIONAL WORLD WIDE WORLDWIDE
MARKETS APPRECIATION GROWTH BALANCED INCOME GROWTH GROWTH HARD ASSETS
DECEMBER 31, 1999 FUND PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO FUND
----------------- ---------- ------------ ---------- ---------- --------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at
market value (See
Supplemental cost
information
below)............. $1,085,079 $8,222,654 $2,866,575 $3,580,814 $260,415 $724,430 $2,733,573 $ 410,436
---------- ---------- ---------- ---------- -------- -------- ---------- ----------
Total
assets..... 1,085,079 8,222,654 2,866,575 3,580,814 260,415 724,430 2,733,573 410,436
---------- ---------- ---------- ---------- -------- -------- ---------- ----------
LIABILITIES:
Payable for fund
withdrawals and
surrenders......... (1,990) -- (863) -- (54,538) (91) (78) (46,638)
---------- ---------- ---------- ---------- -------- -------- ---------- ----------
Total
liabilities.. (1,990) -- (863) -- (54,538) (91) (78) (46,638)
---------- ---------- ---------- ---------- -------- -------- ---------- ----------
Net assets... $1,083,089 $8,222,654 $2,865,712 $3,580,814 $205,877 $724,339 $2,733,495 $ 363,798
========== ========== ========== ========== ======== ======== ========== ==========
Supplemental cost
information:
Investments, at
cost:............ $ 621,316 $6,460,434 $2,564,139 $3,357,450 $202,939 $618,384 $2,394,255 $ 328,321
========== ========== ========== ========== ======== ======== ========== ==========
</TABLE>
See accompanying Notes to Financial Statements.
21
<PAGE> 22
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
<TABLE>
<CAPTION>
THE ALGER MFS
THE ALGER AMERICAN MFS GROWTH MFS SOGEN
AMERICAN MIDCAP EMERGING MFS WITH LIMITED MFS TOTAL OVERSEAS
GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY RETURN VARIABLE
PORTFOLIO PORTFOLIO SERIES SERIES SERIES SERIES SERIES FUND
----------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investments, at
market value (See
Supplemental cost
information
below)............. $19,149,543 $3,883,853 $10,768,176 $4,694,705 $5,275,194 $2,127,072 $5,011,714 $3,323,165
----------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
Total Assets......... 19,149,543 3,883,853 10,768,176 4,694,705 5,275,194 2,127,072 5,011,714 3,323,165
----------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
Payable for fund
withdrawals and
surrenders......... (25,509) (20,216) -- (33,341) (42,329) (142,042) (151,324) --
----------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
Total liabilities.... (25,509) (20,216) -- (33,341) (42,329) (142,042) (151,324) --
----------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
Net assets........... $19,124,034 $3,863,637 $10,768,176 $4,661,364 $5,232,865 $1,985,030 $4,860,390 $3,323,165
=========== ========== =========== ========== ========== ========== ========== ==========
Supplemental cost
information:
Investments, at
cost:.............. $16,042,433 $3,187,774 $ 7,168,784 $3,838,648 $4,985,879 $2,034,696 $4,927,674 $2,632,373
=========== ========== =========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying Notes to Financial Statements.
22
<PAGE> 23
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FIDELITY
FEDERATED FEDERATED FEDERATED FIDELITY ASSET FIDELITY FIDELITY
FOR THE YEAR ENDED PRIME MONEY UTILITY HIGH INCOME EQUITY-INCOME MANAGER INDEX 500 CONTRAFUND
DECEMBER 31, 1999 FUND II FUND II BOND FUND II PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------------ ----------- --------- ------------ ------------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividend income........... $706,558 $149,669 $ 304,785 $216,369 $180,618 $ 190,903 $ 161,610
-------- -------- --------- -------- -------- ---------- ----------
706,558 149,669 304,785 216,369 180,618 190,903 161,610
-------- -------- --------- -------- -------- ---------- ----------
Expenses:
Mortality and expense risk
and administration
charges................. 218,056 36,756 52,594 91,915 47,651 236,504 99,358
-------- -------- --------- -------- -------- ---------- ----------
218,056 36,756 52,594 91,915 47,651 236,504 99,358
-------- -------- --------- -------- -------- ---------- ----------
Net investment
income (loss)...... 488,502 112,913 252,191 124,454 132,967 (45,601) 62,252
-------- -------- --------- -------- -------- ---------- ----------
Investment gains and
(losses):
Net realized gains
(losses)................ -- 10,509 (126,349) 27,187 45,050 1,086,783 251,862
Net unrealized gains
(losses)................ -- (89,449) (183,228) 37,873 315,175 2,357,042 1,425,059
-------- -------- --------- -------- -------- ---------- ----------
Net realized and
unrealized
investment gains
(losses)........... -- (78,940) (309,577) 65,060 360,225 3,443,825 1,676,921
-------- -------- --------- -------- -------- ---------- ----------
Net increase
(decrease) in net
assets resulting
from operations.... $488,502 $ 33,973 $ (57,386) $189,514 $493,192 $3,398,224 $1,739,173
======== ======== ========= ======== ======== ========== ==========
<CAPTION>
THE ALGER
AMERICAN SMALL
FOR THE YEAR ENDED CAPITALIZATION
DECEMBER 31, 1999 PORTFOLIO
------------------ ---------------
<S> <C>
Investment income:
Dividend income........... $ 240,850
----------
240,850
----------
Expenses:
Mortality and expense risk
and administration
charges................. 31,029
----------
31,029
----------
Net investment
income (loss)...... 209,821
----------
Investment gains and
(losses):
Net realized gains
(losses)................ (27,093)
Net unrealized gains
(losses)................ 904,672
----------
Net realized and
unrealized
investment gains
(losses)........... 877,579
----------
Net increase
(decrease) in net
assets resulting
from operations.... $1,087,400
==========
</TABLE>
<TABLE>
<CAPTION>
JANUS JANUS JANUS
VAN ECK ASPEN JANUS JANUS ASPEN ASPEN
WORLDWIDE VAN ECK SERIES ASPEN ASPEN SERIES SERIES
HARD EMERGING CAPITAL SERIES SERIES FLEXIBLE INTERNATIONAL
ASSETS MARKETS APPRECIATION GROWTH BALANCED INCOME GROWTH
FOR THE YEAR ENDED DECEMBER 31, 1999 FUND FUND PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------------------------------ --------- -------- ------------ --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividend income... $ 2,253 -- -- -- -- -- --
------- -------- ---------- -------- -------- ------ --------
2,253 -- -- -- -- -- --
------- -------- ---------- -------- -------- ------ --------
Expenses:
Mortality and expense risk and
administration charges... 2,921 $ 8,211 $ 19,876 $ 5,105 $ 4,713 $ 324 $ 664
------- -------- ---------- -------- -------- ------ --------
2,921 8,211 19,876 5,105 4,713 324 664
------- -------- ---------- -------- -------- ------ --------
Net investment income
(loss)... (668) (8,211) (19,876) (5,105) (4,713) (324) (664)
------- -------- ---------- -------- -------- ------ --------
Investment gains and (losses):
Net realized gains (losses)... (1,568) (10,144) 17,638 3,441 41 (829) 1,668
Net unrealized gains (losses)... 49,925 526,239 1,762,220 301,573 223,364 2,938 105,955
------- -------- ---------- -------- -------- ------ --------
Net realized and unrealized
investment gains
(losses)... 48,357 516,095 1,779,858 305,014 223,405 2,109 107,623
------- -------- ---------- -------- -------- ------ --------
Net increase (decrease) in
net assets resulting from
operations... $47,689 $507,884 $1,759,982 $299,909 $218,692 $1,785 $106,959
======= ======== ========== ======== ======== ====== ========
<CAPTION>
JANUS
ASPEN
SERIES
WORLD WIDE
GROWTH
FOR THE YEAR ENDED DECEMBER 31, 1999 PORTFOLIO
------------------------------------ ----------
<S> <C>
Investment income:
Dividend income... --
--------
--
--------
Expenses:
Mortality and expense risk and
administration charges... $ 3,010
--------
3,010
--------
Net investment income
(loss)... (3,010)
--------
Investment gains and (losses):
Net realized gains (losses)... 157
Net unrealized gains (losses)... 339,240
--------
Net realized and unrealized
investment gains
(losses)... 339,397
--------
Net increase (decrease) in
net assets resulting from
operations... $336,387
========
</TABLE>
See accompanying Notes to Financial Statements.
23
<PAGE> 24
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
THE ALGER MFS
THE ALGER AMERICAN MFS GROWTH MFS MFS SOGEN
AMERICAN MIDCAP EMERGING MFS WITH LIMITED TOTAL OVERSEAS
GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY RETURN VARIABLE
FOR THE YEAR ENDED DECEMBER 31, 1999 PORTFOLIO PORTFOLIO SERIES SERIES SERIES SERIES SERIES FUND
------------------------------------ ---------- --------- ---------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividend income.................... $ 958,176 $220,841 -- $32,893 $ 23,662 $112,682 $ 143,153 $ 34,501
---------- -------- ---------- -------- -------- -------- --------- --------
958,176 220,841 -- 32,893 23,662 112,682 143,153 34,501
---------- -------- ---------- -------- -------- -------- --------- --------
Expenses:
Mortality and expense risk and
administration charges........... 161,061 29,020 $ 70,170 43,888 56,667 $23,473 51,054 37,217
---------- -------- ---------- -------- -------- -------- --------- --------
161,061 29,020 70,170 43,888 56,667 23,473 51,054 37,217
---------- -------- ---------- -------- -------- -------- --------- --------
Net investment income (loss)..... 797,115 191,821 (70,170) (10,995) (33,005) 89,209 92,099 (2,716)
---------- -------- ---------- -------- -------- -------- --------- --------
Investment gains and (losses):
Net realized gains (losses):....... 335,913 21,690 245,537 107,121 122,217 (6,655) 14,997 140,440
Net unrealized gains (losses)...... 2,287,237 529,227 3,087,888 655,276 47,625 (25,526) (127,595) 796,693
---------- -------- ---------- -------- -------- -------- --------- --------
Net realized and unrealized
investment gains (losses)........ 2,623,150 550,917 3,333,425 762,397 169,842 (32,181) (112,598) 937,133
---------- -------- ---------- -------- -------- -------- --------- --------
Net increase (decrease) in net
assets resulting from
operations....................... $3,420,265 $742,738 $3,263,255 $751,402 $136,837 $57,028 $ (20,499) $934,417
========== ======== ========== ======== ======== ======== ========= ========
</TABLE>
See accompanying Notes to Financial Statements.
24
<PAGE> 25
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FEDERATED
FEDERATED HIGH FIDELITY FIDELITY
PRIME FEDERATED INCOME EQUITY- ASSET FIDELITY
MONEY UTILITY BOND INCOME MANAGER INDEX 500
FOR THE YEAR ENDED DECEMBER 31, 1999 FUND II FUND II FUND II PORTFOLIO PORTFOLIO PORTFOLIO
------------------------------------ ------------ ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
From operations:
Net investment income (loss)........ $ 488,502 $ 112,913 $ 252,191 $ 124,454 $ 132,967 $ (45,601)
Net realized and unrealized gains
(losses).......................... -- (78,940) (309,577) 65,060 360,225 3,443,825
------------ ---------- ---------- ---------- ---------- -----------
Change in net assets resulting
from operations................. 488,502 33,973 (57,386) 189,514 493,192 3,398,224
------------ ---------- ---------- ---------- ---------- -----------
From capital transactions:
Net premiums/deposits............... 33,173,793 831,090 1,266,165 2,220,476 1,838,108 7,195,871
Death benefits...................... -- (159,614) (191,732) (58,842) (115,043) (114,424)
Surrenders.......................... (1,163,352) (29,199) (116,987) (310,647) (1,668) (621,921)
Withdrawals......................... (335,752) (50,907) (83,712) (131,986) (50,538) (357,810)
Transfers into (out of) subaccounts,
net -- Note 1..................... (8,057,071) 928,843 874,120 1,788,608 1,464,890 4,065,763
------------ ---------- ---------- ---------- ---------- -----------
Change in net assets resulting
from capital transactions....... 23,617,618 1,520,213 1,747,854 3,507,609 3,135,749 10,167,479
------------ ---------- ---------- ---------- ---------- -----------
Increase in net assets................ 24,106,120 1,554,186 1,690,468 3,697,123 3,628,941 13,565,703
Net assets at beginning of period..... 5,562,204 1,693,662 3,166,765 4,264,468 2,258,023 10,689,980
------------ ---------- ---------- ---------- ---------- -----------
Net assets at end of period... $ 29,668,324 $3,247,848 $4,857,233 $7,961,591 $5,886,964 $24,255,683
------------ ---------- ---------- ---------- ---------- -----------
Net asset value per unit at
end
of period................... $ 1.00 $ 14.35 $ 10.24 $ 25.71 $ 18.67 $ 167.41
============ ========== ========== ========== ========== ===========
Units outstanding at end of
period...................... 29,668,324 226,331 474,339 309,669 315,317 144,888
============ ========== ========== ========== ========== ===========
FOR THE YEAR ENDED DECEMBER 31, 1998
From operations:
Net investment income (loss)........ $ 207,113 $ 3,202 $ (9,420) $ 8,287 $ 19,013 $ (22,378)
Net realized and unrealized gains
(losses).......................... 634 97,354 (26,804) 186,584 141,214 1,288,532
------------ ---------- ---------- ---------- ---------- -----------
Change in net assets resulting
from operations................. 207,747 100,556 (36,224) 194,871 160,227 1,266,154
------------ ---------- ---------- ---------- ---------- -----------
From capital transactions:
Net premiums/deposits............... 24,848,283 1,307,253 2,301,701 2,167,250 1,237,984 6,238,184
Death benefits...................... (15,275) (19,978) (13,846) (7,421) -- --
Surrenders.......................... (198,856) (15,885) (12,264) (37,904) (1,620) (50,773)
Withdrawals......................... (112,539) (77,318) (93,235) (31,134) (22,890) (110,964)
Transfers into (out of) subaccounts,
net -- Note 1..................... (20,028,240) 348,351 830,154 1,482,837 616,956 2,784,494
------------ ---------- ---------- ---------- ---------- -----------
Change in net assets resulting
from capital transactions....... 4,493,373 1,542,423 3,012,510 3,573,628 1,830,430 8,860,941
------------ ---------- ---------- ---------- ---------- -----------
Increase in net assets................ 4,701,120 1,642,979 2,976,286 3,768,499 1,990,657 10,127,095
Net assets at beginning of period..... 861,084 50,683 190,479 495,969 267,366 562,885
------------ ---------- ---------- ---------- ---------- -----------
Net assets at end of period... $ 5,562,204 $1,693,662 $3,166,765 $4,264,468 $2,258,023 $10,689,980
------------ ---------- ---------- ---------- ---------- -----------
Net asset value per unit at
end
of period................... $ 1.00 $ 15.27 $ 10.92 $ 25.42 $ 18.16 $ 141.25
============ ========== ========== ========== ========== ===========
Units outstanding at end of
period...................... 5,562,204 110,914 289,997 167,760 124,340 75,681
============ ========== ========== ========== ========== ===========
<CAPTION>
THE ALGER
AMERICAN
FIDELITY SMALL
CONTRAFUND CAPITALIZATION
FOR THE YEAR ENDED DECEMBER 31, 1999 PORTFOLIO PORTFOLIO
------------------------------------ ----------- --------------
<S> <C> <C>
From operations:
Net investment income (loss)........ $ 62,252 $ 209,821
Net realized and unrealized gains
(losses).......................... 1,676,921 877,579
----------- ----------
Change in net assets resulting
from operations................. 1,739,173 1,087,400
----------- ----------
From capital transactions:
Net premiums/deposits............... 4,291,826 1,066,895
Death benefits...................... (120,178) --
Surrenders.......................... (225,432) (13,535)
Withdrawals......................... (115,676) (33,248)
Transfers into (out of) subaccounts,
net -- Note 1..................... 2,549,528 222,844
----------- ----------
Change in net assets resulting
from capital transactions....... 6,380,068 1,242,956
----------- ----------
Increase in net assets................ 8,119,241 2,330,356
Net assets at beginning of period..... 3,710,438 1,601,255
----------- ----------
Net assets at end of period... $11,829,679 $3,931,611
----------- ----------
Net asset value per unit at
end
of period................... $ 29.15 $ 55.15
=========== ==========
Units outstanding at end of
period...................... 405,821 71,289
=========== ==========
FOR THE YEAR ENDED DECEMBER 31, 1998
From operations:
Net investment income (loss)........ $ 3,442 $ 115,699
Net realized and unrealized gains
(losses).......................... 507,452 2,409
----------- ----------
Change in net assets resulting
from operations................. 510,894 118,108
----------- ----------
From capital transactions:
Net premiums/deposits............... 1,114,162 1,012,659
Death benefits...................... (10,449) (3,193)
Surrenders.......................... (23,821) (27,136)
Withdrawals......................... (23,659) (16,711)
Transfers into (out of) subaccounts,
net -- Note 1..................... 1,814,245 321,797
----------- ----------
Change in net assets resulting
from capital transactions....... 2,870,478 1,287,416
----------- ----------
Increase in net assets................ 3,381,372 1,405,524
Net assets at beginning of period..... 329,066 195,731
----------- ----------
Net assets at end of period... $ 3,710,438 $1,601,255
----------- ----------
Net asset value per unit at
end
of period................... $ 24.44 $ 43.97
=========== ==========
Units outstanding at end of
period...................... 151,818 36,417
=========== ==========
</TABLE>
See accompanying Notes to Financial Statements.
25
<PAGE> 26
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS -- (CONTINUED)
<TABLE>
<CAPTION>
THE ALGER MFS
THE ALGER AMERICAN MFS GROWTH MFS
AMERICAN MIDCAP EMERGING MFS WITH LIMITED
GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY
FOR THE YEAR ENDED DECEMBER 31, 1999 PORTFOLIO PORTFOLIO SERIES SERIES SERIES SERIES
------------------------------------ ----------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
From operations:
Net investment income (loss)............. $ 797,115 $ 191,821 $ (70,170) $ (10,995) $ (33,005) $ 89,209
Net realized and unrealized gains
(losses)............................... 2,623,150 550,917 3,333,425 762,397 169,842 (32,181)
----------- ---------- ----------- ---------- ---------- ----------
Change in net assets resulting from
operations........................... 3,420,265 742,738 3,263,255 751,402 136,837 57,028
----------- ---------- ----------- ---------- ---------- ----------
From capital transactions:
Net premiums/deposits.................... 5,221,581 1,384,117 2,740,437 1,024,522 1,191,276 261,437
Death benefits........................... (52,193) (9,196) (5,257) (33,341) -- (11,410)
Surrenders............................... (246,417) (30,775) (31,310) (36,878) (26,140) (77,142)
Withdrawals.............................. (208,410) (38,843) (34,437) (35,053) (59,788) (22,640)
Transfers into (out of) subaccounts,
net -- Note 1.......................... 5,544,308 642,592 1,911,677 1,312,541 1,605,262 746,199
----------- ---------- ----------- ---------- ---------- ----------
Change in net assets resulting from
capital transactions................. 10,258,869 1,947,895 4,581,110 2,231,791 2,710,610 896,444
----------- ---------- ----------- ---------- ---------- ----------
Increase in net assets..................... 13,679,134 2,690,633 7,844,365 2,983,193 2,847,447 953,472
Net assets at beginning of period.......... 5,444,900 1,173,004 2,923,811 1,678,171 2,385,418 1,031,558
----------- ---------- ----------- ---------- ---------- ----------
Net assets at end of period........ $19,124,034 $3,863,637 $10,768,176 $4,661,364 $5,232,865 $1,985,030
----------- ---------- ----------- ---------- ---------- ----------
Net asset value per unit at end
of period........................ $ 64.38 $ 32.23 $ 37.94 $ 23.34 $ 21.31 $ 9.81
=========== ========== =========== ========== ========== ==========
Units outstanding at end of
period........................... 297,049 119,877 283,821 199,716 245,559 202,348
=========== ========== =========== ========== ========== ==========
FOR THE YEAR ENDED DECEMBER 31, 1998
From operations:
Net investment income (loss)............. $ 307,440 $ 18,386 $ (10,989) $ (1,475) $ (16,356) $ (7,862)
Net realized and unrealized gains
(losses)............................... 766,562 131,442 548,478 172,413 234,577 (11,034)
----------- ---------- ----------- ---------- ---------- ----------
Change in net assets resulting from
operations........................... 1,074,002 149,828 537,489 170,938 218,221 (18,896)
----------- ---------- ----------- ---------- ---------- ----------
From capital transactions:
Net premiums/deposits.................... 2,385,652 456,073 845,164 586,011 1,164,678 743,654
Death benefits........................... -- (3,436) -- -- (4,023) (7,699)
Surrenders............................... (13,467) -- (9,089) (1,253) -- (6,502)
Withdrawals.............................. (33,198) (1,155) (24,319) (11,140) (17,911) (6,087)
Transfers into (out of) subaccounts,
net -- Note 1.......................... 1,782,528 529,267 1,432,918 777,200 805,436 245,382
----------- ---------- ----------- ---------- ---------- ----------
Change in net assets resulting from
capital transactions................. 4,121,515 980,749 2,244,674 1,350,818 1,948,180 968,748
----------- ---------- ----------- ---------- ---------- ----------
Increase in net assets..................... 5,195,517 1,130,577 2,782,163 1,521,756 2,166,401 949,852
Net assets at beginning of period.......... 249,383 42,427 141,648 156,415 219,017 81,706
----------- ---------- ----------- ---------- ---------- ----------
Net assets at end of period........ $ 5,444,900 $1,173,004 $ 2,923,811 $1,678,171 $2,385,418 $1,031,558
----------- ---------- ----------- ---------- ---------- ----------
Net asset value per unit at end
of period........................ $ 53.22 $ 28.87 $ 21.47 $ 19.05 $ 20.11 $ 10.16
=========== ========== =========== ========== ========== ==========
Units outstanding at end of
period........................... 102,309 40,631 136,181 88,093 118,618 101,531
=========== ========== =========== ========== ========== ==========
<CAPTION>
SOGEN
MFS TOTAL OVERSEAS
RETURN VARIABLE
FOR THE YEAR ENDED DECEMBER 31, 1999 SERIES FUND
------------------------------------ ---------- ----------
<S> <C> <C>
From operations:
Net investment income (loss)............. $ 92,099 $ (2,716)
Net realized and unrealized gains
(losses)............................... (112,598) 937,133
---------- ----------
Change in net assets resulting from
operations........................... (20,499) 934,417
---------- ----------
From capital transactions:
Net premiums/deposits.................... 1,432,338 411,295
Death benefits........................... (175,729) --
Surrenders............................... (82,248) (87,477)
Withdrawals.............................. (61,388) (73,467)
Transfers into (out of) subaccounts,
net -- Note 1.......................... 1,874,729 99,935
---------- ----------
Change in net assets resulting from
capital transactions................. 2,987,702 350,286
---------- ----------
Increase in net assets..................... 2,967,203 1,284,703
Net assets at beginning of period.......... 1,893,187 2,038,462
---------- ----------
Net assets at end of period........ $4,860,390 $3,323,165
---------- ----------
Net asset value per unit at end
of period........................ $ 17.75 $ 14.18
========== ==========
Units outstanding at end of
period........................... 273,825 234,356
========== ==========
FOR THE YEAR ENDED DECEMBER 31, 1998
From operations:
Net investment income (loss)............. $ 12,833 $ (24,005)
Net realized and unrealized gains
(losses)............................... 69,285 (64,492)
---------- ----------
Change in net assets resulting from
operations........................... 82,118 (88,497)
---------- ----------
From capital transactions:
Net premiums/deposits.................... 968,524 1,098,070
Death benefits........................... -- (3,348)
Surrenders............................... (7,865) (16,724)
Withdrawals.............................. (11,868) (21,157)
Transfers into (out of) subaccounts,
net -- Note 1.......................... 602,434 317,226
---------- ----------
Change in net assets resulting from
capital transactions................. 1,551,225 1,374,067
---------- ----------
Increase in net assets..................... 1,633,343 1,285,570
Net assets at beginning of period.......... 259,844 752,892
---------- ----------
Net assets at end of period........ $1,893,187 $2,038,462
---------- ----------
Net asset value per unit at end
of period........................ $ 18.12 $ 10.07
========== ==========
Units outstanding at end of
period........................... 104,481 202,429
========== ==========
</TABLE>
See accompanying Notes to Financial Statements.
26
<PAGE> 27
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS -- (CONTINUED)
<TABLE>
<CAPTION>
JANUS JANUS
VAN ECK ASPEN JANUS JANUS ASPEN
WORLDWIDE VAN ECK SERIES ASPEN ASPEN SERIES
HARD EMERGING CAPITAL SERIES SERIES FLEXIBLE
ASSETS MARKETS APPRECIATION GROWTH BALANCED INCOME
FOR THE YEAR ENDED DECEMBER 31, 1999 FUND FUND PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------------------------------ --------- ---------- ------------ ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
From operations:
Net investment income (loss)........... $ (668) $ (8,211) $ (19,876) $ (5,105) $ (4,713) $ (324)
Net realized and unrealized gains
(losses)............................. 48,357 516,095 1,779,858 305,014 223,405 2,109
-------- ---------- ---------- ---------- ---------- --------
Change in net assets resulting from
operations......................... 47,689 507,884 1,759,982 299,909 218,692 1,785
-------- ---------- ---------- ---------- ---------- --------
From capital transactions:
Net premiums/deposits.................. 150,522 195,914 6,485,581 2,588,038 3,367,893 204,092
Death benefits......................... -- -- -- -- -- --
Surrenders............................. (8,640) -- (11,563) (9,539) -- --
Withdrawals............................ (1,989) (15,623) (11,346) (12,696) (5,771) --
Transfers into (out of) subaccounts,
net -- Note 1........................ 35,073 (6,561) -- -- -- --
-------- ---------- ---------- ---------- ---------- --------
Change in net assets resulting from
capital transactions............... 174,966 173,730 6,462,672 2,565,803 3,362,122 204,092
-------- ---------- ---------- ---------- ---------- --------
Increase in net assets................... 222,655 681,614 8,222,654 2,865,712 3,580,814 205,877
Net assets at beginning of period........ 141,143 401,475 -- -- -- --
-------- ---------- ---------- ---------- ---------- --------
Net assets at end of period...... $363,798 $1,083,089 $8,222,654 $2,865,712 $3,580,814 $205,877
-------- ---------- ---------- ---------- ---------- --------
Net asset value per unit at end
of period...................... $ 10.96 $ 14.26 $ 33.17 $ 33.65 $ 27.92 $ 11.42
======== ========== ========== ========== ========== ========
Units outstanding at end of
period......................... 33,193 75,953 247,894 85,162 128,253 18,028
======== ========== ========== ========== ========== ========
FOR THE YEAR ENDED DECEMBER 31, 1998
From operations:
Net investment income (loss)........... $ 4,608 $ (2,674)
Net realized and unrealized gains
(losses)............................. (40,765) (109,753)
Change in net assets resulting from
operations......................... (36,157) (112,427)
-------- ----------
From capital transactions:
Net premiums/deposits.................. 128,466 348,583
Death benefits......................... -- --
Surrenders............................. (20,009) (3,769)
Withdrawals............................ (1,198) (4,392)
Transfers into (out of) subaccounts,
net -- Note 1........................ 61,004 156,590
-------- ----------
Change in net assets resulting from
capital transactions............... 168,263 497,012
-------- ----------
Increase in net assets................... 132,106 384,585
Net assets at beginning of period........ 9,037 16,890
-------- ----------
Net assets at end of period...... $141,143 $ 401,475
-------- ----------
Net asset value per unit at end
of period...................... $ 9.20 $ 7.12
======== ==========
Units outstanding at end of
period......................... 15,342 56,387
======== ==========
<CAPTION>
JANUS JANUS
ASPEN ASPEN
SERIES SERIES
INTERNATIONAL WORLD WIDE
GROWTH GROWTH
FOR THE YEAR ENDED DECEMBER 31, 1999 PORTFOLIO PORTFOLIO
------------------------------------ ------------- ----------
<S> <C> <C>
From operations:
Net investment income (loss)........... $ (664) $ (3,010)
Net realized and unrealized gains
(losses)............................. 107,623 339,397
-------- ----------
Change in net assets resulting from
operations......................... 106,959 336,387
-------- ----------
From capital transactions:
Net premiums/deposits.................. 617,608 2,407,678
Death benefits......................... -- --
Surrenders............................. -- (8,172)
Withdrawals............................ (228) (2,401)
Transfers into (out of) subaccounts,
net -- Note 1........................ -- 3
-------- ----------
Change in net assets resulting from
capital transactions............... 617,380 2,397,108
-------- ----------
Increase in net assets................... 724,339 2,733,495
Net assets at beginning of period........ -- --
-------- ----------
Net assets at end of period...... $724,339 $2,733,495
-------- ----------
Net asset value per unit at end
of period...................... $ 38.67 $ 47.75
======== ==========
Units outstanding at end of
period......................... 18,731 57,246
======== ==========
FOR THE YEAR ENDED DECEMBER 31, 1998
From operations:
Net investment income (loss)...........
Net realized and unrealized gains
(losses).............................
Change in net assets resulting from
operations.........................
From capital transactions:
Net premiums/deposits..................
Death benefits.........................
Surrenders.............................
Withdrawals............................
Transfers into (out of) subaccounts,
net -- Note 1........................
Change in net assets resulting from
capital transactions...............
Increase in net assets...................
Net assets at beginning of period........
Net assets at end of period......
Net asset value per unit at end
of period......................
Units outstanding at end of
period.........................
</TABLE>
See accompanying Notes to Financial Statements.
27
<PAGE> 28
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1. ORGANIZATION
Valley Forge Life Insurance Company Variable Annuity Separate Account
("Variable Account"), a unit investment trust registered with the Securities and
Exchange Commission under the Investment Company Act of 1940, is a separate
account of Valley Forge Life Insurance Company ("VFL"). The Variable Account
began operation on February 3, 1997. The assets of the Variable Account are
segregated from VFL's general account and its other separate accounts. VFL is a
wholly-owned subsidiary of Continental Assurance Company ("Assurance").
Assurance is a wholly-owned subsidiary of Continental Casualty Company
("Casualty"), which is wholly-owned by CNA Financial Corporation ("CNA"). Loews
Corporation owns approximately 86% of the outstanding common stock of CNA.
VFL sells a wide range of life insurance products, including the Flexible
Premium Deferred Annuity Contract ("Contract"). Under the terms of the Contract,
contractholders select where the net purchase payments of the Contract are
invested. The contractholder may choose to invest in either the Variable
Account, the Guaranteed Interest Option Separate Account ("GIO Account") or both
the Variable Account and the GIO Account.
The Variable Account currently offers 24 subaccounts each of which invests
in shares of corresponding funds (Funds), in which the contractholders bear all
of the investment risk. Each Fund is either an open-end diversified management
investment company or a separate investment portfolio of such a company and is
managed by an investment advisor ("Investment Advisor") which is registered with
the Securities and Exchange Commission. The Investment Advisors and subaccounts
are identified here.
<TABLE>
<CAPTION>
INVESTMENT ADVISOR: INVESTMENT ADVISOR:
FUND/SUBACCOUNT FUND/SUBACCOUNT
------------------- -------------------
<S> <C>
FEDERATED ADVISERS: MASSACHUSETTS FINANCIAL SERVICES
Federated Prime Money Fund II COMPANY:
Federated Utility Fund II MFS Emerging Growth Series
Federated High Income Bond Fund II MFS Research Series
FIDELITY MANAGEMENT & RESEARCH MFS Growth With Income Series
COMPANY: MFS Limited Maturity Series (closed
Fidelity Variable Insurance Products to new investments)
Fund Equity-Income Portfolio ("Fidelity MFS Total Return Series
Equity-Income Portfolio") SOCIETE GENERALE ASSET MANAGEMENT
Fidelity Variable Insurance Products CORP.:
Fund II Asset Manager Portfolio SoGen Overseas Variable Fund
("Fidelity Asset Manager Portfolio") VAN ECK ASSOCIATES CORPORATION:
Fidelity Variable Insurance Products Van Eck Worldwide Hard Assets Fund
Fund II Index 500 Portfolio Van Eck Emerging Markets Fund
("Fidelity Index 500 Portfolio") JANUS CAPITAL CORPORATION --
Fidelity Variable Insurance Products INSTITUTIONAL CLASS
Fund II Contrafund Portfolio Janus Aspen Series Capital Appreciation
("Fidelity Contrafund Portfolio") Portfolio
FRED ALGER MANAGEMENT, INC.: Janus Aspen Series Growth Portfolio
The Alger American Small Janus Aspen Series Balanced Portfolio
Capitalization Portfolio Janus Aspen Series Flexible Income Portfolio
The Alger American Growth Portfolio Janus Aspen Series International Growth
The Alger American MidCap Growth Portfolio
Portfolio Janus Aspen Series World Wide Growth Portfolio
</TABLE>
28
<PAGE> 29
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The MFS Limited Maturity Series subaccount is no longer available for new
allocations as of May 1, 1999.
The GIO Account is also a separate account of VFL. Through the guaranteed
interest option, VFL offers specified effective annual rates of interest that
are credited daily and available for specified periods of time. Contractholders
choosing the guaranteed interest option do not participate in the investment
performance of the GIO Account and this performance does not determine the GIO
Account value or benefits relating thereto.
The assets of the GIO Account and the Variable Account are segregated from
other VFL assets and from the General Account of VFL. The contractholder (before
the maturity date, while the contractholder is still living or the Contract is
in force) may transfer all or part of any subaccount value to another
subaccount(s) or to the GIO Account, or transfer all or part of the GIO Account
value to any subaccounts. The GIO Account, however, unlike the Variable Account,
is not registered as an investment company under the 1940 Act. Separate
financial statements are not prepared for the GIO Account and the accompanying
financial statements do not reflect amounts invested in the GIO Account.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Valuation of Investments -- Investments in the Variable Account consist of
shares of the Funds and are stated at market value based on quoted market
prices. Changes in the difference between market value and cost are reflected as
net unrealized gains (losses) in the accompanying financial statements.
Investment Income -- Investment income consists of dividends declared by
the Funds and are recognized on the date of record.
Realized Gains and Losses -- Realized investment gains and losses in the
Variable Account represent the difference between the proceeds from sales of
shares of the Funds held by the subaccount and the cost of such shares, which
are determined using the first-in first-out cost method.
Federal Income Taxes -- Net investment income and realized gains and losses
on investments of the Variable Account are taxable to contractholders generally
upon distribution. Accordingly, no provision for income taxes has been recorded
in the accompanying financial statements.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
In the opinion of Variable Account's management, these statements include all
adjustments, consisting of normal recurring accruals, which are necessary for
the fair presentation of the financial position, results of operations and
changes in net assets in the accompanying financial statements.
29
<PAGE> 30
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. 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 equal to an annual rate of 1.25% of the net assets
of the subaccount.
An annual administration fee of $30 is also deducted from the subaccounts
on each Contract if the contract value is below $50,000. This fee is to cover a
portion of VFL's administrative expenses related to the contracts.
VFL deducts a daily administration charge from the assets of the
subaccounts on each Contract to compensate it for a portion of the expenses it
incurs in administering the contracts. The daily charge is equal to an annual
rate of 0.15% of the net assets of the subaccounts.
VFL permits 12 free transfers among and between the subaccounts within the
Variable Account (four of which can be applied to the GIO Account) per contract
year without an assessment of a fee. For each additional transfer, VFL charges
$25 at the time each such transfer is processed. The fee is deducted from the
amount being transferred.
NOTE 4. 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
of each of the Funds that the Variable Account participates in, that the mutual
Funds satisfy the diversification requirement of the regulations.
30
<PAGE> 31
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
Valley Forge Life Insurance Company
We have audited the accompanying balance sheets of Valley Forge Life
Insurance Company (a wholly-owned subsidiary of Continental Assurance Company,
which is a wholly-owned subsidiary of Continental Casualty Company, a wholly
owned subsidiary of CNA Financial Corporation, an affiliate of Loews
Corporation) as of December 31, 1999 and 1998, and the related statements of
operations, stockholder's equity and cash flows for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Valley Forge Life Insurance Company as of
December 31, 1999 and 1998, and the results of operations and its cash flows for
each of the three years in the period ended December 31, 1999 in conformity with
generally accepted accounting principles.
As discussed in Note 12 to the financial statements, the Company changed
its method of accounting for liabilities for insurance-related assessments in
1999.
Deloitte & Touche LLP
Chicago, Illinois
February 23, 2000
31
<PAGE> 32
VALLEY FORGE LIFE INSURANCE COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 1999 1998
----------- ----------- -----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available-for-sale (amortized cost:
$548,444 and $454,635)................................. $ 530,512 $ 460,516
Equity securities available-for-sale (cost: $0 and
$981).................................................. 51 2,218
Policy loans.............................................. 93,575 74,150
Other invested assets..................................... 433 485
Short-term investments.................................... 24,714 81,418
---------- ----------
TOTAL INVESTMENTS................................. 649,285 618,787
Cash........................................................ 3,529 3,750
Receivables:
Reinsurance............................................... 2,414,553 2,119,897
Premium and other......................................... 82,852 76,690
Less allowance for doubtful accounts...................... (12) (26)
Deferred acquisition costs.................................. 127,297 111,963
Accrued investment income................................... 11,066 7,721
Receivables for securities sold............................. 2,426 --
Federal income tax recoverable.............................. 4,316 --
Other....................................................... 4,883 902
Separate Account business................................... 209,183 73,745
---------- ----------
TOTAL ASSETS...................................... $3,509,378 $3,013,429
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Insurance reserves:
Future policy benefits................................. $2,751,396 $2,438,305
Claims and claim expense............................... 139,653 93,001
Policyholders' funds................................... 43,466 42,746
Payables for securities purchased........................... 2,421 370
Federal income taxes payable................................ -- 6,468
Deferred income taxes....................................... 2,694 6,213
Due to affiliates........................................... 12,435 1,946
Commissions and other payables.............................. 95,976 86,815
Separate Account business................................... 209,183 73,745
---------- ----------
TOTAL LIABILITIES................................. 3,257,224 2,749,609
---------- ----------
Commitments and contingent liabilities
Stockholder's Equity
Common stock ($50 par value; Authorized -- 200,000 shares;
Issued -- 50,000 shares)............................... 2,500 2,500
Additional paid-in capital................................ 69,150 69,150
Retained earnings......................................... 191,464 187,683
Accumulated other comprehensive income (loss)............. (10,960) 4,487
---------- ----------
TOTAL STOCKHOLDER'S EQUITY........................ 252,154 263,820
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY........ $3,509,378 $3,013,429
========== ==========
</TABLE>
See accompanying Notes to Financial Statements.
32
<PAGE> 33
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1999 1998 1997
---------------------- -------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Revenues:
Premiums.................................................. $310,719 $315,599 $332,172
Net investment income..................................... 39,148 35,539 29,913
Realized investment gains (losses)........................ (19,081) 16,967 4,200
Other..................................................... 4,545 7,959 6,872
-------- -------- --------
335,331 376,064 373,157
-------- -------- --------
Benefits and expenses:
Insurance claims and policyholders' benefits.............. 291,547 301,900 307,207
Amortization of deferred acquisition costs................ 13,942 11,807 11,818
Other operating expenses.................................. 23,740 35,813 33,505
-------- -------- --------
329,229 349,520 352,530
-------- -------- --------
Income before income tax expense and cumulative effect of
change in accounting principle......................... 6,102 26,544 20,627
Income tax expense.......................................... 2,087 9,091 7,297
-------- -------- --------
Income before cumulative effect of change in accounting
principle.............................................. 4,015 17,453 13,330
Cumulative effect of change in accounting principle, net
of tax -- Note 12...................................... 234 -- --
-------- -------- --------
NET INCOME........................................ $ 3,781 $ 17,453 $ 13,330
======== ======== ========
</TABLE>
See accompanying Notes to Financial Statements.
33
<PAGE> 34
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN COMPREHENSIVE RETAINED COMPREHENSIVE STOCKHOLDER'S
STOCK CAPITAL INCOME (LOSS) EARNINGS INCOME (LOSS) EQUITY
------ ---------- ------------- -------- ------------- -------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996.... $2,500 $39,150 $156,900 $ 990 $199,540
Comprehensive income:
Net income.................. -- -- $ 13,330 13,330 -- 13,330
Other comprehensive
income................... -- -- 3,390 -- 3,390 3,390
--------
Total comprehensive income.... $ 16,720
========
Balance, December 31, 1997.... 2,500 39,150 170,230 4,380 216,260
Capital Contribution from
Assurance................... -- 30,000 -- -- 30,000
Comprehensive income:
Net income.................. -- -- $ 17,453 17,453 -- 17,453
Other comprehensive
income................... -- -- 107 -- 107 107
--------
Total comprehensive income.... $ 17,560
========
Balance, December 31, 1998.... 2,500 69,150 187,683 4,487 263,820
Comprehensive income (loss):
Net income.................. -- -- $ 3,781 3,781 -- 3,781
Other comprehensive loss.... -- -- (15,447) -- (15,447) (15,447)
--------
Total comprehensive loss...... $(11,666)
========
Balance, December 31, 1999.... $2,500 $69,150 $191,464 $(10,960) $252,154
====== ======= ======== ======== ======== ========
</TABLE>
See accompanying Notes to Financial Statements.
34
<PAGE> 35
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31 1999 1998 1997
----------- ----------- --------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 3,781 $ 17,453 $ 13,330
Adjustments to reconcile net income to net cash flows from
operating activities:
Deferred income tax provision........................... 4,924 2,058 2,581
Realized investment losses (gains)...................... 19,081 (16,967) (4,200)
Amortization of bond discount........................... (2,999) (4,821) (2,438)
Changes in:
Receivables, net..................................... (300,832) (544,920) (269,787)
Deferred acquisition costs........................... (13,866) (16,746) (20,765)
Accrued investment income............................ (3,345) (2,476) (300)
Due to/from affiliates............................... (10,489) 37,945 31,500
Federal income taxes payable and receivable.......... (10,784) 493 2,151
Insurance reserves................................... 380,939 541,560 221,252
Commissions and other payables and other............. 25,642 (18,804) 47,212
----------- --------- ---------
Total adjustments.................................. 88,271 (22,678) 7,206
----------- --------- ---------
NET CASH FLOWS FROM OPERATING
ACTIVITIES....................................... 92,052 (5,225) 20,536
----------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed maturities............................. (1,512,848) (744,431) (464,361)
Proceeds from fixed maturities:
Sales................................................... 1,339,905 741,277 278,459
Maturities, calls and redemptions....................... 58,263 33,635 45,442
Purchases of equity securities............................ -- (5) (1,334)
Proceeds from sale of equity securities................... 2,647 5 2,447
Change in short-term investments.......................... 59,455 (73,233) 39,301
Change in policy loans.................................... (19,424) (7,179) (6,704)
Change in other invested assets........................... 205 (82) (580)
Other, net................................................ -- -- --
----------- --------- ---------
NET CASH FLOWS FROM INVESTING
ACTIVITIES....................................... (71,797) (50,013) (107,330)
----------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Receipts for investment contracts credited to policyholder
accounts................................................ 15,901 30,007 111,478
Return of policyholder account balances on investment
contracts............................................... (36,377) (25,584) (24,878)
Capital contribution from Assurance....................... -- 30,000 --
----------- --------- ---------
NET CASH FLOWS FROM FINANCING
ACTIVITIES....................................... (20,476) 34,423 86,600
----------- --------- ---------
NET CASH FLOWS..................................... (221) (20,815) (194)
Cash at beginning of period................................. 3,750 24,565 24,759
----------- --------- ---------
CASH AT END OF PERIOD....................................... $ 3,529 $ 3,750 $ 24,565
=========== ========= =========
Supplemental disclosures of cash flow information:
Federal income taxes paid................................. $ 8,260 $ 6,651 $ 2,488
=========== ========= =========
</TABLE>
See accompanying Notes to Financial Statements.
35
<PAGE> 36
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
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 86% of
the outstanding common stock of CNAF.
VFL markets and underwrites insurance products designed to satisfy the
life, health insurance and retirement needs of individuals and groups. Products
available in individual policy form include annuities as well as term and
universal life insurance. Products available in group policy form include life,
pension, accident and health insurance.
The operations, assets and liabilities of VFL and its parent, Assurance,
are managed on a combined basis. Pursuant to a Reinsurance Pooling Agreement, as
amended, VFL cedes all of its business, excluding its separate account business,
to its parent, Assurance. This ceded 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.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles (GAAP). Certain amounts applicable to
prior years have been reclassified to conform to classifications followed in
1999.
The preparation of financial statements in conformity with 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.
INSURANCE
Premium revenue -- Revenues on universal life type contracts are comprised
of contract charges and fees which are recognized over the coverage period.
Accident and health insurance premiums are earned ratably over the terms of the
policies after provision for estimated adjustments on retrospectively rated
policies and deductions for ceded insurance. Other life insurance premiums are
recognized as revenue when due, after deductions for ceded insurance.
Future policy benefit reserves -- Reserves for traditional life insurance
products (whole and term life products) are computed based upon the net level
premium method using actuarial assumptions as to interest rates, mortality,
morbidity, withdrawals and expenses. Actuarial assumptions include a margin for
adverse deviation and generally vary by plan, age at issue and policy duration.
Interest rates range from 3% to 9%, and mortality, morbidity and withdrawal
assumptions reflect VFL and industry experience prevailing at the time of issue.
Expense assumptions include the estimated effects of inflation and expenses to
be incurred beyond the premium paying period. Reserves for universal life-type
contracts are equal to the account balances that accrue to the benefit of the
policyholders. Interest crediting rates ranged from 4.45% to 7.25% for the three
years ended December 31, 1999.
Claim and claim expense reserves -- Claim reserves include provisions for
reported claims in the course of settlement and estimates of unreported losses
based upon past experience and estimates of future expenses to be incurred in
settlement of claims.
Reinsurance -- In addition to the Reinsurance Pooling Agreement with
Assurance, VFL also assumes and cedes insurance with other insurers and
reinsurers and members of various reinsurance pools and associations. VFL
utilizes reinsurance arrangements to limit its maximum loss, provide greater
diversification
36
<PAGE> 37
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
of risk and minimize exposures on larger risks. The reinsurance coverages are
tailored to the specific risk characteristics of each product line with VFL's
retained amount varying by type of coverage. VFL's reinsurance includes
coinsurance, yearly renewable term and facultative programs. Amounts recoverable
from reinsurers are estimated in a manner consistent with the claim liability
and future policy benefit reserves.
Deferred acquisition costs -- Cost of acquiring life insurance business are
capitalized and amortized based on assumptions consistent with those used for
computing future policy benefit reserves. Acquisition costs on traditional life
business are amortized over the assumed premium paying periods. Universal life
and annuity acquisition costs are amortized in proportion to the present value
of the estimated gross profits over the products' assumed durations. To the
extent that unrealized gains or losses on available-for-sale securities would
result in an adjustment of deferred policy acquisition costs had those gains or
losses actually been realized, the related unamortized deferred policy
acquisition costs are recorded as an adjustment to the unrealized gains or
losses included in stockholder's equity.
INVESTMENTS
Valuation of investments -- VFL classifies its fixed maturities and its
equity securities as available-for-sale, and as such, they are carried at fair
value. The amortized cost of fixed maturities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization and accretion
are included in net investment income.
Policy loans are carried at unpaid balances. Short-term investments, which
have an original maturity of one year or less, are carried at amortized cost
which approximates market value. VFL has no real estate or mortgage loans.
VFL records its derivative securities at fair value at the reporting date
and changes in fair value are reflected in realized investment gains and losses.
VFL's derivatives are made up of interest rate caps and purchased options and
are classified as other invested assets.
Investment gains and losses -- All securities transactions are recorded on
the trade date. Realized investment gains and losses are determined on the basis
of the cost of the specific securities sold. Unrealized investment gains and
losses on fixed maturities and equity securities are reflected as part of
stockholder's equity, net of applicable deferred income taxes and deferred
acquisition costs. Investments are written down to estimated fair values and
losses are charged to income when a decline in value is considered to be other
than temporary.
Securities lending activities -- VFL lends securities to unrelated parties,
primarily major brokerage firms. Borrowers of these securities must deposit
collateral with VFL equal to 100% of the fair value of the securities if the
collateral is cash, or 102% if the collateral is securities. Cash deposits from
these transactions are invested in short term investments (primarily commercial
paper) and a liability is recognized for the obligation to return the
collateral. VFL continues to receive the interest on loaned debt securities as
beneficial owner, and accordingly, loaned debt securities are included in fixed
maturity securities. VFL had no securities on loan at December 31, 1999 or 1998.
Separate Account business -- VFL writes certain variable annuity contracts
and universal life policies. The supporting assets and liabilities of these
contracts and policies are legally segregated and reflected as assets and
liabilities of Separate Account business. Substantially all assets of the
Separate Account business are carried at fair value. Separate Account
liabilities are principally obligations due to contractholders and are carried
at contract values.
37
<PAGE> 38
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
VFL accounts for income taxes under the liability method. Under the
liability method deferred income taxes are recognized for temporary differences
between the financial statement and tax return bases of assets and liabilities.
Temporary differences primarily relate to insurance reserves, deferred
acquisition costs and net unrealized investment gains or losses.
NOTE 2. INVESTMENTS
The significant components of net investment income are presented in the
following table:
NET INVESTMENT INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1999 1998 1997
---------------------- ------- ------- -------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Fixed maturities -- Taxable bonds....................... $30,851 $27,150 $20,669
Equity securities....................................... 54 72 72
Policy loans............................................ 4,963 4,760 4,264
Short-term investments.................................. 2,969 3,803 4,885
Other................................................... 778 105 201
------- ------- -------
39,615 35,890 30,091
Investment expense...................................... 467 351 178
------- ------- -------
NET INVESTMENT INCOME......................... $39,148 $35,539 $29,913
======= ======= =======
</TABLE>
Net realized investment gains (losses) and unrealized appreciation
(depreciation) in investments are set forth in the following table:
ANALYSIS OF INVESTMENT GAINS (LOSSES)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1999 1998 1997
---------------------- -------- ------- -------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Realized investment gains (losses):
Fixed maturities..................................... $(20,981) $16,907 $ 3,333
Equity securities.................................... 1,667 0 1,021
Other................................................ 233 60 (154)
-------- ------- -------
(19,081) 16,967 4,200
Income tax benefit (expense)........................... 6,679 (5,938) (1,470)
-------- ------- -------
Net realized investment gains (losses)............ (12,402) 11,029 2,730
-------- ------- -------
Change in net unrealized investment gains (losses):
Fixed maturities..................................... (23,813) 441 5,806
Equity securities.................................... (1,186) (42) (607)
Adjustment to deferred policy acquisition costs
related to unrealized gains (losses) and other.... 1,235 (235) 20
-------- ------- -------
(23,764) 164 5,219
Deferred income tax (expense) benefit.................. 8,317 (57) (1,829)
-------- ------- -------
Change in net unrealized investment gains
(losses)........................................ (15,447) 107 3,390
-------- ------- -------
NET REALIZED AND UNREALIZED INVESTMENT GAINS
(LOSSES)................................... $(27,849) $11,136 $ 6,120
======== ======= =======
</TABLE>
38
<PAGE> 39
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SUMMARY OF GROSS REALIZED INVESTMENT GAINS (LOSSES) FOR FIXED MATURITIES AND
EQUITY SECURITIES
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ----------------------- -----------------------
FIXED EQUITY FIXED EQUITY FIXED EQUITY
YEAR ENDED DECEMBER 31 MATURITIES SECURITIES MATURITIES SECURITIES MATURITIES SECURITIES
---------------------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Proceeds from sales............ $1,339,905 $2,647 $741,277 $5 $278,459 $2,447
========== ====== ======== == ======== ======
Gross realized gains........... $ 4,399 $1,667 $ 17,604 $-- $ 4,793 $1,113
Gross realized losses.......... (25,380) -- (697) -- (1,460) (92)
---------- ------ -------- -- -------- ------
NET REALIZED GAINS
(LOSSES) ON
SALES.............. $ (20,981) $1,667 $ 16,907 $-- $ 3,333 $1,021
========== ====== ======== == ======== ======
</TABLE>
ANALYSIS OF NET UNREALIZED INVESTMENT GAINS (LOSSES) INCLUDED IN ACCUMULATED
OTHER COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
1999 1998
---------------------------- --------------------------
DECEMBER 31 GAINS LOSSES NET GAINS LOSSES NET
----------- ------ -------- -------- ------ ------- -------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities.................... $ 666 $(18,598) $(17,932) $6,926 $(1,045) $ 5,881
Equity securities................... 51 -- 51 1,237 -- 1,237
Adjustment to deferred policy
acquisition costs related to
unrealized gains (losses) and
other............................. 1,468 (448) 1,020 -- (215) (215)
------ -------- -------- ------ ------- -------
$2,185 $(19,046) (16,861) $8,163 $(1,260) 6,903
====== ======== ====== =======
Deferred income tax benefit
(expense)......................... 5,901 (2,416)
-------- -------
NET UNREALIZED INVESTMENT GAINS
(LOSSES)..................... $(10,960) $ 4,487
======== =======
</TABLE>
39
<PAGE> 40
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SUMMARY OF INVESTMENTS IN FIXED MATURITIES AND EQUITY SECURITIES AVAILABLE FOR
SALE
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
DECEMBER 31, 1999 COST GAINS LOSSES FAIR VALUE
----------------- --------- ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
U.S. Treasuries and obligations of government
agencies......................................... $253,041 $ -- $ 6,988 $246,053
Asset-backed securities............................ 107,275 50 4,200 103,125
Corporate securities............................... 164,140 98 6,914 157,324
Other debt securities.............................. 23,988 518 496 24,010
-------- ------ ------- --------
Total fixed maturities................... 548,444 666 18,598 530,512
Equity securities.................................. -- 51 -- 51
-------- ------ ------- --------
Total.................................... $548,444 $ 717 $18,598 $530,563
======== ====== ======= ========
DECEMBER 31, 1998
---------------------------------------------------
U.S. Treasuries and obligations of government
agencies......................................... $223,743 $1,601 $ 563 $224,781
Asset-backed securities............................ 109,207 1,163 180 110,190
Corporate securities............................... 98,466 2,512 81 100,897
Other debt securities.............................. 23,219 1,650 221 24,648
-------- ------ ------- --------
Total fixed maturities................... 454,635 6,926 1,045 460,516
Equity securities.................................. 981 1,237 -- 2,218
-------- ------ ------- --------
Total.................................... $455,616 $8,163 $ 1,045 $462,734
======== ====== ======= ========
</TABLE>
SUMMARY OF INVESTMENTS IN FIXED MATURITIES BY CONTRACTUAL MATURITY
<TABLE>
<CAPTION>
1999
--------------------------
AMORTIZED
DECEMBER 31 COST FAIR VALUE
----------- ----------- ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Due in one year or less..................................... $ 4,130 $ 4,115
Due after one year through five years....................... 180,447 176,798
Due after five years through ten years...................... 194,438 188,778
Due after ten years......................................... 62,154 57,697
Asset-backed securities not due at a single maturity date... 107,275 103,124
-------- --------
Total............................................. $548,444 $530,512
======== ========
</TABLE>
Actual maturities may differ from contractual maturities because securities
may be called or prepaid with or without call or prepayment penalties.
There are no investments, other than equity securities, that have not
produced income for the years ended December 31, 1999 and 1998. Except for
investments in securities of the U.S. Government and its Agencies, there are no
investments in a single issuer that when aggregated exceed 10% of stockholder's
equity at December 31, 1999.
Securities with carrying values of $2.7 million and $2.8 million were
deposited by VFL under requirements of regulatory authorities as of December 31,
1999 and 1998, respectively.
40
<PAGE> 41
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. FINANCIAL INSTRUMENTS
In the normal course of business, VFL invests in various financial assets,
incurs various financial liabilities, and enters into agreements involving
derivative securities, including off-balance sheet financial instruments.
Fair values are required to be disclosed for all financial instruments,
whether or not recognized in the balance sheets, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values may be based on estimates using present value or other valuation
techniques. These techniques are significantly affected by the assumptions used,
including the discount rates and estimates of future cash flows. Potential taxes
and other transaction costs have not been considered in estimating fair value.
The estimates presented herein are subjective in nature and are not necessarily
indicative of the amounts VFL could realize in a current market exchange.
All non-financial instruments such as deferred acquisition costs,
reinsurance receivables, deferred income taxes and insurance reserves are
excluded from fair value disclosure. Thus, the total fair value amounts cannot
be aggregated to determine the underlying economic value of VFL.
The carrying amounts reported in the balance sheet approximate fair value
for cash, short-term investments, accrued investment income, receivables for
securities sold, payables for securities purchased and certain other assets and
other liabilities because of their short-term nature. Accordingly, these
financial instruments are not listed in the table below. The carrying amounts
and estimated fair values of VFL's other financial instrument assets and
liabilities are listed below:
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
DECEMBER 31 AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- -------- ---------- -------- ----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Investments:
Fixed maturities...................... $530,512 $530,512 $460,516 $460,516
Equity securities..................... 51 51 2,218 2,218
Policy loans.......................... 93,575 87,156 74,150 72,148
Other................................. 433 433 485 485
Separate Account business:
Fixed maturities...................... 12,999 12,999 247 247
Equity securities (primarily mutual
funds).............................. 175,772 175,772 55,577 55,577
Other................................. 119 119 340 340
FINANCIAL LIABILITIES
Premium deposits and annuity contracts... 294,777 278,810 332,665 312,979
======== ======== ======== ========
</TABLE>
The following methods and assumptions were used by VFL in estimating the
fair value amounts for financial instruments:
Fixed maturities and equity securities are based on quoted market
prices, where available. For securities not actively traded, fair values
are estimated using values obtained from independent pricing services,
costs to settle, or quoted market prices of comparable instruments.
The fair values for policy loans are estimated using discounted cash
flow analyses at interest rates currently offered for similar loans to
borrowers with comparable credit ratings. Loans with similar
characteristics are aggregated for purposes of the calculations.
41
<PAGE> 42
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Valuation techniques to determine fair value of Separate Account
business assets consist of discounted cash flows and quoted market prices
of (a) the investments or (b) comparable instruments. The fair value of
Separate Account business liabilities approximates their carrying value.
Premium deposits and annuity contracts are valued based on cash
surrender values and the outstanding fund balances.
VFL invests from time to time in certain derivative financial instruments
primarily to reduce its exposure to market risk. Financial instruments used for
such purposes may include interest rate caps, put and call options, commitments
to purchase securities, futures and forwards. VFL also uses derivatives to
mitigate the risk associated with certain guaranteed annuity contracts by
purchasing certain options in a notional amount equal to the original customer
deposit. VFL generally does not hold or issue these instruments for trading
purposes.
Options are contracts that grant the purchaser, for a premium payment, the
right, but not the obligation, to either purchase or sell a financial instrument
at a specified price within a specified period of time.
An interest rate cap consists of a guarantee given by the issuer to the
purchaser in exchange for the payment of a premium. This guarantee states that
if interest rates rise above a specified rate, the issuer will pay to the
purchaser the difference between the then current market rate and the specified
rate on the notional principal amount. The notional principal amount is not
actually borrowed or repaid.
Derivative financial instruments consist of interest rate caps in the
general account and purchased options in the Separate Accounts at December 31,
1999. The gross notional principal or contractual amounts of derivative
financial instruments in the general account at December 31, 1999 and 1998
totaled $50 million. The gross notional principal or contractual amounts of
derivative financial instruments in the Separate Accounts was $295 thousand at
December 31, 1999 and was $1.5 million at December 31, 1998 as the separate
accounts sold approximately $1.2 million of notional value in 1999. The contract
of notional amounts are used to calculate the exchange of contractual payments
under the agreements and are not representative of the potential for gain or
loss on these agreements.
The fair values associated with derivative financial instruments are
generally affected by interest rates, equity stock prices and foreign exchange
rates. The credit exposure associated with these instruments is generally
limited to the unrealized fair value of the instruments and will vary based on
the credit worthiness of the counterparties. The risk of default depends on the
creditworthiness of the counterparty to the instrument. Although VFL is exposed
to the aforementioned credit risk, it does not expect any counterparty to fail
to perform as contracted based on the creditworthiness of the counterparties.
Due to the nature of the derivative securities, VFL does not require collateral.
The fair value of derivatives generally reflects the estimated amounts that
VFL would receive or pay upon termination of the contracts at the reporting
date. Dealer quotes are available for substantially all of VFL's derivatives.
For securities not actively traded, fair values are estimated using values
obtained from independent pricing services, costs to settle, or quoted market
prices of comparable instruments. The fair value of derivative financial assets
(liabilities) in the general account and Separate Accounts at December 31, 1999
totaled $0.4 million and $0.1 million, respectively, and compares to $0.1
million and $0.5 million, respectively, at December 31, 1998. Net realized gains
(losses) on derivative financial instruments at December 31, 1999 totaled $0.4
million in the general account and ($0.1) million in the Separate Accounts. At
December 31, 1998, net realized losses on derivative financial instruments held
in the general account totaled $0.2 million and net realized gains on
derivatives in the Separate Accounts were $0.1 million.
42
<PAGE> 43
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. STATUTORY CAPITAL AND SURPLUS (UNAUDITED)
Statutory capital and surplus and net income for VFL are determined in
accordance with accounting practices prescribed or permitted by the Pennsylvania
Insurance Department. Prescribed statutory accounting practices are set forth in
a variety of publications of the National Association of Insurance Commissioners
as well as state laws, regulations, and general administrative rules. VFL has no
material permitted accounting practices. VFL had statutory net income of $8.3
million for the year ended December 31, 1999 and statutory net losses of $8.1
million, and $1.0 million for the years ended December 31, 1998, and 1997
respectively. The statutory net losses for 1998 and 1997 were primarily due to
the immediate expensing of acquisition costs which were substantial and related
sales of individual life and annuity products. Under GAAP, such costs are
capitalized and amortized to income over the duration of these contracts.
Statutory capital and surplus for VFL was $153.1 million, $147.1 million, and
$125.3 million at December 31, 1999, 1998, and 1997, respectively.
The payment of dividends by VFL to Assurance without prior approval of the
Pennsylvania Insurance Department is limited to formula amounts. As of December
31, 1999, dividends of approximately $15.7 million were not subject to prior
Insurance Department approval.
NOTE 5. ACCUMULATED OTHER COMPREHENSIVE INCOME
Comprehensive income is comprised of all changes to stockholder's equity,
including net income, except those changes resulting from investments by, and
distributions to, the stockholder. Other comprehensive income (loss) is
comprehensive income exclusive of net income. The change in the components of
accumulated other comprehensive income (loss) are shown in the following tables.
<TABLE>
<CAPTION>
PRE-TAX TAX (EXPENSE) NET
YEAR ENDED DECEMBER 31, 1999 AMOUNT BENEFIT AMOUNT
---------------------------- -------- ------------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Net unrealized gains (losses) on investment securities:
Net unrealized holding gains (losses) arising during the
period............................................... $(19,684) $ 6,889 $(12,795)
Adjustment for (gains) losses included in net income.... (4,080) 1,428 (2,652)
-------- ------- --------
Total Other Comprehensive Income (Losses)................. $(23,764) $ 8,317 $(15,447)
======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
PRE-TAX TAX (EXPENSE) NET
YEAR ENDED DECEMBER 31, 1998 AMOUNT BENEFIT AMOUNT
---------------------------- -------- ------------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Net unrealized gains on investment securities:
Net unrealized holding gains (losses) arising during the
period............................................... $ 3,756 $(1,314) $ 2,442
Adjustment for (gains) losses included in net income.... (3,592) 1,257 (2,335)
-------- ------- --------
Total Other Comprehensive Income.......................... $ 164 $ (57) $ 107
======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
PRE-TAX TAX (EXPENSE) NET
YEAR ENDED DECEMBER 31, 1997 AMOUNT BENEFIT AMOUNT
---------------------------- -------- ------------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Net unrealized gains (losses) on investment securities:
Net unrealized holding gains (losses) arising during the
period............................................... $ 6,447 $(2,256) $ 4,191
Adjustment for (gains) losses included in net income.... (1,228) 427 (801)
-------- ------- --------
Total Other Comprehensive Income.......................... $ 5,219 $(1,829) $ 3,390
======== ======= ========
</TABLE>
43
<PAGE> 44
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. BENEFIT PLANS
VFL has no employees as it has contracted with Casualty for services
provided by Casualty employees. As Casualty is a wholly-owned subsidiary of
CNAF, all Casualty employees are covered by CNAF's Benefit Plans. The plans are
discussed below.
PENSION PLAN
CNAF has noncontributory pension plans covering all full-time employees age
21 or over that have completed at least one year of service. While the benefits
for the plans vary, they are generally based on years of credited service and
the employee's highest sixty consecutive months of compensation. Casualty is
included in the CNA Employees' Retirement Plan and VFL is allocated a share of
these expenses. The net pension cost allocated to VFL was $1.0 million, $1.1
million and $4.0 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
CNAF provides certain health and dental care benefits for eligible retirees
through age 64, and provides life insurance and reimbursement of Medicare Part B
premiums for all eligible retired persons. CNAF funds benefit costs principally
on the basis of current benefit payments. Net postretirement benefit cost
allocated to VFL was $0.3 million, $0.5 million and $2.1 million for the years
ended December 31, 1999, 1998 and 1997, respectively.
SAVINGS PLAN
Casualty is included in the CNA Employees' Savings Plan, which is a
contributory plan that allows employees to make regular contributions of up to
16% of their salary subject to limitations prescribed by the Internal Revenue
Service. VFL is allocated a share of CNA Employees' Savings Plan expenses. CNAF
contributes an amount equal to 70% of the first 6% of salary contributed by the
employee. CNAF contributions allocated to and expensed by VFL for the Savings
Plan were $0.2 million in each year 1999, 1998 and 1997.
NOTE 7. INCOME TAXES
VFL is taxed under the provisions of the Internal Revenue Code, as
applicable to life insurance companies, and is included along with Assurance,
its parent company, which is ultimately included in the consolidated Federal
income tax return of Loews. The Federal income tax provision of VFL generally is
computed on a stand-alone basis, as if VFL was filing its own separate tax
return.
VFL maintains a special tax memorandum account designated as the
"Shareholder's Surplus Account." Dividends from this account may be distributed
to the shareholder without resulting in any additional tax. The amount in the
Shareholder's Surplus Account was $151.6 million and $156.3 million at December
31, 1999 and 1998, respectively. Another tax memorandum account, defined as the
"Policyholders' Surplus Account," totaled $5.4 million at both December 31, 1999
and 1998. No further additions to this account are allowed. Amounts accumulated
in the Policyholders' Surplus Account are subject to income tax if distributed
to the stockholder. VFL has no plans for such a distribution and as a result,
has not provided for such a tax.
44
<PAGE> 45
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of VFL's net deferred tax liabilities as of December
31, 1999 and 1998 are shown in the table below:
<TABLE>
<CAPTION>
DECEMBER 31 1999 1998
----------- ----------- -----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Insurance reserves.......................................... $ 20,715 $ 26,880
Deferred acquisition costs.................................. (45,457) (37,729)
Investment valuation........................................ 4,166 3,693
Net unrealized gains........................................ 5,901 (2,416)
Annuity deposits and other.................................. 9,349 1,009
Other, net.................................................. 2,632 2,350
-------- --------
NET DEFERRED TAX LIABILITIES...................... $ (2,694) $ (6,213)
======== ========
</TABLE>
At December 31, 1999, gross deferred tax assets and liabilities amounted to
$44.3 million and $47.0 million, respectively. Gross deferred tax assets and
liabilities, at December 31, 1998, amounted to $35.5 million and $41.7 million,
respectively.
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1999 1998 1997
---------------------- ------- ------ ------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Current tax expense (benefit)............................. $(2,837) $7,033 $4,716
Deferred tax expense...................................... 4,924 2,058 2,581
------- ------ ------
TOTAL INCOME TAX EXPENSE........................ $ 2,087 $9,091 $7,297
======= ====== ======
</TABLE>
A reconciliation of the statutory federal income tax rate on income is as
follows:
<TABLE>
<CAPTION>
% OF % OF % OF
PRETAX PRETAX PRETAX
YEAR ENDED DECEMBER 31 1999 INCOME 1998 INCOME 1997 INCOME
---------------------- ------ ------ ------ ------ ------ ------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Income taxes at statutory rates.... $2,136 35.0 $9,290 35.0 $7,219 35.0
Other.............................. (49) (0.8) (199) (0.8) 78 0.4
------ ---- ------ ---- ------ ----
INCOME TAX AT EFFECTIVE RATES.... $2,087 34.2 $9,091 34.2 $7,297 35.4
====== ==== ====== ==== ====== ====
</TABLE>
NOTE 8. REINSURANCE
The ceding of insurance does not discharge primary liability of VFL. VFL
places reinsurance with other carriers only after careful review of the nature
of the contract and a thorough assessment of the reinsurers' credit quality and
claim settlement performance. For carriers that are not authorized reinsurers in
VFL's state of domicile, VFL receives collateral, primarily in the form of bank
letters of credit.
45
<PAGE> 46
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In the table below, the majority of life premium revenue is from long
duration type contracts, while the majority of accident and health insurance
premiums is from short duration contracts. The effects of reinsurance on premium
revenues are shown in the following table:
<TABLE>
<CAPTION>
PREMIUMS
----------------------------------------- ASSUMED/NET
YEAR ENDED DECEMBER 31 DIRECT ASSUMED CEDED NET %
---------------------- -------- -------- -------- -------- -----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
1999
Life................................. $633,764 $109,964 $666,003 $ 77,725 141%
Accident and Health.................. 6,539 232,994 6,539 232,994 100
-------- -------- -------- -------- ---
Total premiums............... $640,303 $342,958 $672,542 $310,719 110%
======== ======== ======== ======== ===
1998
Life................................. $687,644 $ 78,156 $690,541 $ 75,259 104%
Accident and Health.................. 4,158 240,340 4,158 240,340 100
-------- -------- -------- -------- ---
Total premiums............... $691,802 $318,496 $694,699 $315,599 101%
======== ======== ======== ======== ===
1997
Life................................. $564,891 $ 81,502 $567,217 $ 79,176 103%
Accident and Health.................. 2,776 252,996 2,776 252,996 100
-------- -------- -------- -------- ---
Total premiums............... $567,667 $334,498 $569,993 $332,172 101%
======== ======== ======== ======== ===
</TABLE>
Transactions with Assurance, as part of the Pooling Agreement described in
Note 1, are reflected in the above table. Premium revenues ceded to
non-affiliated companies were $395.2 million, $263.4 million and $116.2 million
for the years ended December 31, 1999, 1998 and 1997, respectively.
Additionally, benefits and expenses for insurance claims and policyholder
benefits are net of reinsurance recoveries from non-affiliated companies of
$263.4 million, $203.4 million and $77.8 million for the years ended December
31, 1999, 1998 and 1997, respectively.
Reinsurance receivables reflected on the balance sheets are amounts
recoverable from reinsurers who have assumed a portion of the Company's
insurance reserves. These balances are principally due from Assurance pursuant
the Reinsurance Pooling Agreement.
The impact of reinsurance, including transactions with Assurance, on life
insurance in force is shown in the following schedule:
<TABLE>
<CAPTION>
LIFE INSURANCE IN FORCE
--------------------------------------- ASSUMED/NET
YEAR ENDED DECEMBER 31 DIRECT ASSUMED CEDED NET %
---------------------- -------- ------- -------- ------- -----------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
December 31, 1999........................ $267,102 $42,629 $281,883 $27,848 153.1%
December 31, 1998........................ $224,615 $32,253 $230,734 $26,134 123.4
December 31, 1997........................ $166,308 $25,557 $168,353 $23,512 108.7
</TABLE>
NOTE 9. RELATED PARTIES
As discussed in Note 1, VFL is party to a Reinsurance Pooling Agreement
with its parent, Assurance. 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 companies. 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 are ten percent of the acquisition and underwriting expenses
of the combined pool. Pursuant to the foregoing agreements, VFL recorded
amortization of deferred acquisition costs and other operating expenses totaling
$37.5 million, $47.6 million and $45.3 million for 1999,
46
<PAGE> 47
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1998 and 1997, respectively. Expenses of VFL exclude $5.6 million, $9.2 million
and $9.9 million of general and administrative expenses incurred by VFL and
allocated to CNAF for the years ended December 31, 1999, 1998 and 1997,
respectively. At December 31, 1999 VFL had a payable of $12.4 million to
affiliated companies and a $1.9 million payable at December 31, 1998.
There are no interest charges on intercompany receivables or payables. In
1998, Assurance made a $30.0 million capital contribution to VFL.
NOTE 10. LEGAL
VFL is party to litigation arising in the ordinary course of business. The
outcome of this litigation will not, in the opinion of management, materially
affect the results of operations or stockholder's equity of VFL.
NOTE 11. BUSINESS SEGMENTS
VFL operates in one reportable segment, the business of which is to market
and underwrite insurance products designed to satisfy the life, health and
retirement needs of individuals and groups. VFL products are distributed
primarily in the United States. Premium revenues earned outside the United
States are not material.
The operations, assets and liabilities of VFL and its parent, Assurance,
are managed on a combined basis. Pursuant to a Reinsurance Pooling Agreement, as
amended, VFL cedes all of its business, excluding its Separate Account business,
to Assurance which is then pooled with the business of Assurance, excluding
Assurance's participating contracts and separate account business, and 10% of
the combined pool is assumed by VFL.
The following presents premiums by product group for each of the years in
the three years ended December 31, 1999:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Life................................................. $ 77,725 $ 75,259 $ 79,176
Accident and Health.................................. 232,994 240,340 252,996
-------- -------- --------
Total...................................... $310,719 $315,599 $332,172
-------- -------- --------
</TABLE>
Assurance provides health insurance benefits to postal and other federal
employees under the Federal Employees Health Benefit Plan (FEHBP). Premiums
under this contract totaled $2.1 billion, $2.0 billion and $2.1 billion for the
years ended December 31, 1999, 1998 and 1997, respectively, and the portion of
these premiums assumed by VFL under the Reinsurance Pooling Agreement totaled
$209 million, $202 million and $212 million for the years ended December 31,
1999, 1998 and 1997, respectively.
NOTE 12. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
In the first quarter of 1999, VFL adopted Statement of Position 97-3
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments" (SOP 97-3). SOP 97-3 requires that insurance companies recognize
liabilities for insurance-related assessments when an assessment is probable and
will be imposed, when it can be reasonably estimated, and when the event
obligating the entity to pay or probable assessment has occurred on or before
the date of the financial statements. Adoption of SOP 97-3 resulted in an after
tax charge of $234 thousand ($360 thousand, pretax) as a cumulative effect of a
change in accounting principle. The pro forma effect of adoption on reported
results for prior periods is not significant.
47
