333-85511
File Nos. 811-7547
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 1 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 9 [X]
(Check appropriate box or boxes.)
Valley Forge Life Insurance Company Variable Annuity Separate Account
_____________________________________________________________________
(Exact Name of Registrant)
Valley Forge Life Insurance Company
___________________________________
(Name of Depositor)
CNA Plaza, 43 South, Chicago, Illinois 60685
____________________________________________________________ __________
(Address of Depositor's Principal Executive Offices) (Zip Code)
Depositor's Telephone Number, including Area Code (312) 822-6597
Name and Address of Agent for Service
Jonathan D. Kantor
Senior Vice President, General
Counsel and Secretary
Valley Forge Life Insurance Company
CNA Plaza, 43 South
Chicago, Illinois 60685
Copies to:
Judith A. Hasenauer
Blazzard, Grodd & Hasenauer, P.C.
4401 West Tradewinds Avenue
Suite 207
Lauderdale by the Sea, FL 33308
(954) 771-7909
It is proposed that this filing will become effective:
_X_ immediately upon filing pursuant to paragraph (b) of Rule 485
___ on (date) pursuant to paragraph (b) of Rule 485
___ 60 days after filing pursuant to paragraph (a) (1) of Rule 485
___ on (date) pursuant to paragraph (a) (1) of Rule 485
If appropriate, check the following:
___ this post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
Title of Securities Registered:
Individual Deferred Variable Annuity Contracts
<TABLE>
<CAPTION>
CROSS REFERENCE SHEET
(Required by Rule 495)
Item No. Location
- -------- --------
PART A
<S> <C>
Item 1. Cover Page Cover Page
Item 2. Definitions Index of Special of Terms
Item 3. Synopsis Highlights
Item 4. Condensed Financial Information Not Applicable
Item 5. General Description of Registrant,
Depositor, and Portfolio Companies The Company, Distributor,
CROSS REFERENCE SHEET (CONT'D)
(Required by Rule 495)
Item No. Location
- -------- --------
Investment Choices
Item 6. Deductions and Expenses Expenses
Item 7. General Description of Variable The Annuity Contract
Annuity Contracts
Item 8. Annuity Period Annuity Provisions
Item 9. Death Benefit Death Benefit
Item 10. Purchases and Contract Value Purchase, Contract Value
Item 11. Redemptions Access to Your Money
Item 12. Taxes Taxes
Item 13. Legal Proceedings Not Applicable
Item 14. Table of Contents of the Statement of Other Information
Additional Information
PART B
Item 15. Cover Page Cover Page
Item 16. Table of Contents Table of Contents
Item 17. General Information and History Company
Item 18. Services Not Applicable
Item 19. Purchase of Securities Being Offered Not Applicable
Item 20. Underwriters Distribution
Item 21. Calculation of Performance Data Performance Information
Item 22. Annuity Payments Annuity Provisions
Item 23. Financial Statements Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the appropriate
Item so numbered, in Part C to this Registration Statement.
PART A
VALLEY FORGE LIFE INSURANCE COMPANY
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY
This prospectus describes the variable annuity contract offered by Valley Forge
Life Insurance Company (we, us, our). This is an individual deferred variable
annuity contract and provides for accumulation of contract values and annuity
payments on a fixed and variable basis.
The contract has a number of investment choices (fixed accounts and variable
investment options). The fixed accounts provide an investment rate guaranteed by
us. You can put your money in the fixed accounts and/or any of the following
investment options which are offered through our variable account, Valley Forge
Life Insurance Company Variable Annuity Separate Account. Some of the investment
options may not be available in your state.
FEDERATED INSURANCE SERIES
Advised by Federated Investment Management Company
Federated High Income Bond Fund II
Federated Prime Money Fund II
Federated Utility Fund II
THE ALGER AMERICAN FUND
Advised by Fred Alger Management, Inc.
Alger American Growth Portfolio
Alger American Mid-Cap Growth Portfolio
Alger American Small Capitalization Portfolio
SOGEN VARIABLE FUNDS, INC.
Advised by Societe Generale Asset Management Corp.
SoGen Overseas Variable Fund
VAN ECK WORLDWIDE INSURANCE TRUST
Advised by Van Eck Associates Corporation
Van Eck Worldwide Emerging Markets Fund
Van Eck Worldwide Hard Assets Fund
VARIABLE INSURANCE PRODUCTS FUND (VIP) and
VARIABLE INSURANCE PRODUCTS FUND II (VIP II)
Advised by Fidelity Management & Research Company
Fidelity VIP II Asset Manager Portfolio
Fidelity VIP II Contrafund Portfolio
Fidelity VIP Equity-Income Portfolio
Fidelity VIP II Index 500 Portfolio
MFS VARIABLE INSURANCE TRUST
Advised by MFS Investment Management
MFS Emerging Growth Series
MFS Growth With Income Series
MFS Research Series
MFS Total Return Series
JANUS ASPEN SERIES
Advised by Janus Capital Corporation
Janus Aspen Capital Appreciation Portfolio
Janus Aspen Growth Portfolio
Janus Aspen Balanced Portfolio
Janus Aspen Flexible Income Portfolio
Janus Aspen International Growth Portfolio
Janus Aspen Worldwide Growth Portfolio
ALLIANCE VARIABLE PRODUCTS SERIES FUND, Class B Shares
Advised by Alliance Capital Management, L.P.
Alliance Premier Growth Portfolio
Alliance Growth and Income Portfolio
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
Advised by American Century Investment Management, Inc.
American Century VP Income & Growth Fund
American Century VP Value Fund
TEMPLETON VARIABLE PRODUCTS SERIES FUND, CLASS 2 SHARES
Advised by Templeton Asset Management Ltd.
Templeton Developing Markets Fund
Advised by Templeton Investment Counsel, Inc.
Templeton Asset Allocation Fund
LAZARD RETIREMENT SERIES
Advised by Lazard Asset Management
Lazard Retirement Equity Portfolio
Lazard Retirement Small Cap Portfolio
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
Advised by Morgan Stanley Dean Witter Investment Management Inc.
Morgan Stanley International Magnum Portfolio
Morgan Stanley Emerging Markets Equity Portfolio
Please read this Prospectus before investing. You should keep it for future
reference. It contains important information about the contract.
The expenses for a contract with immediate interest payments are higher than
a contract without immediate interest payments and the amount of the immediate
interest payments may be more than offset by the additional expenses
attributable to the immediate interest payments.
To learn more about the contract, you can obtain a copy of the Statement of
Additional Information (SAI) (dated February 11, 2000). The SAI has been filed
with the Securities and Exchange Commission (SEC) and is legally a part of
this prospectus. The SEC maintains a Web site (http://www.sec.gov) that
contains the SAI, material incorporated by reference and other information
regarding companies that file electronically with the SEC. The Table of
Contents of the SAI is on page _ of this prospectus. For a free copy of the
SAI, call us at (800) 262-1755 or write to: Valley Forge Life, Administrative
Office, 100 CNA Drive, Nashville, TN 37214.
The Contracts:
* are not bank deposits.
* are not federally insured.
* are not endorsed by any bank or governmental agency.
* are not guaranteed and may be subject to loss of principal.
The SEC has not approved or disapproved these securities or determined that
this prospectus is accurate or complete. Any representation that it has
is a criminal offense.
February 11, 2000
TABLE OF CONTENTS
Page
INDEX OF SPECIAL TERMS
HIGHLIGHTS
TABLE OF FEES AND EXPENSES
THE COMPANY
THE ANNUITY CONTRACT
PURCHASE
INVESTMENT CHOICES
EXPENSES
CONTRACT VALUE
WITHDRAWALS
DEATH BENEFIT
ANNUITY PROVISIONS
TAXES
PERFORMANCE
OTHER INFORMATION
INDEX OF SPECIAL TERMS
We have tried to make this prospectus as readable and understandable for you as
possible. By the very nature of the contract, however, certain technical words
or terms are unavoidable. We have identified the following as some of these
words or terms. We indicated below the page in which we believe you will find
the best explanation for the word or term. These words and terms are in italics
on the indicated page.
Page
Accumulation Period
Accumulation Unit
Annuitant
Annuity Date
Annuity Payment Options
Annuity Payments
Annuity Period
Annuity Unit
Beneficiary
Investment Options
Non-Qualified
Qualified
HIGHLIGHTS
The variable annuity contract that we are offering is a contract between you,
the owner, and us, the insurance company. The contract provides a means for
investing on a tax-deferred basis in our fixed account options and investment
options. The contract is intended for retirement savings or other long-term
investment purposes.
The contract has an immediate interest feature in which we will add an
additional 3% to each purchase payment you make during the first contract year.
The contract, as in all deferred annuity contracts, has two phases: the
accumulation period and the annuity period. During the accumulation period,
earnings accumulate on a tax-deferred basis and are taxed as income when you
make a withdrawal. If you make a withdrawal during the accumulation period, we
may also assess a withdrawal charge of up to 7%. The annuity period occurs when
you begin receiving regular payments from your contract.
You can choose to receive annuity payments on a variable basis, a fixed basis,
or a combination of both. If you choose variable payments, the amount of the
variable annuity payments will depend upon the investment performance of the
investment options you select for the annuity period. If you choose fixed
payments, the amount of the fixed annuity payments are level for the annuity
period.
Free Look. If you cancel the contract within 10 days after receiving it (or
whatever period is required in your state), we will cancel the contract without
charging a withdrawal fee. You will receive whatever your contract is worth on
the day that we receive your request. This amount may be more or less than your
original payment. We will return your original payment if required by law.
Tax Penalty. The earnings in your contract are not taxed until you take money
out of your contract. If you take money out during the accumulation period, for
tax purposes any earnings are deemed to come out first. If you are younger than
59 1/2 when you take money out, you may be charged a 10% federal tax penalty on
those earnings. Payments during the annuity period are considered partly a
return of your original investment.
Inquiries. If you need more information, please contact us at:
Valley Forge Life Insurance Company
100 CNA Drive
Nashville, TN 37214
(800) 262-1755
<TABLE>
<CAPTION>
TABLE OF FEES AND EXPENSES
Owner Transaction Expenses
Withdrawal Charge: (as a percentage of purchase payments withdrawn) (See Note 2)
Number of Contract Years
From Receipt of Purchase Payment Withdrawal Charge
<S> <C> <C>
1 7%
2 7%
3 6%
4 6%
5 5%
6 4%
7 3%
8 and thereafter 0%
Transfer Fee: No charge for the first 12 transfers in a
contract year during the accumulation period;
thereafter, the fee is $25 per transfer. There is
no charge for the 4 allowable transfers in a
contract year during the annuity period.
Contract Maintenance Charge: (See Note 3) $30 per contract year.
Variable Account Annual Expenses
(as a percentage of average variable account value)
Product Expense Charge (mortality and expense
risk charge and administrative charge): (See Note 4) 1.40%
</TABLE>
<TABLE>
<CAPTION>
Investment Option Expenses: (as a percentage of the average daily net assets of
an investment option)
Other Total Annual
Expenses (after Expenses (after
waivers and/or waivers and/or
reimbursements reimbursements
with respect with respect
to certain to certain
Management 12b-1 investment investment
(Advisory Fees) Fees options) options)
--------------- ---- -------- --------
Federated Insurance Series (See Note 6)
<S> <C> <C> <C>
Federated High Income Bond Fund II 0.60% 0.18% 0.78%
Federated Prime Money Fund II 0.49% 0.31% 0.80%
Federated Utility Fund II 0.68% 0.25% 0.93%
The Alger American Fund
Alger American Growth Portfolio 0.75% 0.04% 0.79%
Alger American Mid-Cap Growth Portfolio 0.80% 0.04% 0.84%
Alger American Small Capitalization Portfolio 0.85% 0.04% 0.89%
SoGen Variable Funds, Inc. (See Note 7)
SoGen Overseas Variable Fund 0.75% 0.89% 1.64%
Van Eck Worldwide Insurance Trust
Van Eck Worldwide Emerging Markets Fund (See Note 8) 1.00% 0.61% 1.61%
Van Eck Worldwide Hard Assets Fund (See Note 9) 1.00% 0.20% 1.20%
Variable Insurance Products Fund (VIP) and Variable
Insurance Products Fund II (VIP II) (See Note 10)
Fidelity VIP II Asset Manager Portfolio 0.54% 0.10% 0.64%
Fidelity VIP II Contrafund 0.59% 0.11% 0.70%
Fidelity VIP Equity-Income 0.49% 0.09% 0.58%
Fidelity VIP Index 500 Portfolio 0.24% 0.11% 0.35%
MFS Variable Insurance Trust (See Note 11)
MFS Emerging Growth Series 0.75% 0.10% 0.85%
MFS Growth With Income Series 0.75% 0.13% 0.88%
MFS Research Series 0.75% 0.11% 0.86%
MFS Total Return Series 0.75% 0.16% 0.91%
Janus Aspen Series (See Note 12)
Janus Aspen Capital Appreciation Portfolio 0.70% 0.22% 0.92%
Janus Aspen Growth Portfolio 0.65% 0.03% 0.68%
Janus Aspen Balanced Portfolio 0.72% 0.02% 0.74%
Janus Aspen Flexible Income Portfolio 0.65% 0.08% 0.73%
Janus Aspen International Growth Portfolio 0.66% 0.20% 0.86%
Janus Aspen Worldwide Growth Portfolio 0.65% 0.07% 0.72%
Alliance Variable Products Fund, Class B Shares
Alliance Premier Growth Portfolio (See Note 13) 0.97% 0.25% 0.09% 1.31%
Alliance Growth and Income Portfolio 0.63% 0.25% 0.10% 0.98%
American Century Variable Portfolios, Inc.
American Century VP Income & Growth Fund 0.70% - 0.00% 0.70%
American Century VP Value Fund 1.00% - 0.00% 1.00%
Templeton Variable Products Series Fund, Class 2 Shares
Templeton Developing Markets Fund 1.25% 0.25% 0.41% 1.91%
Templeton Asset Allocation Fund 0.60% 0.25% 0.18% 1.03%
Lazard Retirement Series (See Note 14)
Lazard Retirement Equity Portfolio 0.75% 0.25% 0.25% 1.25%
Lazard Retirement Small Cap Portfolio 0.75% 0.25% 0.25% 1.25%
Morgan Stanley Dean Witter Universal Funds, Inc. (See
Note 15)
Morgan Stanley International Magnum Portfolio 0.15% - 1.00% 1.15%
Morgan Stanley Emerging Markets Equity Portfolio 0.00% - 1.95% 1.95%
</TABLE>
Examples
The examples below are designed to help you to understand the expenses in a
contract. You should not consider these examples to represent the actual
expenses you would pay. The actual expenses may be greater or less than those
shown.
If you surrendered your contract after the end of the specified time period, you
would pay the following aggregate expenses on a $1,000 investment, assuming a 5%
annual return:
<TABLE>
<CAPTION>
Investment Option 1 Year 3 Years 5 Years 10 Years
- ----------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Federated High Income Bond Fund II $ 96 $140 $186 $289
Federated Prime Money Fund II $ 96 $140 $187 $291
Federated Utility Fund II $ 97 $144 $194 $305
Alger American Growth Portfolio $ 96 $140 $186 $290
Alger American Mid-Cap Growth Portfolio $ 97 $141 $189 $295
Alger American Small Capitalization Portfolio $ 97 $143 $192 $301
SoGen Overseas Variable Fund $105 $167 $230 $376
Van Eck Worldwide Emerging Markets Fund $105 $166 $229 $374
Van Eck Worldwide Hard Assets Fund $100 $153 $208 $333
Fidelity VIP Equity-Income Portfolio $ 94 $133 $175 $267
Fidelity VIP II Asset Manager Portfolio $ 94 $135 $178 $274
Fidelity VIP II Contrafund $ 95 $137 $182 $280
Fidelity VIP II Index 500 Portfolio $ 91 $126 $163 $242
MFS Emerging Growth Series $ 97 $142 $190 $296
MFS Growth With Income Series $ 97 $143 $191 $300
MFS Research Series $ 97 $142 $190 $297
MFS Total Return Series $ 97 $144 $193 $303
Janus Aspen Capital Appreciation Portfolio $ 97 $144 $193 $304
Janus Aspen Growth Portfolio $ 95 $136 $181 $278
Janus Aspen Balanced Portfolio $ 95 $138 $184 $285
Janus Aspen Flexible Income Portfolio $ 95 $138 $183 $284
Janus Aspen International Growth Portfolio $ 97 $142 $190 $297
Janus Aspen Worldwide Growth Portfolio $ 95 $ 98 $183 $283
Alliance Premier Growth Portfolio $101 $156
Alliance Growth and Income Portfolio $ 98 $ 146
American Century VP Income & Growth Fund $ 95 $ 137
American Century VP Value Fund $ 98 $ 146
Templeton Developing Markets Fund $ 108 $ 175
Templeton Asset Allocation Fund $ 99 $ 147
Lazard Retirement Equity Portfolio $ 101 $ 154
Lazard Retirement Small Cap Portfolio $ 101 $ 154
Morgan Stanley International Magnum Portfolio $ 100 $ 151
Morgan Stanley Emerging Markets Equity Portfolio $ 108 $ 176
</TABLE>
If you do not surrender your contract after the end of the specified time period
or if you begin receiving annuity payments you would pay the following aggregate
expenses on the same investment:
<TABLE>
<CAPTION>
Investment Option 1 Year 3 Years 5 Years 10 Years
- ----------------- ------ ------- ------- -----
<S> <C> <C> <C> <C>
Federated High Income Bond Fund II $26 $ 80 $136 $289
Federated Prime Money Fund II $26 $ 80 $137 $291
Federated Utility Fund II $27 $ 84 $144 $305
Alger American Growth Portfolio $26 $ 80 $136 $290
Alger American Mid-Cap Growth Portfolio $27 $ 81 $139 $295
Alger American Small Capitalization Portfolio $27 $ 83 $142 $301
SoGen Overseas Variable Fund $35 $107 $180 $376
Van Eck Worldwide Emerging Markets Fund $35 $106 $179 $374
Van Eck Worldwide Hard Assets Fund $30 $ 93 $158 $333
Fidelity VIP Equity-Income Portfolio $24 $ 73 $125 $267
Fidelity VIP II Asset Manager Portfolio $24 $ 75 $128 $274
Fidelity VIP II Contrafund $25 $ 77 $132 $280
Fidelity VIP II Index 500 Portfolio $21 $ 66 $113 $242
MFS Emerging Growth Series $27 $ 82 $140 $296
MFS Growth With Income Series $27 $ 83 $141 $300
MFS Research Series $27 $ 82 $140 $297
MFS Total Return Series $27 $ 84 $143 $303
Janus Aspen Capital Appreciation Portfolio $27 $ 84 $143 $304
Janus Aspen Growth Portfolio $25 $ 76 $131 $278
Janus Aspen Balanced Portfolio $25 $ 78 $134 $285
Janus Aspen Flexible Income Portfolio $25 $ 78 $133 $284
Janus Aspen International Growth Portfolio $27 $ 82 $140 $297
Janus Aspen Worldwide Growth Portfolio $25 $ 78 $133 $283
Alliance Premier Growth Portfolio $31 $ 96
Alliance Growth and Income Portfolio $28 $ 86
American Century VP Income & Growth Fund $25 $ 77
American Century VP Value Fund $28 $ 86
Templeton Developing Markets Fund $38 $115
Templeton Asset Allocation Fund $29 $ 87
Lazard Retirement Equity Portfolio $31 $ 94
Lazard Retirement Small Cap Portfolio $31 $ 94
Morgan Stanley International Magnum Portfolio $30 $ 91
Morgan Stanley Emerging Markets Equity Portfolio $38 $116
<FN>
Notes to Table of Fees and Expenses and Examples
1. The purpose of the Table of Fees and Expenses is to assist you in
understanding the various costs and expenses that you will incur directly
or indirectly. The Table reflects expenses of the separate account as well
as the investment options.
2. There are circumstances under which we will waive or reduce the withdrawal
charge.
3. During the accumulation period we will waive this charge if your contract
value is $50,000 or more at the time the deduction is to be made.
4. The Fee Table and contract refer to a Product Expense Charge. This charge
is equivalent to the aggregate charges that until recently were referred to
as a Mortality and Expense Risk Charge and an Administrative Charge by many
companies issuing variable annuity contracts. Throughout this prospectus we
will refer to this charge as a Product Expense Charge. Under certain
circumstances we may reduce the charge.
5. The tables do not reflect any premium taxes, which generally range from 0%
to 4% depending upon the state or jurisdiction.
6. Federated Advisors has voluntarily agreed to waive a portion of its
management fee with respect to these funds. Absent this waiver, the total
annual expenses would have been 0.78%, 0.81% and 1.00% for the Federated
High Income Bond Fund II, the Federated Prime Money Fund II and the
Federated Utility Fund II, respectively.
7. The annualized ratios of operating expenses to average net assets for the
period ended December 31, 1998 would have been 4.98% without the effect of
the investment advisory fee waiver and expense reimbursement provided
by the advisor.
8. For the year ended December 31, 1998, Van Eck Associates Corporation agreed
to waive its management fees and assume all expenses of the Fund except
interest, taxes, brokerage commissions and extraordinary expenses exceeding
1.5% of average daily net assets.
9. The fund directs certain portfolio trades to a broker that, in turn, pays a
portion of the Fund's operating expenses. The fund also has a fee
arrangement based on cash balances left on deposit with the custodian,
which reduces the fund's operating expenses. Due to this, management
fees, other expenses, and total annual expenses were 1.00%, 0.16% and
1.16%, respectively.
10. A portion of the brokerage commissions that these funds pay was used to
reduce fund expenses. In addition, these funds have entered into
arrangements with their custodian whereby credits realized as a result of
uninvested cash balances were used to reduce custodian expenses. Including
these reductions, the total operating expenses presented in the table would
have been 0.57%, 0.63% and 0.66% for the Equity-Income, Asset Manager and
Contrafund portfolios, respectively.
11. Each of these funds has an expense offset arrangement which reduces its
custodian fee based upon the amount of cash it maintains with its custodian
and dividend disbursing agent, and may enter into such arrangements and
directed brokerage arrangements (which would also have the effect of
reducing its expenses). Any such fee reductions are not reflected under
"Other Expenses".
12. Janus Aspen Series has voluntarily agreed to waive a portion of its fees
with respect to some of these funds. Absent this waiver, the total annual
expenses would have been 0.97%, 0.72%, 0.95%, and 0.74% for the Janus Aspen
Capital Appreciation Portfolio, Janus Aspen Growth Portfolio, Janus Aspen
International Growth Portfolio, and Janus Aspen Worldwide Growth Portfolio,
respectively.
13. The adviser to the Fund discontinued the expense reimbursement with respect
to the Premier Growth Portfolio effective May 1, 1998.
14. Lazard Asset Management, the Fund's investment adviser, has voluntarily
agreed to reimburse all expenses through December 31, 1999 to the extent
total annual portfolio expenses exceed in any fiscal year 1.25% of the
Portfolio's average daily net assets. Absent such an agreement with the
adviser, the total annual portfolio expenses for the year ended December
31, 1998 would have been 21.32% for the Lazard Retirement Equity Portfolio
and 16.20% for the Lazard Retirement Small Cap Portfolio.
15. The management fee for 1998 has been reduced to reflect the voluntary
waiver of a portion or all of the management fee and the reimbursement by
the portfolio's adviser to the extent total annual operating expenses
exceed the following percentages: Emerging Markets Equity Portfolio 1.75%;
International Magnum Portfolio 1.15%. The adviser may terminate this
voluntary waiver at any time at its sole discretion. Absent such
reductions, the "Management Fees," "Other Expenses" and "Total Annual
Expenses," respectively, would be as follows: Emerging Markets Equity
Portfolio 1.25%, 2.20%, 3.45%; International Magnum Portfolio 0.80%, 1.00%,
1.80%. Additionally, in determining the actual amount of voluntary
management fee waiver and/or expense reimbursement for a Portfolio, if any,
the adviser excludes from total annual operating expenses certain
investment related expenses, such as foreign country tax expense and
interest expense on borrowing. Included in "Other Expenses" of the Emerging
Markets Equity Portfolio are 0.20% of such investment related expenses.
</FN>
</TABLE>
THE COMPANY
Valley Forge Life Insurance Company, with its administrative office located at
100 CNA Drive, Nashville, TN 37214, 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 September 30, 1999.
We are principally engaged in the sale of life insurance and annuities. We are
licensed in the District of Columbia, Guam, Puerto Rico and all states except
New York, where we are only admitted as a reinsurer.
THE ANNUITY CONTRACT
This prospectus describes the variable annuity contract that we are offering. An
annuity is a contract between you, the owner, and us, the insurance company, in
which we promise to pay you an income, in the form of annuity payments,
beginning on a designated date in the future. Until you decide to begin
receiving annuity payments, your annuity is in the accumulation 7period. Once
you begin receiving annuity payments, your contract is in the annuity period.
The contract benefits from tax deferral. Tax deferral means that you are not
taxed on earnings or appreciation of the assets in your contract until you take
money out of your contract. The contract is called a variable annuity because
you can choose among the investment options, and depending upon market
conditions, you can gain or lose money in any of these options. If you elect
the variable annuity portion of the contract, the amount of money you are able
to accumulate in your contract during the accumulation period depends upon the
investment performance of the investment option(s) you elect.
You can choose to receive annuity payments on a variable basis, a fixed basis or
a combination of both. If you choose variable payments, the amount of the
annuity payments you receive will depend upon the investment performance of the
investment option(s) you select for the annuity period. If you select to receive
payments on a fixed basis, the payments you receive will remain level.
The contract was intended to be sold as a non-qualified contract to individuals
seeking retirement savings or other long-term investment purposes. It can also
be purchased pursuant to standard IRA, Roth IRA and 403(b) qualified plans.
However, if the contract is issued pursuant to a 403(b) plan, it can only be
done as a rollover.
PURCHASE
Purchase Payments
A purchase payment is the money you give us to buy the contract. The minimum
initial purchase payment amount we will accept is $10,000 for non-qualified
contracts, and $2,000 for qualified contracts. Each subsequent purchase payment
must be at least $1,000. If you participate in the Electronic Fund Transfer
program, the minimum subsequent payment is $100. Unless we agree otherwise, the
maximum total of all purchase payments we will accept for the contract is
$1,000,000.
Immediate Interest Payments
We will add an additional 3% to each purchase payment you make during the first
contract year. We refer to these amounts as immediate interest payments.
Immediate interest payments will be allocated in the same way as your purchase
payment.
If you make a withdrawal anytime during the first contract year, including an
exercise of your Free Look Right, (except for withdrawals pursuant to the
systematic withdrawal program which are not subject to the withdrawal charge),
we will deduct (recapture) pro-rata the immediate interest payments from the
amount you withdraw. However, we will not deduct any earnings that resulted from
the immediate interest payments. After the first contract year, the immediate
interest payments will vest and can be withdrawn at any time.
We reserve the right to limit immediate interest payments in the future. The
immediate interest payments are subject to certain state insurance laws and may
not be available in your state. An immediate interest payment and any of its
investment earnings are treated as taxable income.
Contract charges are deducted from contract value. Therefore, when we credit
your contract with immediate interest payments, your contract incurs expenses on
the total contract value, which includes the immediate interest payment amount.
If you make a withdrawal any time during the first contract year, including an
exercise of the Free Look Right, you will forfeit (we will recapture) your
immediate interest payments. Since the charges associated with your contract
will have been assessed during the first year against the higher amount (that
is, the purchase payments plus the immediate interest payment amounts), it is
possible that upon surrender, particularly in a declining market, you will
receive less money back than you would have if you had not received the
immediate interest payment. We intend to profit from the Product Expense Charge
assessed under the contract, including the Product Expense Charges assessed
against contract value attributable to immediate interest payments.
We have applied to the Securities and Exchange Commission for an exemption from
certain provisions of the Investment Company Act of 1940 so that we can
recapture any immediate interest payments applied to a contract as described
above. Until such time as we receive approval of our exemption request, we will
not recapture any immediate interest payments.
Allocation of Purchase Payments
When you purchase a contract, you choose how we will apply your purchase
payments among the investment options and the fixed account options. You may
change the allocation of purchase payments by written notice to us. Any
additional purchase payments will be allocated according to the allocation
schedule in effect unless accompanied by written notice requesting a different
allocation. Only whole percentages may be applied.
Free Look. If you change your mind about owning this contract, you can cancel it
within 10 days after receiving it (or the period required in your state, which
is shown on page 1 of your contract). When you cancel the contract within this
time period, we will not assess a withdrawal charge. You will generally receive
back whatever your contract is worth on the day we receive your request less
any immediate interest payment.
In certain states, or if you have purchased the contract as an IRA, we may be
required to give you back your purchase payment if you decide to cancel your
contract within 10 days after receiving it (or whatever period is required in
your state). We reserve the right to allocate your purchase payment to a money
market fund, or similar investment option, for 15 days before we allocate your
first purchase payment to the investment option(s) you have selected. (In some
states, the period may be longer.) If you exercise your free look right, we will
return the greater of your contract value less any immediate interest payments
or your purchase payments.
Allocation. Once we receive your purchase payment and the necessary information,
we will issue your contract and allocate your first purchase payment within 2
business days except as described in the paragraph before this one. If you do
not give us all of the information we need, we will contact you to get it. If
for some reason we are unable to complete this process within 5 business days,
we will either send back your money or get your permission to keep it until we
get all of the necessary information. If you add more money to your contract by
making additional purchase payments, we will credit those amounts to your
contract within one business day. Our business day closes when the New York
Stock Exchange's normal business day ends, usually 4:00 p.m. Eastern time.
INVESTMENT CHOICES
The contract offers you the choice of allocating purchase payments to one of our
fixed account options or to one or more of the investment options which are
listed below. Additional investment options may be available in the future.
You should read the prospectuses for these funds carefully before investing.
Copies of these prospectuses are attached to this prospectus. Certain investment
options contained in the fund prospectuses may not be available with your
contract. Also, some of the investment options may not be available in your
state.
FEDERATED INSURANCE SERIES
Advised by Federated Investment Management Company
Federated High Income Bond Fund II
Federated Prime Money Fund II
Federated Utility Fund II (seeks high current income and moderate
capital appreciation by investing in securities of utility companies)
THE ALGER AMERICAN FUND
Advised by Fred Alger Management, Inc.
Alger American Growth Portfolio
Alger American Mid-Cap Growth Portfolio
Alger American Small Capitalization Portfolio
SOGEN VARIABLE FUNDS, INC.
Advised by Societe Generale Asset Management Corp.
SoGen Overseas Variable Fund
VAN ECK WORLDWIDE INSURANCE TRUST
Advised by Van Eck Associates Corporation
Van Eck Worldwide Emerging Markets Fund
Van Eck Worldwide Hard Assets Fund
VARIABLE INSURANCE PRODUCTS FUND (VIP) and
VARIABLE INSURANCE PRODUCTS FUND II (VIP II)
Advised by Fidelity Management & Research Company
Fidelity VIP II Asset Manager Portfolio
Fidelity VIP II Contrafund Portfolio (long-term capital appreciation)
Fidelity VIP Equity-Income Portfolio
Fidelity VIP II Index 500 Portfolio
MFS VARIABLE INSURANCE TRUST
Advised by MFS Investment Management
MFS Emerging Growth Series
MFS Growth With Income Series
MFS Research Series (seeks long-term capital growth and future income)
MFS Total Return Series
JANUS ASPEN SERIES
Advised by Janus Capital Corporation
Janus Aspen Capital Appreciation Portfolio
Janus Aspen Growth Portfolio
Janus Aspen Balanced Portfolio
Janus Aspen Flexible Income Portfolio
Janus Aspen International Growth Portfolio
Janus Aspen Worldwide Growth Portfolio
ALLIANCE VARIABLE PRODUCTS SERIES FUND, Class B Shares
Advised by Alliance Capital Management L.P.
Alliance Premier Growth Portfolio
Alliance Growth and Income Portfolio
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
Advised by American Century Investment Management, Inc.
American Century VP Income & Growth Fund
American Century VP Value Fund
TEMPLETON VARIABLE PRODUCTS SERIES FUND, CLASS 2 SHARES
Advised by Templeton Asset Management Ltd.
Templeton Developing Markets Fund
Advised by Templeton Investment Counsel, Inc.
Templeton Asset Allocation Fund
LAZARD RETIREMENT SERIES
Advised by Lazard Asset Management
Lazard Retirement Equity Portfolio
Lazard Retirement Small Cap Portfolio
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
Advised by Morgan Stanley Dean Witter Investment Management Inc.
Morgan Stanley International Magnum Portfolio
Morgan Stanley Emerging Markets Equity Portfolio
The investment objectives and policies of certain investment options are similar
to the investment objectives and policies of other mutual funds that the
investment advisers manage. Although the objectives and policies may be similar,
the investment results of the investment options may be higher or lower than the
results of such other mutual funds. The investment advisers cannot guarantee,
and make no representation, that the investment results of similar funds will be
comparable even though the funds have the same advisers.
Shares of the investment options may be offered in connection with certain
variable annuity contracts and variable life insurance policies of various life
insurance companies which may or may not be affiliated with us. Certain
investment options may also be sold directly to qualified plans. The funds
believe that offering their shares in this manner will not be disadvantageous to
you.
We may enter into certain arrangements under which we are reimbursed by the
investment options' advisers, distributors and/or affiliates for the
administrative services which we provide to the funds.
Fixed Account Options
During the accumulation period, you may allocate purchase payments and contract
values to one of our fixed account options. Fixed Account I is part of our
general account, and will offer a uniform interest rate guaranteed by us. At our
discretion, we may declare an excess interest rate for this account.
Fixed Account II offers various interest rates and time periods from which to
select. We have segregated our assets in Fixed Account II from our General
Account. The interest rates offered by Fixed Account II will depend on the time
period you select. In certain circumstances, if you withdraw your money from the
account before the expiration of the time period you may be subject to an
interest adjustment. The adjustment may be positive or negative.
Fixed Account I and II are not available in all states.
Transfers
You can make transfers as described below. We have the right to terminate or
modify these transfer provisions.
You can make transfers by telephone. If you own the contract with a joint owner,
unless we are instructed otherwise, we will accept instructions from either you
or the other owner. We will use reasonable procedures to confirm that
instructions given to us by telephone are genuine. If we fail to use such
procedures, we may be liable for any losses due to unauthorized or fraudulent
instructions. However, we will not be liable for following telephone
instructions that we reasonably believe to be genuine. We may tape record
telephone instructions.
Transfers are subject to the following:
1. Currently, during the accumulation period, you can make 12 transfers
every contract year without charge.
2. We will assess a $25 transfer fee for each transfer during the
accumulation period in excess of the free 12 transfers allowed per
contract year. Transfers made at the end of the Free Look Period by us
and any transfers made pursuant to the Dollar Cost Averaging Option
and the Automatic Transfer Option will not be counted in determining
the application of any transfer fee.
3. The minimum amount which you can transfer is $500 or your entire value
in the investment option or any fixed account option, if it is less.
This requirement is waived if the transfer is made in connection with
the Dollar Cost Averaging Option or the Automatic Transfer Option.
4. You may not make a transfer until after the end of the Free Look
Period.
5. A transfer will be effected as of the end of the business day when we
receive an acceptable transfer request containing all required
information. The required information includes the amount which is to
be transferred, and the investment option(s) and/or the fixed account
affected.
6. We are not liable for a transfer made in accordance with your
instructions.
7. We reserve the right to restrict transfers between investment options
to a maximum of 12 per contract year and to restrict transfers from
being made on consecutive business days. We also reserve the right to
restrict transfers into and out of any fixed account option.
8. Your right to make transfers is subject to modification if we
determine, in our sole opinion, that the exercise of the right by one
or more owners is, or would be, to the disadvantage of other owners.
Restrictions may be applied in any manner reasonably designed to
prevent any use of the transfer right which is considered by us to be
to the disadvantage of other owners. A modification could be applied
to transfers to, or from, one or more of the investment options and
could include, but is not limited to:
a. the requirement of a minimum time period between each transfer;
b. not accepting a transfer request from an agent acting under a
power of attorney on behalf of more than one owner; or
c. limiting the dollar amount that may be transferred between
investment options by an owner at any one time.
9. Transfers do not change your allocation instructions for future
purchase payments.
10. Transfers made during the annuity period are also subject to the
following:
a. you may make 4 transfers each contract year between investment
options or from the investment options to the general account;
b. you may not make a transfer from the general account to an
investment option; and
c. you may not make a transfer within 3 business days of the annuity
payment date.
Dollar Cost Averaging Option
We offer two Dollar Cost Averaging Options (Program I and Program II). A Dollar
Cost Averaging Option allows you to systematically transfer a set amount from
our dollar cost averaging account to any investment option or Fixed Account I.
If you select Dollar Cost Averaging, we will open a dollar cost averaging
account for you. (You can only have one Dollar Cost Averaging account in
operation at one time.) By allocating amounts on a regular schedule as opposed
to allocating the total amount at one particular time, you may be less
susceptible to the impact of market fluctuations. Dollar Cost Averaging is
available only during the accumulation period.
Under Program I, you must have at least $1,000 allocated to dollar cost
averaging. The funds allocated will be placed in the Money Market Fund. The
minimum amount which can be transferred each month is $100. We guarantee that
the interest we credit to your dollar cost averaging account will be at least
equal to that credited to Fixed Account I. We may, at our discretion, credit
excess interest greater than that credited to Fixed Account I.
Under Program II, you must have at least $5,000 in the dollar cost averaging
account. Transfers must occur for a period of 6 or 12 months. We guarantee that
the interest we credit to your dollar cost averaging account will be at least
equal to that credited to Fixed Account I. We may, at our discretion, credit
excess interest greater than that credited to Fixed Account I.
We have the right to modify, terminate or suspend the Dollar Cost Averaging
Option. If you participate in the Dollar Cost Averaging Option, the transfers
made under the program are not taken into account in determining any transfer
fee. There is no additional charge for this option. If this option is
terminated, all money remaining in the dollar cost averaging account will be
transferred to Fixed Account I or into the Money Market Fund if Fixed Account I
is not available.
Dollar Cost Averaging does not assure a profit and does not protect against loss
in declining markets. Dollar Cost Averaging involves continuous investment in
the selected investment option(s) regardless of fluctuating price levels of the
investment option(s). You should consider your financial ability to continue the
Dollar Cost Averaging Option through periods of fluctuating price levels.
If you participate in a Dollar Cost Averaging option, you may not also
participate in the Systematic Withdrawal Program or the Automatic Transfer
Option.
Automatic Transfer Option
Once your money has been allocated among the investment choices, the performance
of the elected options may cause your allocation to shift. You can direct us to
automatically rebalance amounts in selected investment options and Fixed Account
I to return to your original percentage allocations by selecting our Automatic
Transfer Option.
The Automatic Transfer Option is available only during the accumulation period.
You have the choice of rebalancing quarterly, semi-annually or annually.
Allocation percentages must be in whole numbers and are subject to the minimums
stated in your contract.
If you participate in the Automatic Transfer Option, the transfers made under
the program are not taken into account in determining any transfer fee. You may
not participate in the Dollar Cost Averaging Option or Systematic Withdrawal
Program if you participate in the Automatic Transfer Option.
Example:
Assume that you want your initial purchase payment split between 2
investment options. You want 80% to be in the MFS Growth With Income Series
and 20% to be in the Janus International Growth Portfolio. Over the next 2
1/2 months the domestic market does very well while the international
market performs poorly. At the end of the quarter, the MFS Growth With
Income Series now represents 86% of your holdings because of its increase
in value. If you had chosen to have your holdings rebalanced quarterly, on
the first day of the next quarter, we would sell some of your units in the
MFS Growth With Income Series to bring its value back to 80% and use the
money to buy more units in the Janus International Growth Portfolio to
increase those holdings to 20%.
Substitution and Limitation on Further Investment
We may be substitute one of the investment options you have elected with another
investment option. We would not do this without the prior approval of the
Securities and Exchange Commission. We may also limit further investment in an
investment option. We will give you notice of our intent to take either of these
actions.
EXPENSES
There are charges and other expenses associated with the contract that reduce
the return on your investment in the contract. These charges and expenses are:
Contract Maintenance Charge
Every year on the anniversary of the date when your contract was issued, we
deduct a $30 contract maintenance charge from your contract. We reserve the
right to change the charge but it will never be more than $50 per year. This
charge may be increased only for contracts sold after we amend the prospectus.
The charge is deducted pro rata from your selected investment options and fixed
account options. This charge is for administrative expenses associated with your
contract.
During the accumulation period, we will not deduct this charge if the value of
your contract is $50,000 or more. If you make a total withdrawal on a day other
than a contract anniversary and your contract value for the business day when
the total withdrawal is made is less than $50,000, the full contract maintenance
will be deducted at the time of the total withdrawal.
Product Expense Charge
Each business day we make a deduction for our Product Expense Charge. The
Product Expense Charge is equal to 1.40% (on an annual basis).
This charge is included in part of our calculation of the value of the
accumulation units and the annuity units. This charge is for the guarantee of
annuity rates, the death benefit, for certain expenses of the contract, and for
assuming the risk (expense risk) that the current charges will be insufficient
in the future to cover the cost of administering the contract. If the charges
under the contract are not sufficient, then we will bear the loss. We do,
however, expect to profit from this charge. We may use any profits we make from
this charge to pay for the costs of distributing the contract.
Withdrawal Charge
During the accumulation period, you can make withdrawals from your contract. We
keep track of each purchase payment. Subject to the free withdrawal amount and
other waivers discussed below, if you make a withdrawal and it has been fewer
than the stated number of years since you made your purchase payment, we will
assess a withdrawal charge.
Withdrawal Charge: (as a percentage of purchase payments withdrawn)
Contract Year
Since Receipt of Purchase Payment Withdrawal Charge
-------------------------------- -----------------
1 7%
2 7%
3 6%
4 6%
5 5%
6 4%
7 3%
8 and thereafter 0%
Each purchase payment has its own withdrawal charge period. When the
withdrawal is for only part of the value of your contract, the withdrawal
charge is deducted first from any earnings, and then from any purchase
payments in your contract.
Waiver and Reduction of the Withdrawal Charge
Free Partial Withdrawals. We do not apply a withdrawal charge against the
earnings withdrawn from your contract. Also, after the first contract year
(and during the first year under our Systematic Withdrawal Program) you may
withdraw each contract year free from any withdrawal charge an amount equal
to 10% of the greater of the following:
* your total purchase payments, less prior withdrawals, as of the
first business day of the contract year;
* or your contract value as of the business day we receive your written
notice for the withdrawal.
This right is non-cumulative and we reserve the right to limit the number of
free partial withdrawals in any contract year.
For purposes of determining whether a withdrawal charge applies, we take out
amounts from your contract in the following order:
1. the 10% free partial withdrawal amount described above;
2. purchase payments from oldest to newest; and then
3. earnings in excess of 1 and 2 above.
Waiver of Withdrawal Charges Under Terminal Illness-Confinement Benefit. Under
the conditions set out in the waiver of withdrawal charge for Terminal Illness
or Confinement Rider to your contract, if you were 75 or younger on the contract
date we will waive 100% of the withdrawal charge (25% if you were 76 or older on
the contract date) when:
* you become confined for at least 30 consecutive days; or
* you have been diagnosed with a terminal illness after the contract is
issued (which means you are not expected to live more than 12 months).
You can elect this benefit only if the contract is at least 30 days old. This
benefit varies from state to state and may not be available in your state.
Tax Charges
Some states and other governmental entities (e.g., municipalities) charge
premium taxes or similar taxes. We are responsible for the payment of these
taxes and will make a deduction from the value of your contract for them. Some
of these taxes are due when the contract is issued, and others are due when
annuity payments begin. Premium taxes generally range from 0% to 4%, depending
on the state.
Transfer Fee
We will charge $25 for each additional transfer in excess of the 12 free
transfers permitted. The transfer fee is deducted from the amount which is
transferred. Transfers made at the end of the Free Look Period by us and any
transfers made pursuant to the Dollar Cost Averaging Option or Automatic
Transfer Option will not be counted in determining the application of any
transfer fee.
Income Taxes
We will deduct from your contract for any income taxes which we incur because of
the contract. At the present time, we are not making any such deductions.
Investment Option Expenses
There are deductions from and expenses paid out of the assets of the various
investment options which are described in the attached fund prospectuses.
CONTRACT VALUE
Your contract value is the sum of your interest in the various investment
options and our available fixed account options. Your interest in the investment
option(s) will vary depending upon the performance of the investment options you
choose.
Accumulation Units
In order to keep track of your contract value, we use a unit of measure called
an accumulation unit. During the annuity period of your contract we call the
unit an annuity unit. Every business day we determine the value of an
accumulation unit and an annuity unit. We do this by:
1. determining the change in investment experience (including any
charges) for the investment option from the previous business day to
the current business day;
2. subtracting our product expense charge and any other charges such as
taxes we have deducted; and
3. multiplying the previous business day's accumulation unit (or annuity
unit) value by this result.
When you make a purchase payment, we credit your contract with accumulation
units. The number of accumulation units credited is determined by dividing the
amount of the purchase payment allocated to an investment option by the value of
the accumulation unit for that investment option. When you make a withdrawal, we
debit from your contract accumulation units representing the withdrawal. We also
debit accumulation units when we deduct certain charges under the contract.
We calculate the value of an accumulation unit for each investment option after
the New York Stock Exchange closes each day and the result is reflected in the
value of your contract.
Example:
On Monday we receive an additional purchase payment of $5,000 from you. You
have told us you want this to go to the MFS Growth With Income Series. When
the New York Stock Exchange closes on that Monday, we determine that the
value of an accumulation unit for the MFS Growth With Income Series is
$13.90. We then divide $5,000 by $13.90 and credit your contract on Monday
night with 359.71 accumulation units for the MFS Growth With Income Series.
ACCESS TO YOUR MONEY
You can have access to the money in your contract:
* by making a withdrawal (either a partial or a complete withdrawal); or
* by electing to receive annuity payments; or
* by receiving a death benefit.
Withdrawals Made During the Accumulation Period
You may withdraw all, or part, of your contract value at any time during the
accumulation period. If you make a withdrawal you will receive the value of your
contract on the day you made the withdrawal, less any applicable charges.
Unless you instruct us otherwise, any partial withdrawal will be made pro-rata
from all the investment options and any fixed account option(s) you elected.
Under most circumstances, the amount of any partial withdrawal must be for at
least $500, or your entire interest in any fixed account or investment option.
We require that you have a contract value of $1,000 in any investment option or
$500 in any fixed account option after any partial withdrawal. We require that
you leave at least $10,000 in the contract after a partial withdrawal for
non-qualified contracts and $2,000 for qualified contracts. We may terminate
your contract and pay you the withdrawal value (contract value less any charges
and applicable interest adjustment for Fixed Account II) if you make a
withdrawal before the annuity date of an amount which results in your contract
value falling below the minimum amount. We will notify you of our intent to
terminate the contract. The contract will automatically terminate unless we
receive additional purchase payments in excess of the minimum amount within 30
days.
Income taxes, tax penalties and certain restrictions may apply to any withdrawal
you make.
There are limits to the amount you can withdraw from a qualified plan referred
to as a 403(b) plan (TSA). For a more complete explanation see the discussion in
the Taxes Section and the discussion in the Statement of Additional Information.
Systematic Withdrawal Program
We will make payments (deposited directly to your checking account) to you
periodically at your election (currently: monthly, quarterly, semi-annually or
annually). Withdrawals may be made from any investment option or Fixed Account
I.
Each payment must be at least $100. If there are insufficient funds in the
selected investment options or Fixed Account I, we will take amounts from
remaining investment options and fixed account options. These payments may be
subject to the withdrawal charges. See "Expenses - Withdrawal Charge."
Minimum Distribution Option. If your contract has been issued as an IRA, TSA or
other qualified plan, you may elect the Systematic Withdrawal Program. Under
this program, we will make payments to you that are designed to meet the
applicable minimum distribution requirements imposed by the Internal Revenue
Code on such qualified plans.
Income taxes, tax penalties and certain restrictions may apply to systematic
withdrawals.
DEATH BENEFIT
Death of Contract Owner During the Accumulation Period
If you or your joint owner die during the accumulation period, a death benefit
will be paid to your primary beneficiary. Upon the death of a joint owner, the
surviving joint owner, if any, will be treated as the primary beneficiary. Any
other beneficiary designation on record at the time of death will be treated as
a contingent beneficiary.
Death Benefit Amount During the Accumulation Period
The minimum guaranteed death benefit amount provided in your contract is the
greater of:
1. the total amount of purchase payments made, less any adjusted
withdrawals and applicable withdrawal charges; or
2. your contract value as of the end of the normal business day during
which we receive both due proof of death and election for the payment
method.
The adjusted withdrawal amount depends upon the relationship between the
contract value and the minimum guaranteed death benefit. If the contract value
equals or exceeds the minimum guaranteed death benefit at the time of
withdrawal, the adjusted withdrawal will equal 100% of the actual withdrawal
amount. If the contract value is less than the minimum guaranteed death benefit
at the time of withdrawal, the adjusted withdrawal will equal the actual
withdrawal times the ratio of the minimum guaranteed death benefit to the
contract value.
<TABLE>
<CAPTION>
The following examples illustrate the effect of an adjusted withdrawal under
element 1 as described above:
<S> <C> <C>
1) Purchase Payment : $200,000
Contract Value : $250,000
Minimum Guaranteed Death Benefit : $200,000
(under element 1)
Partial Withdrawal : $ 30,000
Since at the time of the partial withdrawal, the contract value ($250,000) equals
or exceeds the minimum guaranteed death benefit ($200,000), then the adjusted
withdrawal will equal the actual withdrawal ($30,000) resulting in a new minimum
guaranteed death benefit under element 1 of $170,000 ($200,000-$30,000).
2) Purchase Payments: : $200,000
Contract Value : $150,000
Minimum Guaranteed Death Benefit : $200,000
(under element 1)
Partial Withdrawal : $ 30,000
</TABLE>
Since at the time of the partial withdrawal, the contract value ($150,000)
is less then the minimum guaranteed death benefit ($200,000), then the
reduction will equal the actual withdrawal ($30,000) times the ratio of
the minimum guaranteed death benefit to the contract value
($30,000 x 200,000 = $40,000)
150,000
resulting in a new minimum guaranteed death benefit under element 1 of
$160,000 ($200,000 - $40,000).
Contract value for purposes of the death benefits is determined as of the end of
the business day during which we receive both due proof of death and an election
for the payment method. It remains in an investment option and/or any fixed
account option until distribution begins. From the time the death benefit is
determined until complete distribution is made, any amount in an investment
option will be subject to investment risk which is borne by the beneficiary.
Death Benefit Options During the Accumulation Period
Unless already selected by you, a beneficiary must elect the death benefit to be
paid under one of the following options in the event of your death during the
accumulation period. If the beneficiary is the spouse of the owner, he or she
may elect to continue the contract in his or her own name and exercise all the
owner's rights under the contract. In this event, the contract value will be
adjusted to equal the death benefit.
Option 1 - lump sum payment of the death benefit; or
Option 2 - the payment of the entire death benefit within 5 years of the date of
death of the owner or any joint owner; or
Option 3 - payment of the death benefit under an annuity option over the
lifetime of the beneficiary or over a period not extending beyond the life
expectancy of the beneficiary with distribution beginning within 1 year of the
date of your death or of any joint owner.
Any portion of the death benefit not applied under Option 3 within 1 year of the
date of your death, or that of a joint owner, must be distributed within 5 years
of the date of death.
If a lump sum payment is requested, the amount will be paid within 7 days,
unless the suspension of payments provision is in effect.
Payment to the beneficiary, in any form other than a lump sum, may only be
elected during the 60 day period beginning with the date of receipt by us of
proof of death.
Death of Contract Owner During the Annuity Period
If you or a joint owner, who is not the annuitant, dies during the annuity
period, any remaining payments under the annuity option elected will continue to
be made at least as rapidly as under the method of distribution in effect at the
time of your death. Upon your death during the annuity period, the beneficiary
becomes the owner.
Death of Annuitant
Upon the death of the annuitant, who is not the owner, during the accumulation
period, you automatically become the annuitant. You may designate a new
annuitant subject to our underwriting rules then in effect. If the owner is a
non-natural person, the death of the annuitant will be treated as the death of
the owner and a new annuitant may not be designated.
Upon the death of the annuitant during the annuity period, the death benefit, if
any, will be as specified in the annuity option elected. Death benefits will be
paid at least as rapidly as under the method of distribution in effect at the
annuitant's death.
ANNUITY PROVISIONS
Under the contract you can receive regular income payments. You can choose the
day, month and year in which those payments begin. We call that date the annuity
date. The annuity date cannot be after the 28th of any month. You can also
choose among income plans. We call those annuity payments.
Your annuity date must be at least 1 contract year from the date you purchase
the contract. Annuity payments must begin by the annuitant's 95th birthday or
earlier if required by law. The annuitant is the person whose life we look to
when we make annuity payments.
During the annuity period, you have the same investment choices you had just
before the start of the annuity period. If you do not tell us otherwise, your
annuity payments will be based on the investment allocations that were in place
on the annuity date.
General Account
During the annuity period, you can elect to have your annuity payments paid out
of our general account. We guarantee a specified interest rate used in
determining the payments. If you elect this option, the payments you receive
will remain level. This option is only available during the annuity period.
Annuity Payment Amount
If you choose to have your payments come from the General Account, the payment
will not vary. If you choose to have any portion of your annuity payment come
from the investment option(s), the dollar amount of your payment from the
investment option(s) will depend upon four things:
* the value of your contract in the investment option(s) on the annuity
date;
* the 3% assumed investment rate used in the annuity table for the
contract;
* the performance of the investment options you selected; and
* if permitted in your state and under the type of contract you have
purchased, the age and sex of the annuitant(s).
If the actual performance exceeds the 3% assumed investment rate plus the
deductions for expenses, your annuity payments will increase. Similarly, if the
actual performance is less than 3% plus the amount of the deductions, your
annuity payments will decrease.
Annuity Payment Options
You can choose one of the following annuity payment options. Annuity payments
start at least 30 days from the annuity date, provided the annuitant is alive.
Once annuity payments begin, you cannot change the annuity payment option. All
annuity payments are made to you unless you direct us otherwise. If you do not
choose an annuity payment option at the time you purchase the contract, we will
assume that you selected Option 4 with a 10 year period certain.
Option 1 - Payment Certain. Under this option we pay you the value of your
contract applied to the option in equal installments, as specified by you. The
minimum time period over which you can elect this option is 6 years. The total
payments in a year must be at least 5% of the value you apply to this option.
You may request a single lump sum payment, which is the sum of the annuity value
plus or minus any losses or gains since the annuity date, less any annuity
payments made and charges assessed during the annuity period.
Option 2 - Period Certain. Under this option we make equal payments over a
designated period between 6 and 30 years, as chosen by you. You may request a
single lump sum payment, which is the sum of the annuity value plus or minus any
losses or gains since the annuity date, less any annuity payments made and
charges assessed during the annuity period.
Option 3 - Life Annuity. Under this option we make monthly payments during the
lifetime of the annuitant and terminating with the last payment preceding
his/her death.
Option 4 - Life Annuity with a Period Certain. Under this option we make monthly
annuity payments until the later of the death of the annuitant or a designated
period between 6 and 30 years, as chosen by you. We guarantee that if, at the
death of the annuitant, payments have been made for less than a stated period,
the monthly payments will continue during the remainder of the stated period. If
the annuitant dies before we have made all of the payments within the selected
period, you may request a single lump sum payment, which is the sum of the
annuity value plus or minus any losses or gains since the annuity date, less any
annuity payments made and charges assessed during the annuity period.
Option 5 - Joint Life and Survivor Annuity. Under this option we make monthly
payments during the joint lifetime of the annuitant and another named individual
and thereafter during the lifetime of the survivor. Payments cease with the last
payment due prior to the death of the survivor.
Additional Options. We may make other options available.
TAXES
Note: We have prepared the following information on taxes as a general
discussion of the subject. It is not intended as tax advice to any individual.
You should consult your own tax adviser about your own circumstances. We have
included in the Statement of Additional Information a more comprehensive
discussion regarding taxes.
Annuity Contracts in General
Annuity contracts are a means of setting aside money for future needs - usually
retirement. Congress recognized how important saving for retirement was and
provided special rules in the Internal Revenue Code (Code) for annuities.
Simply stated, these rules provide that you will not be taxed on the earnings on
the money held in your annuity contract until you take the money out. This is
referred to as tax deferral. There are different rules as to how you are taxed
depending on how you take the money out and the type of contract - qualified or
non-qualified (see following sections).
Under non-qualified contracts, you, as the owner, are not taxed on increases in
the value of your contract until a distribution occurs - either as a withdrawal
or as annuity payments. When you make a withdrawal, you are taxed on the amount
of the withdrawal that is earnings. For annuity payments, different rules apply.
A portion of each annuity payment is treated as a partial return of your
purchase payments and is not taxed. The remaining portion of the annuity payment
is treated as ordinary income. How the annuity payment is divided between
taxable and non-taxable portions depends upon the period over which the annuity
payments are expected to be made. Annuity payments received after you have
received all of your purchase payments are fully includible in income.
When a non-qualified contract is owned by a non-natural person (e.g.,
corporation or certain other entities other than a trust holding the contract as
an agent for a natural person), the contract will generally not be treated as an
annuity for tax purposes.
Qualified and Non-Qualified Contracts
If you purchase the contract as an individual and not under any pension plan,
specially sponsored program or an individual retirement annuity, your contract
is referred to as a non-qualified contract.
If you purchase the contract under a pension plan, specially sponsored program,
or an individual retirement annuity, your contract is referred to as a qualified
contract. Examples of qualified plans are: Individual Retirement Annuities
(IRAs), Tax-Sheltered Annuities (sometimes referred to as 403(b) contracts), and
pension and profit-sharing plans, which include 401(k) plans and H.R. 10 Plans.
Withdrawals - Non-Qualified Contracts
If you make a withdrawal from your contract, the Code treats such a withdrawal
as first coming from earnings and then from your purchase payments. Such
withdrawn earnings are includible in income.
The Code also provides that any amount received under an annuity contract which
is included in income may be subject to a penalty. The amount of the penalty is
equal to 10% of the amount that is includible in income. Some withdrawals will
be exempt from the penalty. They include any amounts:
(1) paid on or after the taxpayer reaches age 59 1/2;
(2) paid after you die;
(3) paid if the taxpayer becomes totally disabled (as that term is defined
in the Code);
(4) paid in a series of substantially equal payments made annually (or
more frequently) for life or a period not exceeding life expectancy;
(5) paid under an immediate annuity; or
(6) which come from purchase payments made prior to August 14, 1982.
Withdrawals - Qualified Contracts
If you make a withdrawal from your qualified contract, a portion of the
withdrawal is treated as taxable income. This portion depends on the ratio of
the pre-tax purchase payments to the after-tax purchase payments in your
contract. If all of your purchase payments were made with pre-tax money then the
full amount of any withdrawal is includible in taxable income. Special rules may
apply to withdrawals from certain types of qualified contracts.
The Code also provides that any amount received under a qualified contract which
is included in income may be subject to a penalty. The amount of the penalty is
equal to 10% of the amount that is includible in income. (The penalty is
increased to 25% for withdrawals from SIMPLE IRAs during the first two years.)
Some withdrawals will be exempt from the penalty. They include any amounts:
(1) paid on or after you reach age 59 1/2;
(2) paid after you die;
(3) paid if you become totally disabled (as that term is defined in the
Code);
(4) paid to you after leaving your employment in a series of substantially
equal payments made annually (or more frequently) under a lifetime
annuity;
(5) paid to you after you have attained age 55 and left your employment;
(6) paid for certain allowable medical expenses (as defined in the Code);
(7) paid pursuant to a qualified domestic relations order;
(8) paid from an IRA for medical insurance (as defined in the Code);
(9) paid from an IRA for qualified higher education expenses; or
(10) up to $10,000 for qualified first time home buyer expenses (as defined
in the Code).
The exceptions in (5) and (7) above do not apply to IRAs. The exception in (4)
above applies to IRAs but without the requirement of leaving employment.
We have provided a more complete discussion in the Statement of Additional
Information.
Withdrawals - Tax-Sheltered Annuities
The Code limits the withdrawal of amounts attributable to purchase payments
made under a salary reduction agreement by owners from Tax-Sheltered Annuities.
Withdrawals can only be made when an owner:
(1) reaches age 59 1/2;
(2) leaves his/her job;
(3) dies;
(4) becomes disabled (as that term is defined in the Code); or
(5) in the case of hardship.
However, in the case of hardship, the owner can only withdraw the purchase
payments and not any earnings.
Diversification
The Code provides that the underlying investments for a variable annuity must
satisfy certain diversification requirements in order to be treated as an
annuity contract. We believe that the investment options are managed so as to
comply with the requirements.
Neither the Code nor the Internal Revenue Service Regulations issued to date
provide guidance as to the circumstances under which you, because of the degree
of control you exercise over the underlying investments, are considered the
owner of the shares of the investment options. If you are considered owner of
the shares, it will result in the loss of the favorable tax treatment for the
contract. It is unknown to what extent owners are permitted to select investment
options, to make transfers among the investment options or the number and type
of investment options owners may select from without being considered owner of
the shares. If any guidance is provided which is considered a new position, then
the guidance is generally applied prospectively. However, if such guidance is
considered not to be a new position, it may be applied retroactively. This would
mean that you, as the owner of the contract, could be treated as the owner of
the investment options.
Due to the uncertainty in this area, we reserve the right to modify the contract
in an attempt to maintain favorable tax treatment.
PERFORMANCE
We periodically advertise performance of the various investment options. We will
calculate performance by determining the percentage change in the value of an
accumulation unit by dividing the increase (decrease) for that unit by the value
of the accumulation unit at the beginning of the period. This performance number
reflects the deduction of the product expense charge and the fees and expenses
of the investment options. It does not reflect the deduction of any contract
maintenance charge or withdrawal charge. The deduction of any contract
maintenance charge or withdrawal charge would reduce the percentage increase or
make greater any percentage decrease. Any advertisement will also include
average annual total return figures which reflect the deduction of the product
expense charge, contract maintenance charge and withdrawal charges and the fees
and expenses of the investment options.
The performance will be based on the historical performance of the corresponding
investment options for the periods commencing from the date on which the
particular investment option was made available through the contracts. In
addition, for certain investment options performance may be shown for the period
commencing from the inception date of the investment option. These figures
should not be interpreted to reflect actual historical performance of the
Variable Account.
We may, from time to time, include in our advertising and sales materials, tax
deferred compounding charts and other hypothetical illustrations, which may
include comparisons of currently taxable and tax deferred investment programs,
based on selected tax brackets.
OTHER INFORMATION
The Variable Account
We established a variable account, Valley Forge Life Insurance Company Variable
Annuity Separate Account (Variable Account), to hold the assets that underlie
the contracts. Our Board of Directors adopted a resolution to establish the
Variable Account under Pennsylvania insurance law on February 12, 1996. We have
registered the Variable Account with the Securities and Exchange Commission as a
unit investment trust under the Investment Company Act of 1940.
The assets of the Variable Account are held in our name on behalf of the
Variable Account and legally belong to us. However, those assets that underlie
the contracts, are not chargeable with liabilities arising out of any other
business we may conduct. All the income, gains and losses (realized or
unrealized) resulting from these assets are credited to or charged against the
contracts and not against any other contracts we may issue.
Voting Rights
We are the legal owner of the investment option shares. However, we believe that
when an investment option solicits proxies in conjunction with a vote of
shareholders, it is required to obtain from you and other owners instructions as
to how to vote those shares. When we receive those instructions, we will vote
all of the shares we own in proportion to those instructions. This will also
include any shares that we own on our own behalf. Should we determine that we
are no longer required to comply with the above, we will vote the shares in our
own right.
Distributor
CNA Investor Services, Inc. ("CNAISI") serves as the distributor for the
contracts. CNAISI is located at CNA Plaza, Chicago, Illinois 60685.
Commissions will be paid to agents and broker-dealers who sell the contracts.
Such agents and broker-dealers will be paid commissions up to 6% of purchase
payments and may be paid an additional annual trail commission of up to 1% of
contract value.
Ownership
Owner. You, as the owner of the contract, have all the rights under the
contract. The owner is as designated at the time the contract is issued, unless
changed. You can change the owner at any time. A change will automatically
revoke any prior owner designation. The change request must be in writing.
Joint Owner. The contract can be owned by joint owners. Any joint owner must be
the spouse of the other owner (except where not permitted under state law). Upon
the death of either joint owner, the surviving joint owner will be the
designated beneficiary. Any other beneficiary designation at the time the
contract was issued or as may have been later changed will be treated as a
contingent beneficiary unless otherwise indicated in a written notice.
Beneficiary
The following information applies to the beneficiary:
* the beneficiary is the person(s) or entity you name to receive any
death benefit;
* the beneficiary is named at the time the contract is issued unless
changed at a later date;
* unless an irrevocable beneficiary has been named, you can change the
beneficiary at any time before you die.
Annuitant
The following information applies to the annuitant:
* you choose the annuitant at the time you buy the contract;
* you may change the annuitant prior to the annuity date;
* any change of annuitant is subject to our consent; and
* you cannot change the annuitant in a contract which is owned by a
non-individual.
Assignment
You can assign the contract at any time during your lifetime. We will not be
bound by the assignment until we receive written notice of the assignment. We
will not be liable for any payment or other action we take in accordance with
the contract before we receive notice of the assignment. An assignment may be a
taxable event.
If the contract is issued pursuant to a qualified plan, there may be limitations
on your ability to assign the contract.
Suspension of Payments or Transfers
We may be required to suspend or postpone payments for withdrawals or transfers
for any period when:
1. the New York Stock Exchange is closed (other than customary weekend
and holiday closings);
2. trading on the New York Stock Exchange is restricted;
3. an emergency exists as a result of which disposal of shares of the
investment options is not reasonably practicable or we cannot
reasonably value the shares of the investment options;
4. during any other period when the Securities and Exchange Commission,
by order, so permits for the protection of owners.
We have reserved the right to defer payment for a withdrawal or transfer from
any fixed account option for the period permitted by law but not for more than
six months.
Financial Statements
Our financial statements and the financial statements of the Variable Account
have been included in the Statement of Additional Information.
Additional Information
For further information about the contract you may obtain a Statement of
Additional Information. You can call the telephone number indicated on the cover
page or you can write to us. For your convenience we have included a post card
for that purpose.
The Table of Contents of this statement is as follows:
Company
Independent Auditors
Legal Opinion
Distribution
Performance Information
Federal Tax Status
Annuity Provisions
Financial Statements
VALLEY FORGE LIFE INSURANCE COMPANY
ATTN:
____________________________________________________________________________
Please send me, at no charge, the Statement of Additional Information
dated February 11, 2000 for the Annuity Contract issued by Valley Forge Life
Insurance Company.
(Please print or type and fill in all information)
Name
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
City State Zip Code
- --------------------------------------------------------------------------------
PART B
STATEMENT OF ADDITIONAL INFORMATION
INDIVIDUAL 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 FEBRUARY 11, 2000, FOR THE
INDIVIDUAL 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 FEBRUARY 11, 2000.
TABLE OF CONTENTS
Page
COMPANY .......................................................................
INDEPENDENT AUDITORS............................................................
LEGAL OPINIONS..................................................................
DISTRIBUTION....................................................................
Reduction of the Withdrawal Charge.....................................
PERFORMANCE INFORMATION.........................................................
Total Return...........................................................
Historical Unit Values.................................................
Reporting Agencies.....................................................
Performance Information................................................
FEDERAL TAX STATUS..............................................................
Diversification........................................................
Multiple Contracts.....................................................
Contracts Owned by Other than Natural Persons..........................
Tax Treatment of Assignments...........................................
Income Tax Withholding.................................................
Tax Treatment of Withdrawals - Non-qualified Contracts.................
Qualified Plans........................................................
Tax Treatment of Withdrawals - Qualified Contracts.....................
Tax-sheltered Annuities - Withdrawal Limitations.......................
ANNUITY PROVISIONS..............................................................
Variable Annuity.......................................................
Fixed Annuity..........................................................
Annuity Unit...........................................................
Net Investment Factor..................................................
Expense Guarantee......................................................
FINANCIAL STATEMENTS............................................................
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 September 30,
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 we are 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.
INDEPENDENT AUDITORS
The financial statements for Valley Forge Life Insurance Company as of December
31, 1998 and 1997 and for each of the three years in the period ended December
31, 1998 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
December 31, 1998 and 1997 and for year ended December 31, 1998 and for the
period from inception through December 31, 1997 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 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 Lynne Gugenheim, Esquire, Vice President and Associate
General 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. 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.
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:
n
P (1 + T) = 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.
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 managed
by Federated Insurance Series, The Alger American Fund, SoGen Variable Funds,
Inc., Van Eck Worldwide Insurance Trust, Variable Insurance Products Fund and
Variable Insurance Products Fund II, MFS Variable Insurance Trust and Janus
Aspen Series. 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.
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 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.
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
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.
Effective January 1, 1993, 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. Owners,
Annuitants and Beneficiaries are responsible for determining that contributions,
distributions and other transactions with respect to the Contracts comply with
applicable law. 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 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 PLAN
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. While participants in such Plans may
be permitted to specify the form of investment in which their Plan accounts will
participate, all such investments are owned by the sponsoring employer and are
subject to the claims of its creditors until December 31, 1998, or such earlier
date as may be established by Plan amendment. However, amounts deferred under a
governmental Plan created on or after August 20, 1996 and amounts deferred under
any 457 Plan after December 31, 1998 must be held in trust, custodial account or
annuity contract for the exclusive benefit of Plan participants and their
beneficiaries. 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 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, up to $15,000 may be deferred in each of the last
three years before normal retirement age. Furthermore, the Code provides
additional requirements and restrictions regarding eligibility and
distributions.
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 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); (h) distributions from an Individual
Retirement Annuity made to the Owner or Annuitant (as applicable) to the extent
such 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 (i) 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.
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.
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.
<PAGE> 1
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.
- --------------------------------------------------------------------------------
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
(UNAUDITED)
<TABLE>
<CAPTION>
Fidelity
Federated Federated Federated Fidelity Asset Fidelity Fidelity
Prime Money Utility High Income Equity-Income Manager Index 500 Contrafund
September 30, 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: $20,231,490 $ 3,014,603 $ 4,572,111 $ 7,149,565 $ 4,714,558 $19,446,972 $ 8,127,274
Total assets 20,231,490 3,014,603 4,572,111 7,149,565 4,714,558 19,446,972 8,127,274
Liabilities -- -- -- -- -- -- --
================================ =========== =========== =========== =========== =========== =========== ===========
Net assets $20,231,490 $ 3,014,603 $ 4,572,111 $ 7,149,565 $ 4,714,558 $19,446,972 $ 8,127,274
================================ =========== =========== =========== =========== =========== =========== ===========
<CAPTION>
The Alger The Alger MFS
American The Alger American MFS Growth MFS
Small American MidCap Emerging MFS with Limited
Capitalization Growth Growth Growth Research Income Maturity
September 30, 1999 Portfolio Portfolio Portfolio Series Series Series Series
- -------------------------------- -------------- ----------- ----------- -------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at market value: $ 2,210,016 $13,662,271 $ 2,329,000 $ 5,245,418 $ 3,547,918 $ 4,675,634 $ 1,934,947
Total assets 2,210,016 13,662,271 2,329,000 5,245,418 3,547,918 4,675,634 1,934,947
Liabilities -- -- -- -- -- -- --
================================ =========== =========== =========== =========== =========== =========== ===========
Net assets $ 2,210,016 $13,662,271 $ 2,329,000 $ 5,245,418 $ 3,547,918 $ 4,675,634 $ 1,934,947
================================ =========== =========== =========== =========== =========== =========== ===========
<CAPTION>
Van Eck
MFS Sogen Worldwide Van Eck
Total Overseas Hard Emerging
Return Variable Assets Markets
September 30, 1999 Series Fund Fund Fund
- -------------------------------- ----------- ----------- -------- ---------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at market value: $ 4,649,661 $ 3,043,156 $218,712 $ 602,604
Total assets 4,649,661 3,043,156 218,712 602,604
Liabilities -- -- -- --
================================ =========== =========== ======== =========
Net assets $ 4,649,661 $ 3,043,156 $218,712 $ 602,604
================================ =========== =========== ======== =========
</TABLE>
<PAGE> 2
- --------------------------------------------------------------------------------
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Fidelity
Federated Federated Federated Fidelity Asset
Prime Money Utility High Income Equity-Income Manager
For the Nine Months Ended September 30, 1999 Fund II Fund II Bond Fund II Portfolio Portfolio
- ----------------------------------------------------------------- ----------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Investment income:
Dividend income $ 447,158 $ 149,669 $ 304,785 $ 216,369 $ 180,618
447,158 149,669 304,785 216,369 180,618
Expenses:
Policy fees/Cost of insurance 147,412 22,088 37,977 57,228 31,006
147,412 22,088 37,977 57,228 31,006
Net Investment income (loss) 299,746 127,581 266,807 159,141 149,611
Investment gains and (losses):
Net realized gains (losses) -- 4,909 (47,909) 16,651 8,038
Net unrealized gains (losses) 2,171 (111,727) (115,622) 45,095 (99,012)
Net realized and unrealized investment gains (losses) 2,171 (106,818) (163,531) 61,746 (90,974)
- ----------------------------------------------------------------- --------- --------- --------- --------- ---------
Net increase (decrease) in net assets resulting from operations $ 301,917 $ 20,763 $ 103,276 $ 220,887 $ 58,638
================================================================= ========= ========= ========= ========= =========
<CAPTION>
The Alger The Alger
American The Alger American
Fidelity Fidelity Small American MidCap
Index 500 Contrafund Capitalization Growth Growth
For the Nine Months Ended September 30, 1999 Portfolio Portfolio Portfolio Portfolio Portfolio
- ----------------------------------------------------------------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <S>
Investment income:
Dividend income $ 190,903 $ 161,610 $ 240,850 $ 958,176 $ 220,841
190,903 161,610 240,850 958,176 220,841
Expenses:
Policy fees/Cost of insurance 142,921 55,055 18,111 90,763 15,408
142,921 55,055 18,111 90,763 15,408
Net Investment income (loss) 47,982 106,555 222,739 867,413 205,433
Investment gains and (losses):
Net realized gains (losses) 508,706 98,560 (30,867) 48,505 4,826
Net unrealized gains (losses) 334,219 (95,976) (107,794) (538,585) (174,319)
Net realized and unrealized investment gains (losses) 842,925 2,584 (138,661) (490,080) (169,493)
- ----------------------------------------------------------------- --------- --------- --------- --------- ---------
Net increase (decrease) in net assets resulting from operations $ 890,907 $ 109,139 $ 84,078 $ 377,333 $ 35,940
================================================================= ========= ========= ========= ========= =========
<CAPTION>
MFS
MFS Growth MFS MFS
Emerging MFS with Limited Total
Growth Research Income Maturity Return
For the Nine Months Ended September 30, 1999 Series Series Series Series Series
- ----------------------------------------------------------------- ------------ ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Investment income:
Dividend income $ -- $ 32,893 $ 23,662 $ -- $ 143,153
-- 32,893 23,662 -- 143,153
Expenses:
Policy fees/Cost of insurance 37,545 25,413 33,516 14,213 28,781
37,545 25,413 33,516 14,213 28,781
Net Investment income (loss) (37,545) 7,480 (9,854) (14,213) 114,372
Investment gains and (losses):
Net realized gains (losses) 42,989 23,735 22,446 (2,016) 2,908
Net unrealized gains (losses) 340,498 29,602 (72,410) 46,592 (142,051)
Net realized and unrealized investment gains (losses) 383,487 53,337 (49,965) 44,576 (139,143)
- ----------------------------------------------------------------- --------- --------- --------- --------- ---------
Net increase (decrease) in net assets resulting from operations $ 345,942 $ 60,817 $ (59,818) $ 30,363 $ (24,771)
================================================================= ========= ========= ========= ========= =========
<CAPTION>
Van Eck
Sogen Worldwide Van Eck
Overseas Hard Emerging
Variable Assets Markets
For the Nine Months Ended September 30, 1999 Fund Fund Fund
- ----------------------------------------------------------------- ---------- ---------- ---------
<S> <C> <C> <C>
Investment income:
Dividend income $ 22,316 $ 2,253 $ --
22,316 2,253 --
Expenses:
Policy fees/Cost of insurance 23,931 1,785 4,969
23,931 1,785 4,969
Net Investment income (loss) (1,615) 467 (4,969)
Investment gains and (losses):
Net realized gains (losses) 9,833 (12,662) (28,502)
Net unrealized gains (losses) 616,242 43,784 162,746
Net realized and unrealized investment gains (losses) 626,075 31,123 134,244
- ----------------------------------------------------------------- --------- --------- ---------
Net increase (decrease) in net assets resulting from operations $ 624,460 $ 31,590 $ 129,274
================================================================= ========= ========= =========
</TABLE>
<PAGE> 3
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
<TABLE>
<CAPTION>
Federated Federated Federated Fidelity
Prime Money Utility High Income Equity-Income
For the Nine Months Ended September 30, 1999 Fund II Fund II Bond Fund II Portfolio
- -------------------------------------------------------------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
From operations:
Net investment income (loss) $ 299,746 $ 127,581 $ 266,807 $ 159,141
Net realized and unrealized investment gains (losses) 2,171 (106,818) (163,531) 61,746
Change in net assets resulting from operations 301,917 20,763 103,276 220,887
From capital transactions:
Net premiums/deposits 21,880,513 491,632 802,734 999,820
Death Benefits -- (52,283) (191,732) (10,015)
Surrenders (240,024) (29,199) (114,532) (52,994)
Withdrawals (192,859) (38,815) (68,521) (61,210)
Transfers in (out of) subaccounts, net -- Note 1 (7,080,261) 928,844 874,120 1,788,611
Change in net assets resulting from capital transactions 14,367,369 1,300,179 1,302,069 2,664,213
Increase in net assets 14,669,286 1,320,942 1,405,345 2,885,100
- -------------------------------------------------------------------- ------------ ------------ ------------ ------------
Net assets at beginning of period 5,562,204 1,693,661 3,166,766 4,264,465
==================================================================== ============ ============ ------------ ------------
Net assets at end of period $ 20,231,490 $ 3,014,603 $ 4,572,111 $ 7,149,565
==================================================================== ============ ============ ============ ============
Net asset value per unit at end of period $ 1.00 $ 13.88 $ 10.03 $ 24.88
==================================================================== ============ ============ ============ ============
Units outstanding at end of period 20,231,490 217,190 455,844 287,362
==================================================================== ============ ============ ============ ============
<CAPTION>
The Alger
Fidelity American
Asset Fidelity Fidelity Small
Manager Index 500 Contrafund Capitalization
For the Nine Months Ended September 30, 1999 Portfolio Portfolio Portfolio Portfolio
- -------------------------------------------------------------------- ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
From operations:
Net investment income (loss) $ 149,611 $ 47,982 $ 106,555 $ 222,739
Net realized and unrealized investment gains (losses) (90,974) 842,925 2,584 (138,661)
Change in net assets resulting from operations 58,638 890,907 109,139 84,078
From capital transactions:
Net premiums/deposits 977,994 4,057,203 2,024,893 316,446
Death Benefits (9,327) (20,407) -- --
Surrenders (1,092) (98,959) (214,120) (7,728)
Withdrawals (34,566) (137,517) (52,603) (6,880)
Transfers in (out of) subaccounts, net -- Note 1 1,464,891 4,065,773 2,549,533 222,846
Change in net assets resulting from capital transactions 2,397,900 7,866,094 4,307,703 524,685
Increase in net assets 2,456,537 8,757,001 4,416,842 608,763
- -------------------------------------------------------------------- ------------ ------------ ------------ ------------
Net assets at beginning of period 2,258,021 10,689,971 3,710,433 1,601,254
==================================================================== ------------ ------------ ------------ ------------
Net assets at end of period $ 4,714,558 $ 19,446,972 $ 8,127,274 $ 2,210,016
==================================================================== ============ ============ ============ ============
Net asset value per unit at end of period $ 17.16 $ 145.84 $ 24.84 $ 42.08
==================================================================== ============ ============ ============ ============
Units outstanding at end of period 274,741 133,345 327,185 52,519
==================================================================== ============ ============ ============ ============
<CAPTION>
The Alger
The Alger American MFS
American MidCap Emerging MFS
Growth Growth Growth Research
For the Nine Months Ended September 30, 1999 Portfolio Portfolio Series Series
- -------------------------------------------------------------------- ------------ ---------- ------------ -----------
<S> <C> <C> <C> <C>
From operations:
Net investment income (loss) $ 867,413 $ 205,433 $ (37,545) $ 7,480
Net realized and unrealized investment gains (losses) (490,080) (169,493) 383,487 53,337
Change in net assets resulting from operations 377,333 35,940 345,942 60,817
From capital transactions:
Net premiums/deposits 2,432,701 536,766 916,322 685,090
Death Benefits (26,683) (9,196) (5,257) --
Surrenders (32,227) (22,656) (20,165) (5,317)
Withdrawals (78,061) (27,451) (14,810) (18,676)
Transfers in (out of) subaccounts, net -- Note 1 5,544,313 642,593 1,099,576 1,147,834
Change in net assets resulting from capital transactions 7,840,042 1,120,057 1,975,666 1,808,931
Increase in net assets 8,217,376 1,155,997 2,321,608 1,869,748
- -------------------------------------------------------------------- ------------ ----------- ----------- -----------
Net assets at beginning of period 5,444,895 1,173,003 2,923,809 1,678,171
==================================================================== ------------ =========== =========== ===========
Net assets at end of period $ 13,662,271 $ 2,329,000 $ 5,245,418 $ 3,547,918
==================================================================== ============ =========== =========== ===========
Net asset value per unit at end of period $ 52.92 $ 25.66 $ 24.47 $ 19.15
==================================================================== ============ =========== =========== ===========
Units outstanding at end of period 258,168 90,764 214,361 185,270
==================================================================== ============ =========== =========== ===========
<CAPTION>
MFS
Growth MFS MFS Sogen
with Limited Total Overseas
Income Maturity Return Variable
For the Nine Months Ended September 30, 1999 Series Series Series Fund
- -------------------------------------------------------------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
From operations:
Net investment income (loss) $ (9,854) $ (14,213) $ 114,372 $ (1,615)
Net realized and unrealized investment gains (losses) (49,965) 44,576 (139,143) 626,075
Change in net assets resulting from operations (59,818) 30,363 (24,771) 624,460
From capital transactions:
Net premiums/deposits 804,567 227,529 991,703 339,456
Death Benefits -- (11,410) (24,405) --
Surrenders (23,450) (75,906) (27,926) (19,660)
Withdrawals (36,344) (13,301) (32,854) (39,497)
Transfers in (out of) subaccounts, net -- Note 1 1,605,262 746,115 1,874,726 99,935
Change in net assets resulting from capital transactions 2,350,035 873,026 2,781,243 380,235
Increase in net assets 2,290,217 903,388 2,756,472 1,004,695
- -------------------------------------------------------------------- ----------- ----------- ----------- -----------
Net assets at beginning of period 2,385,417 1,031,559 1,893,190 2,038,461
==================================================================== =========== =========== =========== ===========
Net assets at end of period $ 4,675,634 $ 1,934,947 $ 4,649,661 $ 3,043,156
==================================================================== =========== =========== =========== ===========
Net asset value per unit at end of period $ 19.28 $ 10.34 $ 17.26 $ 13.14
==================================================================== =========== =========== =========== ===========
Units outstanding at end of period 242,512 187,132 269,389 231,595
==================================================================== =========== =========== =========== ===========
<CAPTION>
Van Eck
Worldwide Van Eck
Hard Emerging
Assets Markets
For the Nine Months Ended September 30, 1999 Fund Fund
- -------------------------------------------------------------------- ----------- ---------
<S> <C> <C>
From operations:
Net investment income (loss) $ 467 $ (4,969)
Net realized and unrealized investment gains (losses) 31,123 134,244
Change in net assets resulting from operations 31,590 129,274
From capital transactions:
Net premiums/deposits 21,748 80,794
Death Benefits -- --
Surrenders (8,640) --
Withdrawals (1,314) (2,377)
Transfers in (out of) subaccounts, net -- Note 1 34,186 (6,562)
Change in net assets resulting from capital transactions 45,979 71,854
Increase in net assets 77,569 201,129
- -------------------------------------------------------------------- ----------- ---------
Net assets at beginning of period 141,143 401,475
==================================================================== =========== =========
Net assets at end of period $ 218,712 $ 602,604
==================================================================== =========== =========
Net asset value per unit at end of period $ 10.64 $ 9.09
==================================================================== =========== =========
Units outstanding at end of period 20,556 66,293
==================================================================== =========== =========
</TABLE>
<TABLE>
<CAPTION>
Federated Federated Federated Fidelity
Prime Money Utility High Income Equity-Income
For the Year ended December 31, 1998 Fund II Fund II Bond Fund II Portfolio
- -------------------------------------------------------------------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C>
From operations:
Net investment income (loss) $ 207,113 $ 3,202 $ (9,420) $ 8,287
Net realized and unrealized investment gains (losses) 634 97,354 (26,804) 186,584
Change in net assets resulting from operations 207,747 100,556 (36,224) 194,871
From capital transactions:
Net premiums/deposits 24,848,283 1,307,253 2,301,701 2,167,250
Death Benefits (15,275) (19,978) (13,846) (7,421)
Surrenders (198,856) (15,885) (12,264) (37,904)
Withdrawals (112,539) (77,318) (93,235) (31,134)
Transfers in (out of) subaccounts, net -- Note 1 (20,028,240) 348,351 830,154 1,482,837
Change in net assets resulting from capital transactions 4,493,373 1,542,423 3,012,510 3,573,628
Increase (decrease) in net assets 4,701,120 1,642,979 2,976,286 3,768,499
- -------------------------------------------------------------------- ------------ ------------ ------------ ------------
Net assets at beginning of period 861,084 50,683 190,479 495,969
==================================================================== ============ ============ ============ ============
Net assets at end of period $ 5,562,204 $ 1,693,662 $ 3,166,765 $ 4,264,468
==================================================================== ============ ============ ============ ============
Net asset value per unit at end of period $ 1.00 $ 15.27 $ 10.92 $ 25.42
==================================================================== ============ ============ ============ ============
Units outstanding at end of period 5,562,204 110,914 289,997 167,760
==================================================================== ============ ============ ============ ============
<CAPTION>
The Alger
Fidelity American
Asset Fidelity Fidelity Small
Manager Index 500 Contrafund Capitalization
For the Year ended December 31, 1998 Portfolio Portfolio Portfolio Portfolio
- -------------------------------------------------------------------- ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
From operations:
Net investment income (loss) $ 19,013 $ (22,378) $ 3,442 $ 115,699
Net realized and unrealized investment gains (losses) 141,214 1,288,532 507,452 2,409
Change in net assets resulting from operations 160,227 1,266,154 510,894 118,108
From capital transactions: 1,237,984 6,238,184 1,114,162 1,012,659
Net premiums/deposits
Death Benefits -- -- (10,449) (3,193)
Surrenders (1,620) (50,773) (23,821) (27,137)
Withdrawals (22,890) (110,964) (23,664) (16,711)
Transfers in (out of) subaccounts, net -- Note 1 616,956 2,784,494 1,814,245 321,797
Change in net assets resulting from capital transactions 1,830,430 8,860,941 2,870,473 1,287,415
Increase (decrease) in net assets 1,990,657 10,127,095 3,381,367 1,405,523
- -------------------------------------------------------------------- ------------ ------------ ------------ ------------
Net assets at beginning of period 267,366 562,885 329,066 195,731
==================================================================== ------------ ------------ ------------ ------------
Net assets at end of period $ 2,258,023 $ 10,689,980 $ 3,710,433 $ 1,601,254
==================================================================== ============ ============ ============ ============
Net asset value per unit at end of period $ 18.16 $ 141.25 $ 24.44 $ 43.97
==================================================================== ============ ============ ============ ============
Units outstanding at end of period 124,340 75,681 151,818 36,417
==================================================================== ============ ============ ============ ============
<CAPTION>
The Alger
The Alger American MFS
American MidCap Emerging MFS
Growth Growth Growth Research
For the Year ended December 31, 1998 Portfolio Portfolio Series Series
- -------------------------------------------------------------------- ------------ ---------- ------------ -----------
<S> <C> <C> <C> <C>
From operations:
Net investment income (loss) $ 307,440 $ 18,386 $ (10,989) $ (1,475)
Net realized and unrealized investment gains (losses) 766,562 131,442 548,478 172,413
Change in net assets resulting from operations 1,074,002 149,828 537,489 170,938
From capital transactions:
Net premiums/deposits 2,385,652 456,073 845,164 586,011
Death Benefits -- (3,437) -- --
Surrenders (13,467) -- (9,091) (1,253)
Withdrawals (33,203) (1,155) (24,319) (11,140)
Transfers in (out of) subaccounts, net -- Note 1 1,782,528 529,267 1,432,918 777,200
Change in net assets resulting from capital transactions 4,121,510 980,748 2,244,672 1,350,818
Increase (decrease) in net assets 5,195,512 1,130,576 2,782,161 1,521,756
- -------------------------------------------------------------------- ------------ ----------- ----------- -----------
Net assets at beginning of period 249,383 42,427 141,648 156,415
==================================================================== ============ =========== =========== ===========
Net assets at end of period $ 5,444,895 $ 1,173,003 $ 2,923,809 $ 1,678,171
==================================================================== ============ =========== =========== ===========
Net asset value per unit at end of period $ 53.22 $ 28.87 $ 21.47 $ 19.05
==================================================================== ============ =========== =========== ===========
Units outstanding at end of period 102,309 40,631 136,181 88,093
==================================================================== ============ =========== =========== ===========
<CAPTION>
MFS
Growth MFS MFS Sogen
with Limited Total Overseas
Income Maturity Return Variable
For the Year ended December 31, 1998 Series Series Series Fund
- -------------------------------------------------------------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
From operations:
Net investment income (loss) $ (16,356) $ (7,862) $ 12,833 $ (24,005)
Net realized and unrealized investment gains (losses) 234,577 (11,034) 69,285 (64,492)
Change in net assets resulting from operations 218,221 (18,896) 82,118 (88,497)
From capital transactions:
Net premiums/deposits 1,164,678 743,654 968,524 1,098,070
Death Benefits (4,023) (7,699) -- (3,348)
Surrenders -- (6,502) (7,865) (16,724)
Withdrawals (17,911) (6,087) (11,868) (21,157)
Transfers in (out of) subaccounts, net -- Note 1 805,436 245,382 602,434 317,226
Change in net assets resulting from capital transactions 1,948,180 968,748 1,551,225 1,374,067
Increase (decrease) in net assets 2,166,401 949,852 1,633,343 1,285,570
- -------------------------------------------------------------------- ----------- ----------- ----------- -----------
Net assets at beginning of period 219,017 81,706 259,844 752,892
==================================================================== =========== =========== =========== ===========
Net assets at end of period $ 2,385,418 $ 1,031,558 $ 1,893,187 $ 2,038,462
==================================================================== =========== =========== =========== ===========
Net asset value per unit at end of period $ 20.11 $ 10.16 $ 18.12 $ 10.07
==================================================================== =========== =========== =========== ===========
Units outstanding at end of period 118,618 101,531 104,481 202,429
==================================================================== =========== =========== =========== ===========
<CAPTION>
Van Eck
Worldwide Van Eck
Hard Emerging
Assets Markets
For the Year ended December 31, 1998 Fund Fund
- -------------------------------------------------------------------- ----------- ----------
<S> <C> <C>
From operations:
Net investment income (loss) $ 4,608 $ (2,674)
Net realized and unrealized investment 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 in (out of) subaccounts, net -- Note 1 61,004 156,590
Change in net assets resulting from capital transactions 168,263 497,012
Increase (decrease) 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
==================================================================== =========== =========
</TABLE>
<PAGE> 4
NOTES TO FINANCIAL STATEMENTS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
September 30, 1999 -- UNAUDITED
================================================================================
NOTE 1. ORGANIZATION
- --------------------------------------------------------------------------------
Valley Forge Life Insurance Company Variable Annuity Separate Account
("Variable Account"), a unit investment trust registered with the Securities and
Exchange Commission under the Investment Company Act of 1940, is a separate
account of Valley Forge Life Insurance Company ("VFL"). The Variable Account
began operation on February 3, 1997. The assets of the Variable Account are
segregated from VFL's general account and its other separate accounts. VFL is a
wholly-owned subsidiary of Continental Assurance Company ("Assurance").
Assurance is a wholly-owned subsidiary of Continental Casualty Company
("Casualty"), which is wholly-owned by CNA Financial Corporation ("CNA"). Loews
Corporation owns approximately 86% of the outstanding common stock of CNA as of
September 30, 1999.
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 23 subaccounts each of which invests
in shares of corresponding funds (Funds), in which the contractholders bear all
of the investment risk. Each Fund is either an open-end diversified management
investment company or a separate investment portfolio of such a company and is
managed by an investment advisor ("Investment Advisor") which is registered with
the Securities and Exchange Commission. The Investment Advisors and subaccounts
are identified here.
- --------------------------------------------------------------------------------
INVESTMENT ADVISOR:
FUND/SUBACCOUNT
- --------------------------------------------------------------------------------
FEDERATED ADVISERS:
Federated Prime Money Fund II
Federated Utility Fund II
Federated High Income Bond Fund II
FIDELITY MANAGEMENT & RESEARCH COMPANY:
Fidelity Variable Insurance Products Fund Equity-Income
Portfolio ("Fidelity Equity-Income Portfolio")
Fidelity Variable Insurance Products Fund II Asset
Manager Portfolio ("Fidelity Asset Manager Portfolio")
Fidelity Variable Insurance Products Fund II Index 500
Portfolio ("Fidelity Index 500 Portfolio")
Fidelity Variable Insurance Products Fund II Contrafund
Portfolio ("Fidelity Contrafund Portfolio")
- --------------------------------------------------------------------------------
INVESTMENT ADVISOR:
FUND/SUBACCOUNT
- --------------------------------------------------------------------------------
FRED ALGER MANAGEMENT, INC.:
The Alger American Small Capitalization Portfolio
The Alger American Growth Portfolio
The Alger American MidCap Growth Portfolio
JANUS ASPEN SERIES
Janus Aspen Growth Portfolio
Janus Aspen Capital Appreciation Portfolio
Janus Aspen International Growth
Janus Aspen Worldwide Growth Portfolio
Janus Aspen Balanced Portfolio
Janus Aspen Flexible Income Portfolio
MASSACHUSETTS FINANCIAL SERVICES COMPANY:
MFS Emerging Growth Series
MFS Research Series
MFS Growth With Income Series
MFS Limited Maturity Series (closed to new investments)
MFS Total Return Series
SOCIETE GENERALE ASSET MANAGEMENT CORP.:
SoGen Overseas Variable Fund VAN ECK ASSOCIATES CORPORATION:
Van Eck Worldwide Hard Assets Fund
Van Eck Emerging Markets Fund
- --------------------------------------------------------------------------------
8
<PAGE> 5
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
September 30, 1999 -- UNAUDITED
================================================================================
The GIO Account is also a separate account of VFL. Through the guaranteed
interest option, VFL offers specified effective annual rates of interest that
are credited daily and available for specified periods of time. Contractholders
choosing the guaranteed interest option do not participate in the investment
performance of the GIO Account and this performance does not determine the GIO
Account value or benefits relating thereto.
The assets of the GIO Account and the Variable Account are held separately
from other VFL assets and from the General Account of VFL. The contractholder
(before the maturity date, while the contractholder is still living or the
Contract is in force) may transfer all or part of any subaccount value to
another subaccount(s) or to the GIO Account, or transfer all or part of the GIO
Account value to any subaccounts. The MFS Limited Maturity Series subaccount is
no longer available for new allocations as of May 1, 1999. The GIO Account,
however, unlike the Variable Account, is not registered as an investment company
under the 1940 Act. Separate financial statements are not prepared for the GIO
Account and the accompanying financial statements do not reflect amounts
invested in the GIO Account.
- --------------------------------------------------------------------------------
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
VALUATION OF INVESTMENTS -- Investments in the Variable Account consist of
shares of the Funds and are stated at market value based on quoted market
prices. Changes in the difference between market value and cost are reflected as
net unrealized gains (losses) in the accompanying financial statements.
INVESTMENT INCOME -- Investment income consists of dividends declared by
the Funds and are recognized on the date of record.
REALIZED GAINS AND LOSSES -- Realized investment gains and losses in the
Variable Account represent the difference between the proceeds from sales of
shares of the Funds held by the subaccount and the cost of such shares, which
are determined using the average cost method.
FEDERAL INCOME TAXES -- Net investment income and realized gains and losses
on investments of the Variable Account are taxable to contractholders generally
upon distribution. Accordingly, no provision for income taxes has been recorded
in the accompanying financial statements.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
In the opinion of Variable Account's management, these statements include all
adjustments, consisting of normal recurring accruals, which are necessary for
the fair presentation of the financial position, results of operations and
changes in net assets in the accompanying financial statements.
- --------------------------------------------------------------------------------
9
<PAGE> 6
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
September 30, 1999 -- UNAUDITED
================================================================================
NOTE 3. CHARGES AND DEDUCTIONS
- --------------------------------------------------------------------------------
VFL deducts a daily charge from the assets of the Variable Account to
compensate it for various product expense risks that it assumes under the
Contract. The daily charge is equal to an annual rate of 1.40% 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 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
if each of the Funds that the Variable Account participates in, that the mutual
Funds satisfy the diversification requirement of the regulations.
- --------------------------------------------------------------------------------
10
<PAGE> 7
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
September 30, 1999 -- UNAUDITED
================================================================================
NOTE 5. MANAGEMENT'S DISCUSSION OF YEAR 2000 IMPACT ON VARIABLE ACCOUNT
- --------------------------------------------------------------------------------
The widespread use of computer programs, both in the United States and
internationally, that rely on two digit date fields to perform computations and
decision making functions may cause computer systems to malfunction when
processing information involving dates beginning in 1999. Such malfunctions
could lead to business delays and disruptions. The Variable Account does not
maintain any systems. Instead, it relies on the systems of CNA, third party
vendors and other business partners. CNA, on behalf of The Variable Account, has
a plan under which it reviews periodically the progress that these parties are
making on this issue. As of December 1, 1998, CNA had certified internally as
Year 2000-ready all of the internal systems used by Separate Account. However,
as business conditions change, CNA may respond by revising previous Year 2000
strategies or solutions affecting specific systems. In limited cases, a system
that was to have been replaced, instead, may be renovated to become Year 2000
ready prior to January 1, 2000. The Variable Account does not believe these
changes will have a material impact on the Variable Account.
CNA has also received statements of Year 2000 compliance from certain key
business partners. Separate Account management believes that the systems on
which it relies does not have any significant remaining exposure to the Year
2000 issue and, therefore The Variable Account does not have a material exposure
to the Year 2000 issue. However, due to the interdependent nature of computer
systems, there may be an adverse impact on Separate Account if its business
partners fail to address the Year 2000 issue successfully. To mitigate this
impact, if any, CNA on behalf of itself and Separate Account is communicating
with its business partners to coordinate Year 2000 conversion. In addition, CNA
has developed business resumption plans to ensure that it and The Variable
Account are able to continue critical processes through other means in the event
that it becomes necessary to do so. Formal strategies have been developed to
include appropriate recovery processes and use of alternative vendors.
Based on its current assessment, CNA estimates that the total cost to
replace and upgrade its systems to accommodate Year 2000 processing will be
approximately $70 million. As of September 30th, 1999, CNA has spent
approximately $60 million on Year 2000 readiness matter.
- --------------------------------------------------------------------------------
<PAGE> 1
- --------------------------------------------------------------------------------
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 statements of assets and liabilities of
the subaccounts of Valley Forge Life Insurance Company Variable Annuity Separate
Account (the "Account") as of December 31, 1998 and 1997, and the related
statements of operations and changes in net assets for the year ended December
31, 1998 and the period from inception through December 31, 1997. 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 Fund and Van Eck Emerging Markets Fund.
These financial statements are the responsibility of the Variable 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
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned at December 31, 1998 and 1997. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our 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, 1998 and 1997, the results of their operations and
the changes in their net assets for the year ended December 31, 1998 and the
period from inception through December 31, 1997, in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Chicago, Illinois
February 23, 1999
7
<PAGE> 2
STATEMENTS OF ASSETS AND LIABILITIES
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIDELITY FIDELITY
FEDERATED FEDERATED FEDERATED EQUITY- ASSET FIDELITY FIDELITY
PRIME MONEY UTILITY HIGH INCOME INCOME MANAGER INDEX 500 CONTRAFUND
DECEMBER 31, 1998 FUND II FUND II BOND FUND II PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at market value: $5,562,204 $1,693,662 $3,166,765 $4,264,468 $2,258,023 $10,689,980 $3,710,438
---------- ---------- ---------- ---------- ---------- ----------- ----------
TOTAL ASSETS 5,562,204 1,693,662 3,166,765 4,264,468 2,258,023 10,689,980 3,710,438
---------- ---------- ---------- ---------- ---------- ----------- ----------
LIABILITIES - - - - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $5,562,204 $1,693,662 $3,166,765 $4,264,468 $2,258,023 $10,689,980 $3,710,438
=================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIDELITY FIDELITY
FEDERATED FEDERATED FEDERATED EQUITY- ASSET FIDELITY FIDELITY
PRIME MONEY UTILITY HIGH INCOME INCOME MANAGER INDEX 500 CONTRAFUND
DECEMBER 31, 1997 FUND II FUND II BOND FUND II PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at market value: $ 861,084 $ 50,683 $ 190,479 $ 495,969 $ 267,366 $ 562,885 $ 329,066
---------- ---------- ---------- ---------- ---------- ----------- ----------
TOTAL ASSETS 861,084 50,683 190,479 495,969 267,366 562,885 329,066
---------- ---------- ---------- ---------- ---------- ----------- ----------
LIABILITIES - - - - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $ 861,084 $ 50,683 $ 190,479 $ 495,969 $ 267,366 $ 562,885 $ 329,066
=================================================================================================================================
</TABLE>
See accompanying Notes to Financial Statements
8
<PAGE> 3
STATEMENTS OF ASSETS AND LIABILITIES
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE ALGER THE ALGER MFS
AMERICAN THE ALGER AMERICAN MFS GROWTH MFS
SMALL AMERICAN MIDCAP EMERGING MFS WITH LIMITED
CAPITALIZATION GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY
DECEMBER 31, 1998 PORTFOLIO PORTFOLIO PORTFOLIO SERIES SERIES SERIES SERIES
---------------------------------------------------------------------------------------------
<S> <S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at market value: $1,601,255 $5,444,900 $1,173,004 $2,923,811 $1,678,171 $2,385,418 $1,031,558
---------- ---------- ---------- ---------- ---------- ---------- ----------
TOTAL ASSETS 1,601,255 5,444,900 1,173,004 2,923,811 1,678,171 2,385,418 1,031,558
---------- ---------- ---------- ---------- ---------- ---------- ----------
LIABILITIES - - - - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $1,601,255 $5,444,900 $1,173,004 $2,923,811 $1,678,171 $2,385,418 $1,031,558
=================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
VAN ECK
MFS SOGEN WORLDWIDE VAN ECK
TOTAL OVERSEAS HARD EMERGING
RETURN VARIABLE ASSETS MARKET
DECEMBER 31, 1998 SERIES FUND FUND FUND
----------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at market value: $1,893,187 $2,038,462 $141,143 $401,475
---------- ---------- -------- --------
TOTAL ASSETS 1,893,187 2,038,462 141,143 401,475
---------- ---------- -------- --------
LIABILITIES - - - -
- ----------------------------------------------------------------------------------------
NET ASSETS $1,893,187 $2,038,462 $141,143 $401,475
========================================================================================
</TABLE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE ALGER THE ALGER MFS
AMERICAN THE ALGER AMERICAN MFS GROWTH MFS
SMALL AMERICAN MIDCAP EMERGING MFS WITH LIMITED
CAPITALIZATION GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY
DECEMBER 31, 1997 PORTFOLIO PORTFOLIO PORTFOLIO SERIES SERIES SERIES SERIES
---------------------------------------------------------------------------------------------
<S> <S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at market value: 195,731
$ $ 249,383 $ 42,427 $ 141,648 $ 156,415 $ 219,017 $ 81,706
TOTAL ASSETS ---------- ---------- ---------- ---------- ---------- ---------- ----------
195,731 249,383 42,427 141,648 156,415 219,017 81,706
LIABILITIES ---------- ---------- ---------- ---------- ---------- ---------- ----------
- ------------------------------------ - - - - - - -
NET ASSETS ---------------------------------------------------------------------------------------------
$ 195,731 $ 249,383 $ 42,427 $ 141,648 $ 156,415 $ 219,017 $ 81,706
==================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
VAN ECK
MFS SOGEN WORLDWIDE VAN ECK
TOTAL OVERSEAS HARD EMERGING
RETURN VARIABLE ASSETS MARKET
DECEMBER 31, 1997 SERIES FUND FUND FUND
------------------------------------- ------------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at market value: $ 259,844 $ 752,892 $ 9,037 $ 16,890
---------- ---------- -------- --------
TOTAL ASSETS 259,844 752,892 9,037 16,890
---------- ---------- -------- --------
LIABILITIES - - - -
--------------------------------------------------
NET ASSETS $ 259,844 $ 752,892 $ 9,037 $ 16,890
========================================================================================
</TABLE>
See accompanying Notes to Financial Statements
9
<PAGE> 4
STATEMENTS OF OPERATIONS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIDELITY FIDELITY
FEDERATED FEDERATED FEDERATED EQUITY- ASSET FIDELITY FIDELITY
FOR THE YEAR ENDED PRIME MONEY UTILITY HIGH INCOME INCOME MANAGER INDEX 500 CONTRAFUND
DECEMBER 31, 1998 FUND II FUND II BOND FUND II PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividend income $295,559 $ 11,976 $ 14,362 $ 37,197 $ 34,952 $ 53,264 $ 26,355
-------- -------- -------- -------- -------- ---------- --------
295,559 11,976 14,362 37,197 34,952 53,264 26,355
-------- -------- -------- -------- -------- ---------- --------
Expenses:
Mortality and expense risk
and administration charges 88,446 8,774 23,782 28,910 15,939 75,642 22,913
-------- -------- -------- -------- -------- ---------- --------
88,446 8,774 23,782 28,910 15,939 75,642 22,913
-------- -------- -------- -------- -------- ---------- --------
NET INVESTMENT INCOME
(LOSS) 207,113 3,202 (9,420) 8,287 19,013 (22,378) 3,442
-------- -------- -------- -------- -------- ---------- --------
Investment gains and (losses):
Net realized gains (losses) 634 26,859 (8,426) (6,499) (25,723) 153,627 34,709
Net unrealized gains
(losses) - 70,495 (18,378) 193,083 166,937 1,134,905 472,743
-------- -------- -------- -------- -------- ---------- --------
NET REALIZED AND
UNREALIZED INVESTMENT
GAINS (LOSSES) 634 97,354 (26,804) 186,584 141,214 1,288,532 507,452
- ------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $207,747 $100,556 $(36,224) $194,871 $160,227 $1,266,154 $510,894
========================================================================================================================
FOR THE PERIOD FROM INCEPTION
TO
DECEMBER 31, 1997 4-MAR-97 17-MAR-97 1-MAY-97 21-FEB-97 21-FEB-97 17-MAR-97 21-FEB-97
- ------------------------------------------------------------------------------------------------------------------------
Investment income:
Dividend income $ 21,053 $ 82 $ 1,192 - - - -
-------- -------- -------- -------- -------- ---------- --------
21,053 82 1,192 - - - -
-------- -------- -------- -------- -------- ---------- --------
Expenses:
Mortality, expense risk and
administration charges 5,938 150 647 $ 1,842 $ 1,397 $ 1,805 $ 917
-------- -------- -------- -------- -------- ---------- --------
5,938 150 647 1,842 1,397 1,805 917
-------- -------- -------- -------- -------- ---------- --------
NET INVESTMENT INCOME
(LOSS) 15,115 (68) 545 (1,842) (1,397) (1,805) (917)
-------- -------- -------- -------- -------- ---------- --------
Investment gains and (losses):
Net realized gains (losses) - 85 1,461 18,226 11,160 9,302 3,732
Net unrealized gains
(losses) - 4,190 3,915 6,272 1,593 19,813 4,074
-------- -------- -------- -------- -------- ---------- --------
NET REALIZED AND
UNREALIZED INVESTMENT
GAINS (LOSSES) - 4,275 5,376 24,498 12,753 29,115 7,806
- ------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ 15,115 $ 4,207 $ 5,921 $ 22,656 $ 11,356 $ 27,310 $ 6,889
========================================================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
10
<PAGE> 5
STATEMENT OF OPERATIONS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE ALGER THE ALGER MFS
AMERICAN THE ALGER AMERICAN MFS GROWTH MFS MFS
SMALL AMERICAN MIDCAP EMERGING MFS WITH LIMITED TOTAL
CAPITALIZATION GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY RETURN
PORTFOLIO PORTFOLIO PORTFOLIO SERIES SERIES SERIES SERIES SERIES
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividend income $128,450 $ 341,214 $ 25,115 $ 5,508 $ 7,886 - - $27,446
-------- ---------- -------- -------- -------- -------- -------- -------
128,450 341,214 25,115 5,508 7,886 - - 27,446
-------- ---------- -------- -------- -------- -------- -------- -------
Expenses:
Mortality and expense risk
and administration charges 12,751 33,774 6,729 16,497 9,361 $ 16,356 $ 7,862 14,613
-------- ---------- -------- -------- -------- -------- -------- -------
12,751 33,774 6,729 16,497 9,361 16,356 7,862 14,613
-------- ---------- -------- -------- -------- -------- -------- -------
NET INVESTMENT INCOME
(LOSS) 115,699 307,440 18,386 (10,989) (1,475) (16,356) (7,862) 12,833
-------- ---------- -------- -------- -------- -------- -------- -------
Investment gains and (losses):
Net realized gains (losses) (39,387) (39,007) (16,647) 40,933 10,492 40,525 11,121 20,622
Net unrealized gains
(losses) 41,796 805,569 148,089 507,545 161,921 194,052 (22,155) 48,663
-------- ---------- -------- -------- -------- -------- -------- -------
NET REALIZED AND
UNREALIZED INVESTMENT
GAINS (LOSSES) 2,409 766,562 131,442 548,478 172,413 234,577 (11,034) 69,285
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $118,108 $1,074,002 $149,828 $537,489 $170,938 $218,221 $(18,896) $82,118
===================================================================================================================================
FOR THE PERIOD FROM INCEPTION
TO
DECEMBER 31, 1997 3-APR-97 17-JUN-97 21-FEB-97 21-FEB-97 21-FEB-97 13-MAR-97 1-MAY-97 21-FEB-97
- -----------------------------------------------------------------------------------------------------------------------------------
Investment income:
Dividend income $ 51 - $ 89 - - $ 5,132 $ 3,140 -
-------- ---------- -------- -------- -------- -------- -------- -------
51 - 89 - - 5,132 3,140 -
-------- ---------- -------- -------- -------- -------- -------- -------
Expenses:
Mortality, expense risk and
administration charges 661 $ 621 199 $ 692 $ 969 792 470 $ 1,259
-------- ---------- -------- -------- -------- -------- -------- -------
661 621 199 692 969 792 470 1,259
-------- ---------- -------- -------- -------- -------- -------- -------
NET INVESTMENT INCOME
(LOSS) (610) (621) (110) (692) (969) 4,340 2,670 (1,259)
-------- ---------- -------- -------- -------- -------- -------- -------
Investment gains and (losses):
Net realized gains (losses) 5,548 732 1,490 122 3,145 2,986 1,202 5,264
Net unrealized gains
(losses) (13,637) (8,997) (1,453) 3,958 5,519 5,310 (1,986) 11,648
-------- ---------- -------- -------- -------- -------- -------- -------
NET REALIZED AND
UNREALIZED INVESTMENT
GAINS (LOSSES) (8,089) (8,265) 37 4,080 8,664 8,296 (784) 16,912
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ (8,699) $ (8,886) $ (73) $ 3,388 $ 7,695 $ 12,636 $ 1,886 $15,653
===================================================================================================================================
<CAPTION>
VAN ECK
SOGEN WORLDWIDE VAN ECK
OVERSEAS HARD EMERGING
VARIABLE ASSETS MARKETS
FUND FUND FUND
---------------------- ---------
<S> <C> <C> <C>
Investment income:
Dividend income - $ 5,831 $ 783
-------- -------- ---------
- 5,831 783
-------- -------- ---------
Expenses:
Mortality and expense risk
and administration charges $ 24,005 1,223 3,457
-------- -------- ---------
24,005 1,223 3,457
-------- -------- ---------
NET INVESTMENT INCOME
(LOSS) (24,005) 4,608 (2,674)
-------- -------- ---------
Investment gains and (losses):
Net realized gains (losses) (62) (20,683) (49,149)
Net unrealized gains
(losses) (64,430) (20,082) (60,604)
-------- -------- ---------
NET REALIZED AND
UNREALIZED INVESTMENT
GAINS (LOSSES) (64,492) (40,765) (109,753)
- ---------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $(88,497) $(36,157) $(112,427)
===========================================================================
FOR THE PERIOD FROM INCEPTION
TO
DECEMBER 31, 1997 3-FEB-97 3-APR-97
- ---------------------------------------------------------------------------
Investment income:
Dividend income - - -
-------- -------- ---------
- - -
-------- -------- ---------
Expenses:
Mortality, expense risk and
administration charges $ 8,364 $ 20 $ 94
-------- -------- ---------
8,364 20 94
-------- -------- ---------
NET INVESTMENT INCOME
(LOSS) (8,364) (20) (94)
-------- -------- ---------
Investment gains and (losses):
Net realized gains (losses) 7,592 11 (404)
Net unrealized gains
(losses) (34,846) (189) (4,665)
-------- -------- ---------
NET REALIZED AND
UNREALIZED INVESTMENT
GAINS (LOSSES) (27,254) (178) (5,069)
- ---------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $(35,618) $ (198) $ (5,163)
===========================================================================
</TABLE>
<PAGE> 6
STATEMENTS OF CHANGES IN NET ASSETS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIDELITY FIDELITY
FEDERATED FEDERATED FEDERATED EQUITY- ASSET FIDELITY FIDELITY
FOR THE PERIOD ENDED PRIME MONEY UTILITY HIGH INCOME INCOME MANAGER INDEX 500 CONTRAFUND
DECEMBER 31, 1998 FUND II FUND II BOND FUND II PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
From operations:
Net investment income (loss) $ 207,113 $ 3,202 $ (9,420) $ 8,287 $ 19,013 $ (22,378) $ 3,442
Net realized and unrealized
gains (losses) 634 97,354 (26,804) 186,584 141,214 1,288,532 507,452
------------ ---------- ---------- ---------- ---------- ----------- ----------
Change in net assets
resulting from operations 207,747 100,556 (36,224) 194,871 160,227 1,266,154 510,894
------------ ---------- ---------- ---------- ---------- ----------- ----------
From capital transactions:
Net premiums/deposits 24,848,283 1,307,253 2,301,701 2,167,250 1,237,984 6,238,184 1,114,162
Death benefits (15,275) (19,978) (13,846) (7,421) - - (10,449)
Surrenders (198,856) (15,885) (12,264) (37,904) (1,620) (50,773) (23,821)
Withdrawals (112,539) (77,318) (93,235) (31,134) (22,890) (110,964) (23,659)
Transfers into (out of)
subaccounts, net -- Note 1 (20,028,240) 348,351 830,154 1,482,837 616,956 2,784,494 1,814,245
------------ ---------- ---------- ---------- ---------- ----------- ----------
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 2,870,478
------------ ---------- ---------- ---------- ---------- ----------- ----------
Increase in net assets 4,701,120 1,642,979 2,976,286 3,768,499 1,990,657 10,127,095 3,381,372
Net assets at beginning of
period 861,084 50,683 190,479 495,969 267,366 562,885 329,066
------------ ---------- ---------- ---------- ---------- ----------- ----------
NET ASSETS AT END OF PERIOD $ 5,562,204 $1,693,662 $3,166,765 $4,264,468 $2,258,023 $10,689,980 $3,710,438
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER UNIT AT END
OF PERIOD $ 1.00 $ 15.27 $ 10.92 $ 25.42 $ 18.16 $ 141.25 $ 24.44
================================================================================================================================
UNITS OUTSTANDING AT END OF
PERIOD 5,562,204 110,914 289,997 167,760 124,340 75,681 151,818
================================================================================================================================
FOR THE PERIOD FROM INCEPTION
TO
DECEMBER 31, 1997 4-MAR-97 17-MAR-97 1-MAY-97 21-FEB-97 21-FEB-97 17-MAR-97 21-FEB-97
- --------------------------------------------------------------------------------------------------------------------------------
From operations:
Net investment income (loss) $ 15,115 $ (68) $ 545 $ (1,842) $ (1,397) $ (1,805) $ (917)
Net realized and unrealized
gains (losses) - 4,275 5,376 24,498 12,753 29,115 7,806
------------ ---------- ---------- ---------- ---------- ----------- ----------
Change in net assets
resulting from operations 15,115 4,207 5,921 22,656 11,356 27,310 6,889
------------ ---------- ---------- ---------- ---------- ----------- ----------
From capital transactions:
Net premiums/deposits 3,534,379 22,534 116,421 427,889 186,728 444,865 146,548
Withdrawals (6,610) - (507) (701) (12) (704) -
Transfers into (out of)
subaccounts, net -- Note 1 (2,681,800) 23,942 68,644 46,125 69,294 91,414 175,629
------------ ---------- ---------- ---------- ---------- ----------- ----------
Change in net assets
resulting from capital
transactions 845,969 46,476 184,558 473,313 256,010 535,575 322,177
------------ ---------- ---------- ---------- ---------- ----------- ----------
Increase in net assets 861,084 50,683 190,479 495,969 267,366 562,885 329,066
Net assets at beginning of
period - - - - - - -
------------ ---------- ---------- ---------- ---------- ----------- ----------
NET ASSETS AT END OF PERIOD $ 861,084 $ 50,683 $ 190,479 $ 495,969 $ 267,366 $ 562,885 $ 329,066
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER UNIT AT END
OF PERIOD $ 1.00 $ 14.29 $ 10.95 $ 24.28 $ 18.01 $ 114.39 $ 19.94
================================================================================================================================
UNITS OUTSTANDING AT END OF
PERIOD 861,084 3,547 17,395 20,427 14,845 4,921 16,503
================================================================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
12
<PAGE> 7
STATEMENTS OF CHANGES IN NET ASSETS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE THE
ALGER THE ALGER MFS
AMERICAN ALGER AMERICAN MFS GROWTH MFS
SMALL AMERICAN MIDCAP EMERGING MFS WITH LIMITED
FOR THE PERIOD ENDED CAPITALIZATION GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY
DECEMBER 31, 1998 PORTFOLIO PORTFOLIO PORTFOLIO SERIES SERIES SERIES SERIES
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
From operations:
Net investment income (loss) $ 115,699 $ 307,440 $ 18,386 $ (10,989) $ (1,475) $ (16,356) $ (7,862)
Net realized and unrealized
gains (losses) 2,409 766,562 131,442 548,478 172,413 234,577 (11,034)
----------- ---------- ---------- ---------- ---------- ---------- ----------
Change in net assets
resulting from operations 118,108 1,074,002 149,828 537,489 170,938 218,221 (18,896)
----------- ---------- ---------- ---------- ---------- ---------- ----------
From capital transactions:
Net premiums/deposits 1,012,659 2,385,652 456,073 845,164 586,011 1,164,678 743,654
Death benefits (3,193) - (3,436) - - (4,023) (7,699)
Surrenders (27,136) (13,467) - (9,089) (1,253) - (6,502)
Withdrawals (16,711) (33,198) (1,155) (24,319) (11,140) (17,911) (6,087)
Transfers into (out of)
subaccounts, net -- Note 1 321,797 1,782,528 529,267 1,432,918 777,200 805,436 245,382
----------- ---------- ---------- ---------- ---------- ---------- ----------
Change in net assets
resulting from capital
transactions 1,287,416 4,121,515 980,749 2,244,674 1,350,818 1,948,180 968,748
----------- ---------- ---------- ---------- ---------- ---------- ----------
Increase in net assets 1,405,524 5,195,517 1,130,577 2,782,163 1,521,756 2,166,401 949,852
Net assets at beginning of
period 195,731 249,383 42,427 141,648 156,415 219,017 81,706
----------- ---------- ---------- ---------- ---------- ---------- ----------
NET ASSETS AT END OF PERIOD $ 1,601,255 $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 $ 43.97 $ 53.22 $ 28.87 $ 21.47 $ 19.05 $ 20.11 $ 10.16
==========================================================================================================================
UNITS OUTSTANDING AT END OF
PERIOD 36,417 102,309 40,631 136,181 88,093 118,618 101,531
==========================================================================================================================
FOR THE PERIOD FROM INCEPTION
TO
DECEMBER 31, 1997 3-APR-97 17-JUN-97 21-FEB-97 21-FEB-97 21-FEB-97 13-MAR-97 1-MAY-97
- --------------------------------------------------------------------------------------------------------------------------
From operations:
Net investment income (loss) $ (610) $ (621) $ (110) $ (692) $ (969) $ 4,340 $ 2,670
Net realized and unrealized
gains (losses) (8,089) (8,265) 37 4,080 8,664 8,296 (784)
----------- ---------- ---------- ---------- ---------- --------- ---------
Change in net assets
resulting from operations (8,699) (8,886) (73) 3,388 7,695 12,636 1,886
----------- ---------- ---------- ---------- ---------- --------- ---------
From capital transactions:
Net premiums/deposits 186,908 203,646 38,097 99,654 121,533 124,921 75,938
Withdrawals - - - - - - (960)
Transfers into (out of)
subaccounts, net -- Note 1 17,522 54,623 4,403 38,606 27,187 81,460 4,842
----------- ---------- ---------- ---------- ---------- --------- ---------
Change in net assets
resulting from capital
transactions 204,430 258,269 42,500 138,260 148,720 206,381 79,820
----------- ---------- ---------- ---------- ---------- --------- ---------
Increase in net assets 195,731 249,383 42,427 141,648 156,415 219,017 81,706
Net assets at beginning of
period - - - - - - -
----------- ---------- ---------- ---------- ---------- --------- ---------
NET ASSETS AT END OF PERIOD $ 195,731 $ 249,383 $ 42,427 $ 141,648 $ 156,415 $ 219,017 $ 81,706
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER UNIT AT END
OF PERIOD $ 43.75 $ 42.76 $ 24.18 $ 16.14 $ 15.79 $ 16.44 $ 10.01
==========================================================================================================================
UNITS OUTSTANDING AT END OF
PERIOD 4,474 5,832 1,755 8,776 9,906 13,322 8,162
==========================================================================================================================
<CAPTION>
VAN ECK
MFS SOGEN WORLDWIDE VAN ECK
TOTAL OVERSEAS HARD EMERGING
FOR THE PERIOD ENDED RETURN VARIABLE ASSETS MARKETS
DECEMBER 31, 1998 SERIES FUND FUND FUND
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
From operations:
Net investment income (loss) $ 12,833 $ (24,005) $ 4,608 $ (2,674)
Net realized and unrealized
gains (losses) 69,285 (64,492) (40,765) (109,753)
---------- ---------- -------- ---------
Change in net assets
resulting from operations 82,118 (88,497) (36,157) (112,427)
---------- ---------- -------- ---------
From capital transactions:
Net premiums/deposits 968,524 1,098,070 128,466 348,583
Death benefits - (3,348) - -
Surrenders (7,865) (16,724) (20,009) (3,769)
Withdrawals (11,868) (21,157) (1,198) (4,392)
Transfers into (out of)
subaccounts, net -- Note 1 602,434 317,226 61,004 156,590
---------- ---------- -------- ---------
Change in net assets
resulting from capital
transactions 1,551,225 1,374,067 168,263 497,012
---------- ---------- -------- ---------
Increase in net assets 1,633,343 1,285,570 132,106 384,585
Net assets at beginning of
period 259,844 752,892 9,037 16,890
---------- ---------- -------- ---------
NET ASSETS AT END OF PERIOD $1,893,187 $2,038,462 $141,143 $ 401,475
- ----------------------------------------------------------------------------------
NET ASSET VALUE PER UNIT AT END
OF PERIOD $ 18.12 $ 10.07 $ 9.20 $ 7.12
==================================================================================
UNITS OUTSTANDING AT END OF
PERIOD 104,481 202,429 15,342 56,387
==================================================================================
FOR THE PERIOD FROM INCEPTION
TO
DECEMBER 31, 1997 21-FEB-97 3-FEB-97 3-APR-97 11-APR-97
- ----------------------------------------------------------------------------------
From operations:
Net investment income (loss) $ (1,259) $ (8,364) $ (20) $ (94)
Net realized and unrealized
gains (losses) 16,912 (27,254) (178) (5,069)
---------- ---------- -------- ---------
Change in net assets
resulting from operations 15,653 (35,618) (198) (5,163)
---------- ---------- -------- ---------
From capital transactions:
Net premiums/deposits 186,723 819,873 4,326 19,999
Withdrawals (786) (959) - -
Transfers into (out of)
subaccounts, net -- Note 1 58,254 (30,404) 4,909 2,054
---------- ---------- -------- ---------
Change in net assets
resulting from capital
transactions 244,191 788,510 9,235 22,053
---------- ---------- -------- ---------
Increase in net assets 259,844 752,892 9,037 16,890
Net assets at beginning of
period - - - -
---------- ---------- -------- ---------
NET ASSETS AT END OF PERIOD $ 259,844 $ 752,892 $ 9,037 $ 16,890
- ----------------------------------------------------------------------------------
NET ASSET VALUE PER UNIT AT END
OF PERIOD $ 16.63 $ 9.77 $ 15.72 $ 11.00
==================================================================================
UNITS OUTSTANDING AT END OF
PERIOD 15,625 77,062 575 1,536
==================================================================================
</TABLE>
See accompanying Notes to Financial Statements
13
<PAGE> 8
NOTES TO FINANCIAL STATEMENTS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 85% 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 18 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 a registered investment advisor ("Investment
Advisor"). The Investment Advisors and subaccounts are identified in Notes 3 and
4.
The GIO Account is also a separate account of VFL. Through the guaranteed
interest option, VFL offers specified effective annual rates of interest that
are credited daily and available for specified periods of time. Contractholders
choosing the guaranteed interest option do not participate in the investment
performance of the GIO Account and this performance does not determine the GIO
Account value or benefits relating thereto.
The assets of the GIO Account and the Variable Account are held separately
from other VFL assets and from the general account of VFL. The contractholder
(before the maturity date, while the contractholder is still living or the
Contract is in force) may transfer all or part of any subaccount value to
another subaccount(s) or to the GIO Account, or transfer all or part of 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.
14
<PAGE> 9
NOTES TO FINANCIAL STATEMENTS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 INVESTMENT 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 is determined using the average cost method.
FEDERAL INCOME TAXES -- Net investment income and realized gains and losses
on investments of the Variable Account are taxable to contractholders generally
upon distribution. Accordingly, no provision for income taxes has been recorded
in the accompanying financial statements.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
In the opinion of Variable Accounts' 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.
15
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 3. INVESTMENTS
- --------------------------------------------------------------------------------
The investments in the Funds/subaccounts of the Variable Account at
December 31, 1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
INVESTMENT ADVISOR MARKET
FUND/SUBACCOUNT SHARES COST VALUE
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
FEDERATED ADVISERS:
FEDERATED PRIME MONEY FUND II
December 31, 1998 5,562,204 $5,562,204 $ 5,562,204
December 31, 1997 861,084 $ 861,084 $ 861,084
FEDERATED UTILITY FUND II
December 31, 1998 110,914 $1,618,977 $ 1,693,662
December 31, 1997 3,547 $ 46,493 $ 50,683
FEDERATED HIGH INCOME BOND FUND II
December 31, 1998 289,997 $3,181,228 $ 3,166,765
December 31, 1997 17,395 $ 186,564 $ 190,479
FIDELITY MANAGEMENT & RESEARCH COMPANY:
FIDELITY VARIABLE INSURANCE PRODUCTS FUND EQUITY-INCOME PORTFOLIO
("FIDELITY EQUITY-INCOME PORTFOLIO")
December 31, 1998 167,760 $4,065,113 $ 4,264,468
December 31, 1997 20,427 $ 489,697 $ 495,969
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II ASSET MANAGER PORTFOLIO
("FIDELITY ASSET MANAGER PORTFOLIO")
December 31, 1998 124,340 $2,089,493 $ 2,258,023
December 31, 1997 14,845 $ 265,773 $ 267,366
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II INDEX 500 PORTFOLIO
("FIDELITY INDEX 500 PORTFOLIO")
December 31, 1998 75,681 $9,535,262 $10,689,980
December 31, 1997 4,921 $ 543,072 $ 562,885
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II CONTRAFUND PORTFOLIO
("FIDELITY CONTRAFUND PORTFOLIO")
December 31, 1998 151,818 $3,233,621 $ 3,710,438
December 31, 1997 16,503 $ 324,992 $ 329,066
FRED ALGER MANAGEMENT, INC.:
THE ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO
December 31, 1998 36,417 $1,573,096 $ 1,601,255
December 31, 1997 4,474 $ 209,368 $ 195,731
THE ALGER AMERICAN GROWTH PORTFOLIO
December 31, 1998 102,309 $4,648,328 $ 5,444,900
December 31, 1997 5,832 $ 258,380 $ 249,383
THE ALGER AMERICAN MIDCAP GROWTH PORTFOLIO
December 31, 1998 40,631 $1,026,368 $ 1,173,004
December 31, 1997 1,755 $ 43,880 $ 42,427
</TABLE>
16
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
INVESTMENT ADVISOR MARKET
FUND/SUBACCOUNT SHARES COST VALUE
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
MASSACHUSETTS FINANCIAL SERVICES COMPANY:
MFS EMERGING GROWTH SERIES
December 31, 1998 136,181 $2,412,308 $ 2,923,811
December 31, 1997 8,776 $ 137,690 $ 141,648
MFS RESEARCH SERIES
December 31, 1998 88,093 $1,510,731 $ 1,678,171
December 31, 1997 9,906 $ 150,896 $ 156,415
MFS GROWTH WITH INCOME SERIES
December 31, 1998 118,618 $2,186,056 $ 2,385,418
December 31, 1997 13,322 $ 213,707 $ 219,017
MFS LIMITED MATURITY SERIES
December 31, 1998 101,531 $1,055,699 $ 1,031,558
December 31, 1997 8,162 $ 83,692 $ 81,706
MFS TOTAL RETURN SERIES
December 31, 1998 104,481 $1,832,876 $ 1,893,187
December 31, 1997 15,625 $ 248,196 $ 259,844
SOCIETE GENERALE ASSETS MANAGEMENT CORP.:
SOGEN OVERSEAS VARIABLE FUND
December 31, 1998 202,429 $2,137,738 $ 2,038,462
December 31, 1997 77,062 $ 787,738 $ 752,892
VAN ECK ASSOCIATES CORPORATION:
VAN ECK WORLDWIDE HARD ASSETS FUND
December 31, 1998 15,342 $ 161,414 $ 141,143
December 31, 1997 575 $ 9,226 $ 9,037
VAN ECK EMERGING MARKETS FUND
December 31, 1998 56,387 $ 466,744 $ 401,475
December 31, 1997 1,536 $ 21,555 $ 16,890
</TABLE>
17
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 4. INVESTMENT TRANSACTIONS
- --------------------------------------------------------------------------------
The aggregate cost of purchases and proceeds from sales of shares of Funds
in the subaccounts for the year ended December 31, 1998 and from inception
through 1997 are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
INVESTMENT ADVISOR 1998 1997
FUND/SUBACCOUNT PURCHASES SALES PURCHASES SALES
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FEDERATED ADVISERS:
Federated Prime Money Fund II $37,915,138 $33,510,211 $3,550,031 $2,710,000
Federated Utility Fund II 2,109,966 576,317 131,884 85,557
Federated High Income Bond
Fund II 3,840,081 851,353 226,400 42,489
FIDELITY MANAGEMENT & RESEARCH COMPANY:
Fidelity Equity-Income
Portfolio 4,569,909 1,025,191 675,097 203,626
Fidelity Asset Manager
Portfolio 2,313,974 499,483 429,770 175,157
Fidelity Index 500 Portfolio 10,107,926 1,322,627 646,677 112,906
Fidelity Contrafund Portfolio 3,468,672 621,107 366,624 45,364
FRED ALGER MANAGEMENT, INC.:
The Alger American Small
Capitalization Portfolio 1,599,548 324,883 327,651 123,882
The Alger American Growth
Portfolio 4,889,796 802,055 391,931 134,284
The Alger American MidCap
Growth Portfolio 1,170,468 196,448 55,923 13,622
MASSACHUSETTS FINANCIAL SERVICES COMPANY:
MFS Emerging Growth Series 2,619,399 391,222 319,665 182,097
MFS Research Series 1,743,636 402,179 181,534 33,784
MFS Growth With Income Series 2,781,439 849,615 231,099 25,510
MFS Limited Maturity Series 1,655,554 694,668 135,099 55,749
MFS Total Return Series 2,062,990 526,378 466,510 223,577
SOCIETE GENERALE ASSETS MANAGEMENT CORP.:
SoGen Overseas Variable Fund 1,826,237 476,175 994,765 214,619
VAN ECK ASSOCIATES CORPORATION:
Van Eck Worldwide Hard Assets
Fund 212,775 45,735 10,106 892
Van Eck Emerging Markets Fund 623,134 129,579 26,885 4,925
</TABLE>
18
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 5. CHARGES AND DEDUCTIONS
- --------------------------------------------------------------------------------
VFL deducts a daily charge from the assets of the Variable Account to
compensate it for mortality and expense risks that it assumes under the
Contract. The daily charge is 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 covers 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 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 6. DIVERSIFICATION REQUIREMENTS
- --------------------------------------------------------------------------------
Under the provisions of Section 817(h) of the Internal Revenue Code of 1986
(the Code), a variable annuity contract, other than a contract issued in
connection with certain types of employee benefit plans, will not be treated as
an annuity contract for federal tax purposes for any period for which the
investments of the segregated asset account on which the contract is based are
not adequately diversified. The Code provides that the "adequately diversified"
requirement may be met if the underlying investments satisfy either a statutory
safe harbor test or diversification requirements set forth in regulations issued
by the Secretary of the Treasury. VFL believes, based on the prospectuses of
each of the Funds that the Variable Account participates in, that the Funds
satisfy the diversification requirement of the regulations.
19
<PAGE> 1
VALLEY FORGE LIFE INSURANCE COMPANY
CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
September 30, December 31,
(In thousands of dollars) 1999 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Investments:
Fixed maturities available-for-sale (amortized cost: $493,941 and $454,635) $ 486,806 $ 460,516
Equity securities available-for-sale (cost: $0 and $981) 53 2,218
Policy loans 75,326 74,150
Other invested assets 319 485
Short-term investments 77,722 81,418
----------- -----------
Total investments 640,226 618,787
Cash 34,759 3,750
Receivables:
Reinsurance 2,329,323 2,119,897
Premium and other insurance 45,425 54,664
Deferred acquisition costs 123,066 111,963
Accrued investment income 8,105 7,721
Receivables for securities sold 1,917 --
Due from affiliates 566 --
Deferred income taxes 4,054 --
Other 6,325 902
Separate Account business 153,858 73,745
- --------------------------------------------------------------------------------------------------------------
Total assets $ 3,347,624 $ 2,991,429
==============================================================================================================
Liabilities and Stockholder's Equity:
Liabilities:
Insurance reserves:
Future policy benefits $ 2,673,385 $ 2,438,305
Claims 128,502 93,001
Policyholders' funds 45,029 42,746
Payables for securities purchased 1,828 370
Federal income taxes payable 987 6,468
Deferred income taxes -- 6,213
Due to affiliates -- 1,946
Commissions and other payables 90,120 64,815
Separate Account business 153,858 73,745
----------- -----------
Total liabilities 3,093,709 2,727,609
----------- -----------
Commitments and contingent liabilities - Note 3 -- --
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 185,706 187,683
Accumulated other comprehensive income (loss) (3,441) 4,487
----------- -----------
Total stockholder's equity 253,915 263,820
- --------------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $ 3,347,624 $ 2,991,429
==============================================================================================================
</TABLE>
See accompanying Notes to Condensed Financial Statements (Unaudited).
3
<PAGE> 2
VALLEY FORGE LIFE INSURANCE COMPANY
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
NINE MONTHS ENDED SEPTEMBER 30 1999 1998 1999 1998
(In thousands of dollars)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Premiums $ 74,272 $ 76,936 $ 232,596 $ 231,516
Net investment income 10,130 8,879 28,238 26,502
Realized investment gains(losses) (1,149) 967 (19,051) 4,480
Other 253 1,113 5,515 5,269
--------- --------- --------- ---------
83,506 87,895 247,298 267,767
--------- --------- --------- ---------
Benefits and expenses:
Insurance claims and policyholders' benefits 71,052 74,163 222,054 219,544
Amortization of deferred acquisition costs 4,450 3,465 10,515 8,632
Other operating expenses 3,994 9,825 17,708 26,396
--------- --------- --------- ---------
79,496 87,453 250,277 254,572
--------- --------- --------- ---------
Income (loss) before income tax 4,010 442 (2,979) 13,195
Income tax expense (benefit) 1,757 123 (1,236) 4,677
--------- --------- --------- ---------
Income before cumulative effect of change
in accounting principle 2,253 319 (1,743) 8,518
Cumulative effect of change in accounting
principle, net of taxes - Note 5 -- -- 234 --
--------- --------- --------- ---------
NET INCOME (LOSS) $ 2,253 $ 319 $ (1,977) $ 8,518
===================================================================================================
</TABLE>
See accompanying Notes to Condensed Financial Statements (Unaudited).
4
<PAGE> 3
VALLEY FORGE LIFE INSURANCE COMPANY
CONDENSED STATEMENTS OF STOCKHOLDER'S EQUITY
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other Total
Common Paid-in Comprehensive Retained Comprehensive Stockholder's
(In thousands of dollars) Stock Capital Income/(Loss) Earnings Income/(Loss) Equity
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $ 2,500 $ 39,150 $ 170,230 $ 4,380 $ 216,260
Comprehensive income:
Net income -- -- $ 8,518 8,518 -- 8,518
Other comprehensive income -- -- 8,720 -- 8,720 8,720
---------
Total comprehensive income $ 17,238
=========
- ---------------------------------------------------------- -----------------------------------------
Balance, September 30, 1998 $ 2,500 $ 39,150 $ 178,748 $ 13,100 $ 233,498
========================================================== =========================================
Balance, December 31, 1998 $ 2,500 $ 69,150 $ 187,683 $ 4,487 $ 263,820
Comprehensive income (loss):
Net loss -- -- $ (1,977) (1,977) -- (1,977)
Other comprehensive loss -- -- (7,928) -- (7,928) (7,928)
---------
Total comprehensive loss $ (9,905)
=========
- ---------------------------------------------------------- -----------------------------------------
Balance, September 30, 1999 $ 2,500 $ 69,150 $ 185,706 $ (3,441) $ 253,915
========================================================== =========================================
</TABLE>
See accompanying Notes to Condensed Financial Statements (Unaudited).
5
<PAGE> 4
VALLEY FORGE LIFE INSURANCE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30 1999 1998
(In thousands of dollars)
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (1,977) $ 8,518
Adjustments to reconcile net income to net cash provided by
operating activities:
Deferred income taxes (5,030) 3,880
Net realized investment (gains) losses, pre-tax 19,051 (4,480)
Amortization of bond discount (1,969) (3,684)
Changes in:
Insurance receivables, net (200,187) (594,886)
Deferred acquisition costs (9,833) (11,832)
Accrued investment income (384) (2,467)
Due from affiliates 2,512 38,080
Federal income taxes (5,481) 676
Insurance reserves 290,528 686,506
Commissions and other payables and other 14,465 (49,988)
----------- -----------
Total adjustments 103,672 61,805
----------- -----------
Net cash provided by operating activities 101,695 70,323
----------- -----------
INVESTING ACTIVITIES:
Purchases of fixed maturities (1,332,210) (253,512)
Proceeds from fixed maturities:
Sales 1,222,475 278,402
Maturities, calls and redemptions 49,453 30,757
Proceeds from sales of equity securities 2,648 --
Change in policy loans (1,176) (3,659)
Change in other invested assets 214 165
Change in short-term investments 5,574 (75,428)
----------- -----------
Net cash used in investing activities (53,022) (23,275)
----------- -----------
FINANCING ACTIVITIES:
Receipts for investment contracts credited to policyholder
account balances 9,268 47,914
Return of policyholder account balances on investment contracts (26,932) (117,939)
----------- -----------
Net cash used in financing activities (17,664) (70,025)
----------- -----------
Increase (decrease) in cash 31,009 (22,977)
Cash at beginning of period 3,750 24,565
- ---------------------------------------------------------------------------------------------
Cash at end of period $ 34,759 $ 1,588
=============================================================================================
</TABLE>
See accompanying Notes to Condensed Financial Statements (Unaudited).
6
<PAGE> 5
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION:
Valley Forge Life Insurance Company (VFL) is a wholly-owned subsidiary of
Continental Assurance Company (CAC). CAC is a wholly-owned subsidiary of
Continental Casualty Company (Casualty) which is wholly-owned by CNA Financial
Corporation (CNA Financial). CNA Financial is a holding company whose primary
subsidiaries consist of property/casualty and life insurance companies,
collectively CNA. As of September 30, 1999, Loews Corporation owns approximately
86% of the outstanding common stock of CNA Financial.
VFL markets and underwrites insurance products designed to satisfy the life,
health 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.
The operations of VFL and its parent, CAC, are managed on a combined basis
pursuant to a Reinsurance Pooling Agreement. Under this Reinsurance Pooling
Agreement, VFL cedes all of its business, excluding its Separate Account
business, to its parent, CAC. This ceded business is then pooled with the
business of CAC, which excludes CAC's participating contracts and separate
account business, and 10% of the combined pool is assumed by VFL.
The operating results for the interim periods are not necessarily indicative
of the results to be expected for the full year. These statements should be read
in conjunction with the financial statements and notes thereto included in VFL's
Form 10-K for the year ended December 31, 1998, filed with the Securities and
Exchange Commission.
The accompanying condensed financial statements have been prepared in
conformity with generally accepted accounting principles. Certain amounts
applicable to prior years have been reclassified to conform to classifications
followed in 1999.
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 VFL'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 cash flows in
the accompanying condensed financial statements (unaudited).
7
<PAGE> 6
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE 2. REINSURANCE:
In the table below, the majority of life premium revenue is from long
duration type contracts, while the majority of accident and health earned
premiums is from short duration contracts. The effects of reinsurance on premium
revenues are shown in the following schedule:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
PREMIUMS
-------------------------------------------------------------------------------------
ASSUMED/
NINE MONTHS ENDED SEPT. 30 DIRECT ASSUMED CEDED NET NET %
- -------------------------------- ----------------- --------------- ----------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
(In thousands of dollars)
1999
Life $ 473,440 $ 70,620 $ 488,650 $ 55,410 127%
Accident and health 4,508 177,186 4,508 177,186 100
=============================== ========== =========== ========== =========== ===
TOTAL PREMIUMS $ 477,948 $ 247,806 $ 493,158 $ 232,596 107%
=============================== ========== =========== ========== =========== ===
1998
Life $ 385,432 $ 57,725 $ 387,886 $ 55,271 104%
Accident and health 2,747 176,245 2,747 176,245 100
=============================== ========== =========== ========== =========== ===
Total premiums $ 388,179 $ 233,970 $ 390,633 $ 231,516 101%
=============================== ========== =========== ========== =========== ===
</TABLE>
Transactions with CAC, as part of the pooling agreement described in Note 1,
are reflected in the above table. Premium revenues ceded to non-affiliated
companies for the nine months ended September 30, 1999 and 1998, were $283.8
million and $176.7 million, respectively. Additionally, insurance claims and
policyholders' benefits are net of reinsurance recoveries from non-affiliated
companies for the nine months ended September 30, 1999 and 1998, were $188.7
million and $132.4 million, respectively.
Reinsurance receivables reflected on the balance sheets are amounts
recoverable from reinsurers who have assumed a portion of VFL's insurance
reserves. These balances are principally due from CAC pursuant to the
Reinsurance Pooling Agreement.
NOTE 3. LEGAL PROCEEDINGS:
VFL is party to litigation 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 equity of VFL.
8
<PAGE> 7
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE 4. 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
other comprehensive income (loss) are presented in the following table:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
PRE-TAX TAX (EXPENSE) NET
THREE MONTHS ENDED SEPTEMBER 30, 1999 AMOUNT BENEFIT AMOUNT
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands of dollars)
Net unrealized gains (losses) on investments securities:
Net unrealized gains (losses) arising during the period $ (3,686) $ 1,842 $ (1,844)
Reclassification adjustment for (gains) losses included (1,168) 409 (759)
in net income
- ------------------------------------------------------------------------------------------------------------------
Total Other Comprehensive (Loss) $ (4,854) $ 2,251 $ (2,603)
==================================================================================================================
Pre-tax Tax (Expense) Net
Three Months Ended September 30, 1998 Amount Benefit Amount
- ------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
Net unrealized gains (losses) on investments securities:
Net unrealized gains (losses) arising during the period $ 12,575 $ (4,401) $ 8,174
Reclassification adjustment for (gains) losses included (372) 130 (242)
in net income
- ------------------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income $ 12,203 $ (4,271) $ 7,932
==================================================================================================================
- ------------------------------------------------------------------------------------------------------------------
PRE-TAX TAX (EXPENSE) NET
NINE MONTHS ENDED SEPTEMBER 30, 1999 AMOUNT BENEFIT AMOUNT
- ------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
Net unrealized gains (losses) on investments securities:
Net unrealized gains (losses) arising during the period $ (9,009) $ 3,693 $ (5,316)
Reclassification adjustment for (gains) losses included (4,019) 1,407 (2,612)
in net income
- ------------------------------------------------------------------------------------------------------------------
Total other Comprehensive Loss $ (13,028) $ 5,100 $ (7,928)
==================================================================================================================
Pre-tax Tax (Expense) Net
Nine Months Ended September 30, 1998 Amount Benefit Amount
- ------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
Net unrealized gains (losses) on investments securities:
Net unrealized gains (losses) arising during the period $ 10,825 $ (3,789) $ 7,036
Reclassification adjustment for (gains) losses included 2,590 (906) 1,684
in net income
- ------------------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income $ 13,415 $ (4,695) $ 8,720
==================================================================================================================
</TABLE>
9
<PAGE> 8
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - CONCLUDED
NOTE 5. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE:
In December 1997, the American Institute of Certified Public Accountants'
Accounting Standards Executive Committee issued Statement of Position (SOP)
97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments." SOP 97-3 requires that entities recognize liabilities for
insurance-related assessments when all of the following criteria have been met:
an assessment has been imposed or it is probable that an assessment will be
imposed; the event obligating an entity to pay an imposed or probable assessment
has occurred on or before the date of the financial statements; and the amount
of the assessment can be reasonably estimated. This SOP is effective for
financial statements for fiscal years beginning after December 15, 1998.
Accordingly, VFL adopted SOP 97-3 effective January 1, 1999 and an after-tax
charge of $234,000 ($360,000 pre-tax) was recorded in the first quarter of 1999
to reflect the cumulative effect of a change in accounting principle.
10
<PAGE> 9
VALLEY FORGE LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL:
The following discussion and analysis should be read in conjunction with the
condensed financial statements (unaudited) and notes thereto found on pages 3 to
10, which contain additional information helpful in evaluating operating results
and financial condition.
BUSINESS:
VFL, along with its parent CAC, markets and underwrites insurance products
designed to satisfy the life, health and retirement needs of individuals and
groups. The individual insurance products consist primarily of term and
universal life insurance policies and individual annuities. Group insurance
products include life, accident and health, consisting primarily of major
medical and hospitalization and pension products. VFL also markets a portfolio
of variable products, including annuity and universal life products. These
variable products offer policyholders the option of allocating payments to one
or more variable accounts or to a guaranteed income account or both. Payments
allocated to the variable accounts are invested in corresponding investment
portfolios where the investment risk is borne by the policyholder while payments
allocated to the guaranteed income account earn a minimum guaranteed rate of
interest for a specified period of time for annuity contracts and one year for
life products.
The operations, assets and liabilities of VFL and its parent, CAC, are
managed on a combined basis pursuant to a Reinsurance Pooling Agreement. Under
this Reinsurance Pooling Agreement, VFL cedes all of its business, excluding its
Separate Account business, to its parent, CAC. This ceded business is then
pooled with the business of CAC, which excludes CAC's participating contracts
and Separate Account business, and 10% of the combined pool is assumed by VFL.
FORWARD-LOOKING STATEMENTS
The statements contained in this management discussion and analysis which
are not historical facts are forward-looking statements. When included in this
management discussion and analysis, the words, "believe," "expects," "intends,"
"anticipates," "estimates," and analogous expressions are intended to identify
forward-looking statements. Such statements inherently are subject to a variety
of risks and uncertainties that could cause actual results to differ materially
from those projected. Such risks and uncertainties include, among others, the
impact of competitive products, policies and pricing; product and policy demand
and market responses; development of claims and the effect on loss reserves; the
performance of reinsurance companies under reinsurance contracts with the
Company; general economic and business conditions; changes in financial markets
(interest rate, credit, currency, commodities and stocks); changes in foreign,
political, social and economic conditions; regulatory initiatives and compliance
with governmental regulations; judicial decisions and rulings; the effect on the
Company with regards to third party corrective actions on Year 2000 compliance;
changes in rating agency policies and practices; the results of financing
efforts; changes in the Company's composition of operating segments; the actual
closing of contemplated transactions and agreements and various other matters
and risks (many of which are beyond the Company's control) detailed in the
Company's Securities and Exchange Commissions filings. These forward-looking
statements speak only as of the date of this management discussion and analysis.
The Company expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statement contained
herein to reflect any change in the Company's expectations with regard thereto
or any change in events, conditions or circumstances on which any statement is
based.
11
<PAGE> 10
VALLEY FORGE LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
RESULTS OF OPERATIONS:
The following table summarizes key components of VFL's operating results for
the three months and nine months ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
PERIOD ENDED SEPTEMBER 30 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands of dollars)
OPERATING SUMMARY
Revenues (excluding realized investment gains/losses):
Premiums $ 74,272 $ 76,936 $ 232,596 $ 231,516
Net investment income 10,130 8,879 28,238 26,502
Other 253 1,113 5,515 5,269
--------- --------- --------- ---------
Total revenues 84,655 86,928 266,349 263,287
Benefits and expenses 79,496 87,453 250,277 254,572
--------- --------- --------- ---------
Operating income (loss) before income tax 5,159 (525) 16,072 8,715
Income tax (expense) (2,159) 216 (5,432) (3,109)
--------- --------- --------- ---------
Net operating income (loss)
(excluding realized investment gains/losses) 3,000 (309) 10,640 5,606
Net realized investment gains (losses), net of
income tax (747) 628 (12,383) 2,912
--------- --------- --------- ---------
Income (loss) before cumulative effect of
change in accounting principle 2,253 319 (1,743) 8,518
Cumulative effect of change in accounting
principle, net of taxes -- -- (234) --
- ----------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 2,253 $ 319 $ (1,977) $ 8,518
====================================================================================================
</TABLE>
VFL's revenues, excluding net realized investment gains (losses), were
$266.3 million for the first nine months of 1999, compared to $263.3 million for
the same period in 1998. Premiums for the nine months ended September 30, 1999
increased approximately 0.5% to $232.6 million compared to $231.5 million for
the same period in 1998. The slight increase in premiums is due to an increase
in the premiums earned for the Federal Employees Health Benefits Plan offset
somewhat by the exiting of the insured comprehensive medical market and by lower
sales of single premium fixed annuity products.
Premiums for the three months ended September 30, 1999 decreased
approximately 3.5% to $74.3 million compared to $76.9 million for the same
period in 1998. This decrease in premiums is primarily attributed to the effects
of a term reinsurance treaty that was completed in late 1998. This decline was
partially offset by an increase in premium revenue in the life reinsurance
business.
12
<PAGE> 11
VALLEY FORGE LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
VFL's investment income for the nine months ended September 30, 1999 was
$28.2 million, an increase of 6.6% from the comparable 1998 period when
investment income was $26.5 million. The increase is attributable to a larger
investment portfolio, funded by net cash flow during the nine months ended
September 30, 1999.
Benefits and expenses were $250.3 million for the nine months ended
September 30, 1999 as compared to $254.6 million for the same period in 1998.
Contributing to this change was that during the third quarter of 1998, VFL
recorded $3.7 million in restructuring and other related charges.
VFL's net realized investment losses, net of tax for the nine months ended
September 30, 1999 of $12.4 million, compares unfavorably to $2.9 million of net
investment gains, net of tax, realized during the comparable period in 1998.
Sales of fixed maturity securities accounted for virtually all of the net
realized gains and losses in both reporting periods. VFL's net realized
investment gains (losses), net of tax for the three months ended September 30,
1999 and 1998 were $(0.7) million and $0.6 million, respectively. This decline
in investment gains can be attributed to the same factors underlying realized
investment performance for the nine month reporting periods, which are more
fully discussed above.
FINANCIAL CONDITION:
Assets increased approximately $372 million from December 31, 1998 to $3,364
million as of September 30, 1999. VFL's cash and invested assets increased by
$69 million from December 31, 1998 to $692 million. Reinsurance receivables
increased by $209 million primarily due to the Reinsurance Pooling Agreement
with CAC.
During the first nine months of 1999, VFL's stockholder's equity decreased
by $9.9 million, or 3.8% to approximately $253.9 million. The decrease in
stockholder's equity in 1999 is due primarily to a net loss of $2.0 million and
other comprehensive loss of $7.9 million during the nine months ended September
30, 1999.
13
<PAGE> 12
VALLEY FORGE LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
INVESTMENTS:
The following table summarizes VFL's investments shown at cost or amortized
cost and carrying value at September 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
DISTRIBUTION OF INVESTMENTS SEPTEMBER 30, December 31,
1999 % 1998 %
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands of dollars) Fixed maturity securities:
U.S. Treasury Securities and
obligations of government agencies $261,661 40.4% $223,743 36.6%
Asset backed securities 98,523 15.2 109,207 17.8
Other debt securities 133,757 20.7 121,685 19.9
- ---------------------------------------------------------------------------------------------------------------------
Total fixed maturity securities 493,941 76.3 454,635 74.3
Common stocks 0 0.0 981 0.2
Policy loans 75,326 11.6 74,150 12.1
Other invested assets 427 .1 485 0.1
Short-term investments 77,722 12.0 81,418 13.3
- ---------------------------------------------------------------------------------------------------------------------
INVESTMENTS AT AMORTIZED COST $647,416 100.0% $611,669 100.0%
======================================================================================================================
INVESTMENTS AT CARRYING VALUE* $640,226 $618,787
======================================================================================================================
</TABLE>
*As reported on the Condensed Balance Sheets (Unaudited)
The investment portfolios of VFL are managed to maximize after-tax
investment return, while minimizing credit risks, with investments concentrated
in high quality securities to support insurance underwriting operations. The
investment portfolios are segregated for the purpose of supporting policy
liabilities for universal life, annuities and other interest sensitive products.
VFL's investments in fixed maturity securities are carried at a fair value
of $486.8 million at September 30, 1999, compared with $460.5 million at
December 31, 1998. The net unrealized gains and (losses) on fixed maturity
securities amounted to approximately $(7.1) million and approximately $5.9
million at September 30, 1999 and December 31, 1998, respectively. The gross
unrealized gains and (losses) for the fixed maturities portfolio at September
30, 1999 were $1.8 million and $(8.9) million, respectively, compared to $6.9
million and $(1.0) million, respectively, at December 31, 1998.
VFL's investments in equity securities are carried at a fair value of $0.1
million and $2.2 million at September 30, 1999 and December 31, 1998,
respectively. The unrealized gains on equity securities were $0.1 million and
approximately $1.2 million at September 30, 1999 and December 31, 1998,
respectively. There were no unrealized losses on equity securities at September
30, 1999 and December 31, 1998.
14
<PAGE> 13
VALLEY FORGE LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
The following table summarizes the ratings of VFL's fixed maturity portfolio
at carrying value (market):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
SEPTEMBER 30, December 31,
1999 % 1998 %
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands of dollars)
U.S. government and affiliated securities $ 298,278 61.3% $270,600 58.8%
Other AAA rated 63,727 13.1 76,258 16.5
AA and A rated 52,714 10.8 53,528 11.6
BBB rated 66,109 13.6 54,241 11.8
Below investment grade 5,978 1.2 5,889 1.3
- -------------------------------------------------------------------------------------------------------
TOTAL $ 486,806 100.0% $460,516 100.0%
=======================================================================================================
</TABLE>
Included in the carrying value of fixed maturity securities at September 30,
1999 are $95.8 million of asset-backed securities, consisting of approximately
47% in collateralized mortgage obligations (CMOs), 40% in U.S. government agency
issued pass-through certificates, 8% in corporate mortgage-backed pass-through
certificates and 5% in corporate asset-backed obligations. The majority of CMOs
held are U.S. government agency issues, which are actively traded in liquid
markets and are priced by broker-dealers.
CMOs are subject to prepayment risk that tends to vary with changes in
interest rates. During periods of declining interest rates, CMOs generally
prepay faster as the underlying mortgages are prepaid and refinanced by the
borrowers in order to take advantage of the lower rates. Conversely, during
periods of rising interest rates, prepayments are generally slow. VFL limits the
risks associated with interest rate fluctuations and prepayments by
concentrating its CMO investments in planned amortization classes with
relatively short principal repayment windows. Net unrealized gains (losses) on
CMOs is $(1.5) million and $1.0 million at September 30, 1999 and December 31,
1998, respectively. VFL avoids investments in complex mortgage derivatives and
does not have any investments in mortgage loans or real estate.
VFL invests from time to time in derivative financial instruments primarily
to reduce its exposure to market risk. 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's
general account derivatives are classified as other invested assets and its
Separate Accounts' derivatives are classified as Separate Account business.
Derivative financial instruments consist of interest rate caps in the
general account and purchased options in the Separate Accounts at September 30,
1999. The gross notional or contractual amounts of derivative financial
instruments in the general account totaled $50 million at September 30, 1999 and
December 31, 1998. The gross notional principal or contractual amounts of
derivative financial instruments in the Separate Accounts totaled $1.6 million
and $1.5 million at September 30, 1999 and December 31, 1998, respectively. The
fair value of derivative financial instruments in the general account and
Separate Accounts at September 30, 1999 totaled $0.3 million and $0.5 million,
respectively. The fair value of derivative financial instruments in the general
account and Separate Accounts at December 31, 1998 totaled $0.1 million and $0.5
million, respectively. Net realized gains and (losses) on derivative financial
instruments held in the general account and Separate Accounts were not material
for the period ended September 30, 1999 and December 31, 1998.
15
<PAGE> 14
VALLEY FORGE LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
High yield securities are bonds rated below investment grade by bond rating
agencies, and other unrated securities which, in the opinion of management, are
below investment grade (below BBB). High yield securities generally involve a
greater degree of risk than that of investment grade securities. Returns are
expected to compensate for the added risk. The risk is also considered in the
interest rate assumptions in the underlying insurance products. VFL's
concentration in high yield bonds was approximately 0.2% of total assets as of
September 30, 1999 and December 31, 1998. At September 30, 1999 and December 31,
1998, net unrealized gains and (losses) on high yield securities were
approximately $(0.7) million and $0.3 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES:
The liquidity requirements of VFL have been met primarily by funds generated
from operating, investing and financing activities. VFL's principal cash flow
sources are premiums, investment income, receipts for investment
contracts sold and sales and maturities of investments. The primary cash flow
uses are payments for claims, policy benefits, payments on matured policyholder
contracts and operating expenses.
During the first nine months of 1999, VFL's operating activities generated
net positive cash flows of approximately $101.7 million, compared with net
positive cash flows of $70.3 million for the same period in 1998.
Management believes that future liquidity needs will be met primarily by
cash generated from operations. Net cash flows from operations are generally
invested in marketable securities. Investment strategies employed by VFL
consider the cash flow requirements of the insurance products sold and the tax
attributes of the various types of marketable investments.
IMPACT OF YEAR 2000 ON VFL:
The widespread use of computer programs, both in the United States and
internationally, that rely on two digit date fields to perform computations and
decision making functions may cause computer systems to malfunction when
processing information involving dates beginning in 1999. Such malfunctions
could lead to business delays and disruptions. VFL does not maintain any
systems. Instead, it relies on the systems of CNA Financial, third party vendors
and other business partners. CNA Financial, on behalf of VFL, has a plan under
which it reviews periodically the progress that these parties are making on this
issue. As of December 1, 1998, CNA Financial had certified internally as Year
2000-ready all of the internal systems used by VFL. However, as business
conditions change, CNA may respond by revising previous Year 2000 strategies or
solutions affecting specific systems. In limited cases, a system that was to
have been replaced, instead, may be renovated to become Year 2000 ready prior to
January 1, 2000. VFL does not believe these changes will have a material impact
on the Company.
CNA Financial has also received statements of Year 2000 compliance from
certain key business partners. VFL management believes that the systems on which
it relies do not have any significant remaining exposure to the Year 2000 issue
and, therefore VFL does not have a material exposure to the Year 2000 issue.
However, due to the interdependent nature of computer systems, there may be an
adverse impact on VFL if its business partners fail to address the Year 2000
issue successfully. To mitigate this impact, if any, CNA Financial on behalf of
itself and VFL is communicating with its business partners to coordinate Year
2000 conversion. In addition, CNA Financial has developed business resumption
plans to ensure that it and VFL are able to continue critical processes through
other means in the event that it becomes necessary to do so. Formal strategies
have been developed to include appropriate recovery processes and use of
alternative vendors.
Based on its current assessment, CNA Financial estimates that the total cost
to replace and upgrade its systems to accommodate Year 2000 processing will be
approximately $70 million. As of September 30, 1999, CNA Financial has spent
approximately $60 million on Year 2000 readiness matters. VFL is allocated its
proportionate share of this cost.
16
<PAGE> 15
VALLEY FORGE LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONCLUDED
ACCOUNTING STANDARDS:
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard 133, "Accounting for Derivative Instruments and
Hedging Activities." This statement requires that entities recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation.
This Statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. VFL is currently evaluating the effects of this Statement
on its accounting and reporting for derivative securities and hedging
activities.
In October 1998, the American Institute of Certified Public Accountant's
Accounting Standards Executive Committee issued SOP 98-7, "Accounting for
Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk." This
guidance excludes long-duration life and health insurance contracts from its
scope. This Statement is effective for financial statements in the year 2000,
with early adoption encouraged. VFL is currently evaluating the effects of this
SOP.
17
<PAGE> 1
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, 1998 and 1997, and the related statements of
operations, stockholder's equity and cash flows for each of the three years in
the period ended December 31, 1998. 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, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Chicago, Illinois
February 10, 1999
64
<PAGE> 2
FINANCIAL STATEMENTS OF VALLEY FORGE LIFE INSURANCE COMPANY
The following financial statements are those of VFL and not those of the
separate account. They are included for the purpose of informing investors as to
the financial position and operations of VFL.
VALLEY FORGE LIFE INSURANCE COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
DECEMBER 31, 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands of dollars)
ASSETS:
Investments:
Fixed maturities available-for-sale (amortized cost:
$454,635 and $466,267)................................ $ 460,516 $ 471,707
Equity securities available-for-sale (cost: $981 and
$981)................................................. 2,218 2,260
Policy loans............................................ 74,150 66,971
Other invested assets................................... 485 433
Short-term investments.................................. 81,418 4,597
---------- ----------
TOTAL INVESTMENTS................................... 618,787 545,968
Cash...................................................... 3,750 24,565
Receivables:
Reinsurance............................................. 2,119,897 1,586,471
Premium and other insurance............................. 54,690 65,196
Less allowance for doubtful accounts.................... (26) (285)
Deferred acquisition costs................................ 111,963 95,354
Accrued investment income................................. 7,721 5,245
Receivables for securities sold........................... -- 744
Due from affiliates....................................... -- 35,999
Other..................................................... 902 228
Separate Account business................................. 73,745 8,941
- ----------------------------------------------------------------------------------------
TOTAL ASSETS $2,991,429 $2,368,426
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY:
Liabilities:
Insurance reserves:
Future policy benefits.................................. $2,438,305 $1,906,899
Claims.................................................. 93,001 81,242
Policyholders' funds.................................... 42,746 39,928
Payables for securities purchased......................... 370 497
Federal income taxes payable.............................. 6,468 5,975
Deferred income taxes..................................... 6,213 4,098
Due to affiliates......................................... 1,946 --
Commissions and other payables............................ 64,815 104,586
Separate Account business................................. 73,745 8,941
---------- ----------
TOTAL LIABILITIES................................... 2,727,609 2,152,166
---------- ----------
Commitments and contingent liabilities -- Notes 8 and 10.... -- --
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 39,150
Retained earnings......................................... 187,683 170,230
Accumulated other comprehensive income.................... 4,487 4,380
---------- ----------
TOTAL STOCKHOLDER'S EQUITY.......................... 263,820 216,260
- ----------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $2,991,429 $2,368,426
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
65
<PAGE> 3
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands of dollars)
Revenues:
Premiums.................................................. $315,599 $332,172 $325,486
Net investment income..................................... 35,539 29,913 29,312
Realized investment gains................................. 16,967 4,200 4,771
Other..................................................... 7,959 6,872 8,217
-------- -------- --------
376,064 373,157 367,786
-------- -------- --------
Benefits and expenses:
Insurance claims and policyholders' benefits.............. 301,900 307,207 304,840
Amortization of deferred acquisition costs................ 11,807 11,818 1,177
Other operating expenses.................................. 35,813 33,505 36,022
-------- -------- --------
349,520 352,530 342,039
-------- -------- --------
Income before income tax................................ 26,544 20,627 25,747
Income tax expense.......................................... 9,091 7,297 9,028
================================================================================================
NET INCOME $ 17,453 $ 13,330 $ 16,719
================================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
66
<PAGE> 4
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 EARNINGS INCOME EQUITY
- -----------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995....... $2,500 $39,150 $140,181 $ 13,641 $195,472
Comprehensive income:
Net income..................... -- -- $ 16,719 16,719 16,719
Other comprehensive loss....... -- -- (12,651) -- (12,651) (12,651)
--------
Total comprehensive
income................... $ 4,068
========
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
=================================================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
67
<PAGE> 5
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 17,453 $ 13,330 $ 16,719
Adjustments to reconcile net income to net cash flows from
operating activities:
Deferred income tax provision............................. 2,115 2,581 3,309
Realized investment gains................................. (16,967) (4,200) (4,771)
Amortization of bond discount............................. (4,821) (2,438) (4,922)
Changes in:
Insurance receivables, net.............................. (522,920) (269,787) (254,549)
Deferred acquisition costs.............................. (16,746) (20,765) (23,989)
Accrued investment income............................... (2,476) (300) (258)
Due to/from affiliates.................................. 37,945 31,500 (62,563)
Federal income taxes payable............................ 493 2,151 4,399
Insurance reserves...................................... 541,560 221,252 198,239
Commissions and other payables and other................ (40,861) 47,212 (8,376)
--------- --------- ---------
TOTAL ADJUSTMENTS................................... (22,678) 7,206 (153,481)
--------- --------- ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES............ (5,225) 20,536 (136,762)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed maturities............................... (744,431) (464,361) (535,263)
Proceeds from fixed maturities:
Sales..................................................... 741,277 278,459 530,828
Maturities, calls and redemptions......................... 33,635 45,442 36,726
Purchases of equity securities.............................. (5) (1,334) (728)
Proceeds from sale of equity securities..................... 5 2,447 1,306
Change in short-term investments............................ (73,233) 39,301 (2,851)
Change in policy loans...................................... (7,179) (6,704) (4,259)
Change in other invested assets............................. (82) (580) --
Other, net.................................................. -- -- 72
--------- --------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES............ (50,013) (107,330) 25,831
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Receipts for investment contracts credited to policyholder
accounts................................................ 30,007 111,478 98,091
Return of policyholder account balances on investment
contracts............................................... (25,584) (24,878) (4,504)
Capital contribution from Affiliate....................... 30,000 -- --
--------- --------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES............ 34,423 86,600 93,587
--------- --------- ---------
NET CASH FLOWS...................................... (20,815) (194) (17,344)
Cash at beginning of period................................. 24,565 24,759 42,103
- ---------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD....................................... $ 3,750 $ 24,565 $ 24,759
===================================================================================================
Supplemental disclosures of cash flow information:
Federal income taxes paid................................. $ 6,651 $ 2,488 $ 1,965
===================================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
68
<PAGE> 6
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 85% of
the outstanding common stock of CNAF.
VFL markets and underwrites insurance products designed to satisfy the
life, health 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.
The operations, assets and liabilities of VFL and its parent, Assurance,
are managed on a combined basis. Pursuant to a Reinsurance Pooling Agreement,
amended July 1, 1996, VFL cedes all of its business, excluding its separate
account business, to its parent, Assurance. This business is then pooled with
the business of Assurance, which excludes Assurance's participating contracts
and separate account business, and 10% of the combined pool is assumed by VFL.
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
1998.
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
beyond the premium paying period. Reserves for universal life-type contracts are
69
<PAGE> 7
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 1.--(CONTINUED)
equal to the account balances that accrue to the benefit of the policyholders.
Interest crediting rates ranged from 4.30% to 7.25% for the three years ended
December 31, 1998.
Claim reserves--Claim reserves include provisions for reported claims in
the course of settlement and estimates of unreported losses based upon past
experience.
Reinsurance--In addition to the 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 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.
Deferred acquisition costs--Life acquisition costs are capitalized and
amortized based on assumptions consistent with those used for computing 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 of 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
that approximates market value. VFL has no real estate or mortgage loans.
VFL accounts for its derivative securities under the fair value method.
Under this method the derivative securities are recorded 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
70
<PAGE> 8
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 1.--(CONTINUED)
values and losses are charged to income when a decline in value is considered to
be other than temporary.
Securities lending activities--VFL has a securities lending program were
securities are loaned to third parties, primarily major brokerage firms.
Borrowers of these securities must deposit 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). VFL continues to receive the interest on the
loaned debt securities, as beneficial owner, and accordingly, loaned debt
securities are included within fixed maturity securities. VFL had no securities
on loan at December 31, 1998 or 1997.
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.
INCOME TAXES
The provision for income taxes includes deferred taxes, resulting from
temporary differences between the financial statement and tax return basis of
assets and liabilities under the liability method. Temporary differences
primarily relate to insurance reserves, deferred acquisition costs, investment
valuation differences, and net unrealized investment gains/losses.
71
<PAGE> 9
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 2. INVESTMENTS:
<TABLE>
<CAPTION>
NET INVESTMENT INCOME
- -----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1998 1997 1996
- -----------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C>
Fixed maturities:
Taxable bonds............................................. $27,150 $20,669 $21,597
Equity securities........................................... 72 72 59
Policy loans................................................ 4,760 4,264 3,669
Short-term investments...................................... 3,803 4,885 4,197
Other....................................................... 105 201 12
------- ------- -------
35,890 30,091 29,534
Investment expense.......................................... 351 178 222
- -----------------------------------------------------------------------------------------------
NET INVESTMENT INCOME $35,539 $29,913 $29,312
===============================================================================================
</TABLE>
<TABLE>
<CAPTION>
ANALYSIS OF INVESTMENT GAINS (LOSSES)
- ------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1998 1997 1996
- ------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C>
Realized investment gains (losses):
Fixed maturities.......................................... $16,907 $ 3,333 $ 4,123
Equity securities......................................... -- 1,021 578
Other..................................................... 60 (154) 70
------- ------- --------
16,967 4,200 4,771
Income tax expense.......................................... (5,938) (1,470) (1,670)
------- ------- --------
NET REALIZED INVESTMENT GAINS......................... 11,029 2,730 3,101
------- ------- --------
Change in net unrealized investment gains (losses):
Fixed maturities.......................................... 441 5,806 (20,726)
Equity securities......................................... (42) (607) 1,263
Separate Account business and other....................... (235) 20 --
------- ------- --------
164 5,219 (19,463)
Deferred income tax (expense) benefit....................... (57) (1,829) 6,812
------- ------- --------
CHANGE IN NET UNREALIZED INVESTMENT GAINS (LOSSES).... 107 3,390 (12,651)
- ------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES) $11,136 $ 6,120 $ (9,550)
================================================================================================
</TABLE>
<TABLE>
<CAPTION>
SUMMARY OF GROSS REALIZED
INVESTMENT GAINS (LOSSES) FOR FIXED
MATURITIES AND EQUITY SECURITIES
- ---------------------------------------------------------------------------------------------------------------------
1998 1997 1996
----------------------- ----------------------- -----------------------
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................... $741,277 $ 5 $278,459 $2,447 $530,828 $1,306
======== === ======== ====== ======== ======
Gross realized gains.................. $ 17,604 $-- $ 4,793 $1,113 $ 7,927 $ 578
Gross realized losses................. (697) -- (1,460) (92) (3,804) --
- ---------------------------------------------------------------------------------------------------------------------
NET REALIZED GAINS ON SALES $ 16,907 $-- $ 3,333 $1,021 $ 4,123 $ 578
=====================================================================================================================
</TABLE>
72
<PAGE> 10
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 2.--(CONTINUED)
<TABLE>
<CAPTION>
ANALYSIS OF NET UNREALIZED INVESTMENT
GAINS (LOSSES) INCLUDED IN ACCUMULATED
OTHER COMPREHENSIVE INCOME
- ---------------------------------------------------------------------------------------------------------------
1998 1997
---------------------------- ---------------------------
DECEMBER 31 GAINS LOSSES NET GAINS LOSSES NET
- ---------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities.................................. $6,926 $(1,045) $ 5,881 $6,227 $(787) $ 5,440
Equity securities................................. 1,237 -- 1,237 1,279 -- 1,279
Separate Account business and other............... -- (215) (215) 20 -- 20
------ ------- ------- ------ ----- -------
$8,163 $(1,260) 6,903 $7,526 $(787) 6,739
====== ======= ====== =====
Deferred income tax expense....................... (2,416) (2,359)
- ---------------------------------------------------------------------------------------------------------------
NET UNREALIZED INVESTMENT GAINS $ 4,487 $ 4,380
===============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
SUMMARY OF INVESTMENTS IN FIXED MATURITIES
AND EQUITY SECURITIES AVAILABLE FOR SALE
- ------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1998 COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C>
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
============================================================================================================
DECEMBER 31, 1997
U.S. Treasuries and obligations of government agencies... $299,066 $2,073 $ 711 $300,428
Asset-backed securities.................................. 68,612 147 74 68,685
Corporate securities..................................... 72,431 2,384 2 74,813
Other debt securities.................................... 26,158 1,623 -- 27,781
-------- ------ ------ --------
Total fixed maturities............................. 466,267 6,227 787 471,707
Equity securities........................................ 981 1,279 -- 2,260
- ------------------------------------------------------------------------------------------------------------
TOTAL $467,248 $7,506 $ 787 $473,967
============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
SUMMARY OF INVESTMENTS IN FIXED
MATURITIES BY CONTRACTUAL MATURITY
- -------------------------------------------------------------------------------------
1998
---------------------
AMORTIZED MARKET
DECEMBER 31 COST VALUE
- -------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C>
Due in one year or less..................................... $ 7,507 $ 7,508
Due after one year through five years....................... 111,381 112,434
Due after five years through ten years...................... 45,393 46,494
Due after ten years......................................... 181,146 183,891
Asset-backed securities not due at a single maturity date... 109,208 110,189
- -------------------------------------------------------------------------------------
TOTAL $454,635 $460,516
=====================================================================================
</TABLE>
73
<PAGE> 11
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 2.--(CONTINUED)
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, 1998 and 1997. There are no
equity investments in a single issuer that when aggregated exceed 10% of
stockholder's equity.
NOTE 3. FAIR VALUE OF 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 sheet, 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>
- -------------------------------------------------------------------------------------------------------------
1998 1997
CARRYING ESTIMATED CARRYING ESTIMATED
DECEMBER 31 AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands of dollars)
FINANCIAL ASSETS
Investments:
Fixed maturities....................................... $460,516 $ 460,516 $471,707 $ 471,707
Equity securities...................................... 2,218 2,218 2,260 2,260
Policy loans........................................... 74,150 72,148 66,971 63,756
Other.................................................. 485 485 433 433
Separate Account business:
Fixed maturities....................................... 247 247 3,198 3,198
Mutual funds........................................... 55,577 55,577 5,233 5,233
Other.................................................. 340 340 305 305
FINANCIAL LIABILITIES
Premium deposits and annuity contracts................... 332,665 312,979 266,093 247,567
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
74
<PAGE> 12
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 3.--(CONTINUED)
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.
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.
Derivative financial instruments consist of interest rate caps in the
general account and purchased options in the Separate Accounts at December 31,
1998. The gross notional principal or contractual amounts of derivative
financial instruments in the general account at December 31, 1998 and 1997
totaled $50 million. The gross notional principal or contractual amounts of
derivative financial instruments in the Separate Accounts totaled $1.5 million
at December 31, 1998 and 1997. The contract or 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.
75
<PAGE> 13
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 3.--(CONTINUED)
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, 1998
totaled $0.1 million and $0.5 million, respectively, and compares to $0.4
million and $0.3 million, respectively, at December 31, 1997. Net realized gains
(losses) on derivative financial instruments held in the general account and
Separate Accounts totaled ($0.2) million and $0.1 million, respectively, for the
year ended December 31, 1998. Net realized losses on derivative financial
instruments held in the general account totaled $0.1 million for the year ended
December 31, 1997, while net realized losses on derivatives in the Separate
Accounts were negligible for the same period.
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.
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 losses of $8.1
million, $1.0 million and $2.7 million for the years ended December 31, 1998,
1997 and 1996, respectively. The statutory net losses for 1998, 1997 and 1996
were primarily due to the immediate expensing of acquisition costs which were
substantial and a result of 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 $147.1 million, and
$125.3 million at December 31, 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, 1998, dividends of approximately $14.7 million was not subject to prior
Insurance Department approval.
76
<PAGE> 14
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
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, 1998 AMOUNT BENEFIT AMOUNT
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands of dollars)
Net unrealized gains on investment securities:
Net unrealized holding gains 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
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands of dollars)
Net unrealized gains 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>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PRE-TAX TAX (EXPENSE) NET
YEAR ENDED DECEMBER 31, 1996 AMOUNT BENEFIT AMOUNT
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands of dollars)
Net unrealized gains (losses) on investment securities:
Net unrealized holding gains (losses) arising during the
period.................................................. $ (5,822) $ 2,038 $ (3,784)
Adjustment for (gains) losses included in net income...... (13,641) 4,774 (8,867)
- ---------------------------------------------------------------------------------------------------
TOTAL OTHER COMPREHENSIVE LOSS $(19,463) $ 6,812 $(12,651)
===================================================================================================
</TABLE>
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 its
proportionate share of these expenses. The net pension cost allocated to VFL was
$1.1 million, $4.0 million and $3.6 million for the years ended December 31,
1998, 1997 and 1996, respectively.
77
<PAGE> 15
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 6.--(CONTINUED)
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 $0.5 million, $2.1
million and $1.3 million for the years ended December 31, 1998, 1997 and 1996,
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
6% of their salary. VFL is allocated its proportionate share of CNA Employees'
Savings Plan expenses. CNAF contributes an amount equal to 70% of the employee's
regular contribution. Employees may also make an additional contribution of up
to 10% of their salaries for which there is no matching contribution by CNAF.
CNAF contributions allocated to and expensed by VFL for the Savings Plan were
$0.2 million in 1998 and 1997, and $1.0 million in 1996.
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 $156.3 million and $121.8 million at December
31, 1998 and 1997, respectively.
Significant components of VFL's deferred tax liabilities as of December 31,
1998 and 1997 are shown in the table below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
DECEMBER 31 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands of dollars)
Insurance reserves.......................................... $ 26,880 $ 24,961
Deferred acquisition costs.................................. (37,729) (33,374)
Investment valuation........................................ 3,693 6,129
Net unrealized gains........................................ (2,416) (2,359)
Receivables................................................. 1,009 (2,486)
Other, net.................................................. 2,350 3,031
- ------------------------------------------------------------------------------------
NET DEFERRED TAX LIABILITIES $ (6,213) $ (4,098)
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
</TABLE>
78
<PAGE> 16
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 7.--(CONTINUED)
At December 31, 1998, gross deferred tax assets and liabilities amounted to
$35.5 million and $41.7 million, respectively. Gross deferred tax assets and
liabilities, at December 31, 1997, amounted to $35.1 million and $39.2 million,
respectively.
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands of dollars)
Current tax expense......................................... $7,033 $4,716 $5,719
Deferred tax expense........................................ 2,058 2,581 3,309
- ------------------------------------------------------------------------------------------
TOTAL INCOME TAX EXPENSE................................ $9,091 $7,297 $9,028
==========================================================================================
</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 1998 INCOME 1997 INCOME 1996 INCOME
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands of dollars)
Income taxes at statutory rates.................... $9,290 35.0 $7,219 35.0 $9,011 35.0
Other.............................................. (199) (0.8) 78 0.4 17 0.1
- ---------------------------------------------------------------------------------------------------------------
INCOME TAX AT EFFECTIVE RATES.................. $9,091 34.2 $7,297 35.4 $9,028 35.1
===============================================================================================================
</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. Such collateral totaled approximately $0.1 million at both
December 31, 1998 and 1997.
In the table below, the majority of life premium revenue is from long
duration type contracts, while the majority of accident and health earned
premiums is from short
79
<PAGE> 17
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 8.--(CONTINUED)
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 %
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands of dollars)
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%
======== ======== ======== ======== ===
1996
Life........................................ $422,700 $72,718 $424,907 $ 70,511 103%
Accident and Health......................... 1,080 254,975 1,080 254,975 100
-------- -------- -------- -------- ---
Total premiums............................ $423,780 $327,693 $425,987 $325,486 101%
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</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 $263.4 million, $116.2 million and $43.0 million
for the years ended December 31, 1998, 1997 and 1996, respectively.
Additionally, benefits and expenses for insurance claims and policyholder
benefits are net of reinsurance recoveries from non-affiliated companies of
$203.4 million, $77.8 million and $7.0 million for the years ended December 31,
1998, 1997 and 1996, 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
DIRECT ASSUMED CEDED NET %
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands of dollars)
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
December 31, 1996............................ $108,126 $22,085 $109,873 $20,338 108.6
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 9. RELATED PARTIES:
As discussed in Note 1, VFL is party to a 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
80
<PAGE> 18
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 9.--(CONTINUED)
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 $47.6 million, $45.3 million and $37.2
million for 1998, 1997 and 1996, respectively. Expenses of VFL exclude $9.2
million, $9.9 million and $12.3 million of general and administrative expenses
incurred by VFL and allocated to CNAF for the years ended December 31, 1998,
1997 and 1996, respectively. At December 31, 1998, VFL had a payable of $1.9
million to affiliated companies. VFL had a $36.0 million affiliated receivable
at December 31, 1997, for net cash settlements due from Assurance in the normal
course of operations related to pooling and general expense reimbursements.
There are no interest charges on intercompany receivables or payables.
During 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 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,
amended July 1, 1996, 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 represents premiums by product group for each of the years in
the three years ended December 31, 1998:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
(THOUSANDS OF DOLLARS) 1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Life........................................................ $ 75,259 $ 79,176 $ 70,511
Accident and Health......................................... 240,340 252,996 254,975
- ------------------------------------------------------------------------------------------------
Total....................................................... $315,599 $332,172 $325,486
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
81
<PAGE> 19
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 11.--(CONTINUED)
Assurance is a large provider of health insurance benefits to postal and
other federal employees under the Federal Employees Health Benefit Plan (FEHBP).
Premiums under this contract totaled $2.0 billion, $2.1 billion and $2.1 billion
for the years ended December 31, 1998, 1997 and 1996, respectively, and the
portion of these premiums assumed by VFL under the Reinsurance Pooling Agreement
totaled $202 million, $212 million and $210 million for the years ended December
31, 1998, 1997 and 1996, respectively.
82
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
The following financial statements of the Variable Account are
included in Part B hereof:
1. Statements of Assets and Liabilities - September 30, 1999 (unaudited)
2. Statements of Operations for the Nine Months Ended September 30, 1999
(unaudited)
3. Statements of Changes in Net Assets for the Nine Months Ended
September 30, 1999 (unaudited)
4. Notes to Financial Statements - September 30, 1999 (unaudited)
5. Independent Auditors' Report
6. Statements of Assets and Liabilities - December 31, 1998 and
December 31, 1997
7. Statements of Operations for the Year Ended December 31, 1998
and For the Period from Inception to December 31, 1997
8. Statements of Changes in Net Assets For the Period Ended
December 31, 1998 and for the Period From Inception to December
31, 1997
9. Notes to Financial Statements - December 31, 1998
The following financial statements of the Company are included
in Part B hereof:
1. Condensed Balance Sheets - September 30, 1999 (unaudited) and
December 31, 1998
2. Condensed Statements of Operations (unaudited) for the three-and
nine months ended September 30, 1999 and 1998
3. Condensed Statements of Stockholder's Equity (unaudited) for the
nine-months ended September 30, 1999 and 1998
4. Condensed Statements of Cash Flows (unaudited) for the nine-months
ended September 30, 1999 and 1998
5. Notes to Condensed Financial Statements - September 30, 1999 (unaudited)
6. Independent Auditors' Report
7. Balance Sheets - December 31, 1998 and 1997
8. Statements of Operations For the Year Ended December 31, 1998,
1997 and 1996
9. Statements of Stockholder's Equity
10. Statements of Cash Flows for the Years Ended December 31, 1998,
1997 and 1996
11. Notes to Financial Statements
(b) Exhibits
(1) Certified resolution of the board of directors of the Company
dated February 12, 1996, establishing the Variable Account.*
(2) Not applicable.
(3) Form of underwriting agreement between the Company and CNA Investor
Services, Inc. ("CNAISI").**
(4) (a) Form of Flexible Premium Deferred Variable Annuity Contract (the
"Contract").+
(b) Form of Terminal Illness and Confinement Endorsement.***
(c) Form of Tax Sheltered Annuity Endorsement.***
(d) Form of Pension/Profit Sharing Endorsement.***
(e) Form of Systematic Withdrawal Endorsement.***
(f) Form of Automatic Transfer Endorsement.***
(g) Form of Dollar Cost Averaging I Endorsement.+
(h) Form of Dollar Cost Averaging II Endorsement.+
(i) Form of Roth IRA Endorsement. ***
(j) Form of IRA Endorsement. ***
(5) Form of Application.+
(6) (a) Articles of Incorporation of the Company.*
(b) By-Laws of the Company.*
(7) Not applicable.
(8) (a) Form of Participation Agreement between the Company and Federated
Insurance Series.**
(b) Form of Participation Agreement between the Company and Variable
Insurance Products Fund.**
(c) Form of Participation Agreement between the Company and The Alger
American Fund.**
(d) Form of Participation Agreement between the Company and MFS
Variable Insurance Trust. **
(e) Form of Participation Agreement between the Company and SoGen
Variable Funds, Inc. **
(f) Form of Participation Agreement between the Company and Van Eck
Worldwide Insurance Trust.**
(g) Form of Participation Agreement between the Company and Janus
Aspen Series.***
(h) Form of Participation Agreement among the Company, CNA Investor
Services, Inc., Lazard Asset Management and Lazard Retirement
Series, Inc.
(i) Form of Participation Agreement among Templeton Variable Products
Series Fund, Franklin Templeton Distributors, Inc. and the
Company.
(j) Form of Participation Agreement among the Company, CNA Investor
Services, Inc., Alliance Capital Management L.P. and Alliance
Fund Distributors, Inc.
(k) Form of Shareholder Services Agreement between the Company and
American Century Investment Management, Inc.
(l) Form of Participation Agreement between the Company and Morgan
Stanley Dean Witter Universal Funds, Inc.
(9) (a) Opinion and Consent of Counsel+
(9) (b) Consent of Blazzard, Grodd & Hasenauer, P.C.
(10) Independent Auditors' Consent
(11) Not applicable.
(12) Not applicable.
(13) Not applicable.
(14) Not applicable
* Incorporated herein by reference to the initial filing of this Form N-4
Registration on February 20, 1996.
** Incorporated herein by reference to filing of Pre-Effective Amendment
Number 1 to this Form N-4 Registration on September 4, 1996.
*** Incorporated herein by reference to Form N-4 (File No. 333-85511) as filed
electronically on August 18, 1999.
+ Incorporated herein by reference to Pre-Effective Amendment No. 1 to Form
N-4 (File No. 333-85511) as filed electronically on December 29, 1999.
ITEM 25. DIRECTORS AND OFFICERS OF THE COMPANY
The name, age, positions and offices, term as director, and business
experience during the past five years for Valley Forge Life Insurance Company's
("VFL") directors and executive officers are listed in the following table:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
OFFICERS OF VFL
- ----------------------------------------------------------------------------------------------------
POSITION(S) HELD
NAME AND ADDRESS AGE WITH VFL PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- - ----------------------------------------------------------------------------------------------------
Bernard L. Hengesbaugh 53 Chairman of the Chairman of the Board and Chief Executive
CNA Plaza Board, Chief Officer of CNA since February, 1999. Prior
Chicago, IL 60685 Executive thereto, Mr. Hengesbaugh served as Executive
Officer, and Vice President and Chief Operating Officer of
Director CNA since February, 1998. Prior thereto, Mr.
Hengesbaugh was Senior Vice President of CNA
since November, 1990. Mr. Hengesbaugh has
served as Director since February, 1999.
- - ----------------------------------------------------------------------------------------------------
Peter E. Jokiel 52 President and Senior Vice President of CNA since November,
CNA Plaza Chief Operating 1990. Chief Financial Officer of CNA from
Chicago, IL 60685 Officer, November, 1990 through October, 1997. Mr.
CNA Life Jokiel served as a Director of VFL from July,
1992 through October, 1997.
- ------------------------------------------------------------------------------------------------------
Jonathan D. Kantor 43 Senior Vice Senior Vice President, Secretary and General
CNA Plaza President, Counsel of CNA since April, 1997. Group Vice
Chicago, IL 60685 Secretary, President of CNA since April, 1994. Prior
General Counsel thereto, Mr. Kantor was a partner at the law
and Director firm of Shea & Gould.* Mr. Kantor has served
as a Director of VFL since April, 1997.
- - ----------------------------------------------------------------------------------------------------
Robert V. Deutsch 40 Senior Vice Senior Vice President, Chief Financial Officer
CNA Plaza President, Chief and Director since August 16, 1999. Prior
Chicago, IL 60685 Financial thereto, Chief Financial Officer for Executive
Officer, Director Risk, Inc.
- - ----------------------------------------------------------------------------------------------------
Tom Taylor 48 Executive Vice Executive Vice President, Underwriting Policy
President Group since June 1999. Specialty Operations,
1998-1999. President and Chief Operating
Officer, Financial Insurance, 1992-1998.
- ------------------------------------------------------------------------------------------------------
Carol Dubnicki 48 Senior Vice Senior Vice President, Human Resources since
President, May, 1998. Prior thereto, Senior Vice President,
Director Human Resources, Amoco, 1993-1998.
- ------------------------------------------------------------------------------------------------------
Donald P. Lofe, Jr. 42 Group Vice Group Vice President, Corporate Finance
President, Department since October 1998. Prior thereto,
Director partner of PricewaterhouseCoopers LLP.
- -----------------------------------------------------------------------------------------------------
John M. Squarok 46 Group Vice Group Vice President of CNA since July 1998.
President Prior thereto, Mr. Squarok was Chief Financial
and Director Officer of various businesses of GE Capital from
August 1988 until July 1998. Director since
August 1998.
- ------------------------------------------------------------------------------------------------------
</TABLE>
Each director is elected to serve until the next annual meeting of
stockholders or until his or her successor is elected and shall have qualified.
Some directors hold various executive positions with insurance company
affiliates of VFL. Executive officers serve at the discretion of the Board of
Directors.
* Shea & Gould declared bankruptcy in 1995.
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
The registrant is a segregated asset account of the Company and is therefore
owned and controlled by the Company. The Company is a stock life insurance
company of which all of the voting securities are owned by Continental Assurance
Company. Continental Assurance Company is owned by Continental Casualty Company,
a stock casualty insurance company organized under the Illinois Insurance Code,
the home office of which is located at CNA Plaza, Chicago, Illinois 60685. All
of the voting securities of Continental Casualty Company are owned by CNA
Financial Corporation, a Delaware Corporation. As of September 30, 1999, 86% of
the outstanding voting securities of CNA Financial Corporation are owned by
Loews Corporation, a Delaware Corporation, 667 Madison Avenue, New York, New
York 10021-8087. Loews corporation has interests in insurance, hotels, watches
and other timing devices, drilling rigs and tobacco. Laurence A. Tisch is
Co-Chairman of the Board and a director of Loews Corporation and Chief Executive
Officer and a director of CNA Financial Corporation. Preston R. Tisch is
Co-Chairman of the Board and a director of Loews Corporation and a director of
CNA Financial Corporation. James S. Tisch is President and Chief Executive
Officer and director of Loews Corporation and a director of CNA Financial
Corporation.
ITEM 27. NUMBER OF CONTRACT OWNERS
Not Applicable.
ITEM 28. INDEMNIFICATION
The registrant has no officers, directors or employees. The depositor and the
registrant do not indemnify the officers, directors of employees of the
depositor. CNA Financial Corporation, ("CNAFC") a parent of the depositor,
indemnifies the depositor's officers, directors and employees in their capacity
as such. Most of the officers, directors and employees are also officers,
directors and/or employees of CNAFC.
CNAFC indemnifies any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of CNAFC) by reason of the fact that he is or was a director,
officer, employee, or agent of CNAFC, or was serving at the request of CNAFC as
a director, office, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorney's
fees), judgments, fines, and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of CNAFC, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
CNAFC indemnifies any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action or suit by or in the right
of CNAFC to procure a judgment in its favor by reason of the fact that he is or
was a director, officer, employee or agent of CNAFC, or was serving at the
request of CNAFC as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorney's fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of CNAFC. No indemnification is made, however, in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable for negligence or misconduct in the performance of his duty to CNAFC
unless and only to the extent that a court determines that, despite the
adjudication of liability but in view of all of the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the court deems proper.
To the extent that any person referred to above is successful on the merits or
otherwise in defense of any action, suit or proceeding referred to above, or in
defense of any claim, issue or matter therein, CNAFC will indemnify such person
against expenses (including attorney's fees) actually and reasonably incurred by
him in connection therewith. CNAFC may advance to such a person, expenses
incurred in defending a civil or criminal action, suit or proceeding as
authorized by CNAFC's board of directors upon receipt of an undertaking by (or
on behalf of) such person to repay the amount advanced unless it is ultimately
determined that he is entitled to be indemnified.
Indemnification and advancement of expenses described above (unless pursuant to
a court order) is only made as authorized in the specific case upon a
determination that such indemnification or advancement of expenses is proper in
the circumstances because he has met the applicable standard of conduct. Such
determination must be made by a majority vote of a quorum of CNAFC's board of
directors who are not parties to the action, suit or proceeding or by
independent legal counsel in a written opinion or by CNAFC's stockholders.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 29. PRINCIPAL UNDERWRITER
(a) CNAISI is the registrant's principal underwriter and also serves as the
principal underwriter of certain variable annuity contracts and variable
life insurance contracts issued by the Company and certain variable
annuity contracts and variable life insurance contracts issued by
affiliates of the Company.
(b) CNA Investor Services Inc.("CNAISI") is the principal underwriter for the
Policies. The following persons are the officers and directors of CNAISI.
Name and Principal Positions and Offices
Business Address with Underwriter
---------------- ----------------
Kevin Hogan President, Chief Executive Officer,
Treasurer and Director
Ronald Chapon Vice President and Director
Lynne Gugenheim Vice President, Secretary and Director
John J. Sullivan, Jr. Vice President and Director
The principal business address for each officer and director of CNAISI is CNA
Plaza, 34 South Chicago, Illinois 60685.
(c) Not applicable.
Item 30. LOCATION BOOKS AND RECORDS
All of the accounts, books, records or other documents required to be kept by
Section 31(a) of the Investment Company Act of 1940 and rules thereunder, are
maintained by the Company at CNA Plaza, Chicago, Illinois 60685, or 100 CNA
Drive, Nashville, Tennessee 37214-3439, and by CNAISI at CNA Plaza, Chicago,
Illinois 60685.
ITEM 31. MANAGEMENT SERVICES
Not Applicable.
ITEM 32. UNDERTAKINGS
a. Registrant hereby undertakes to file a post-effective amendment to this
registration statement as frequently as is necessary to ensure that the audited
financial statements in the registration statement are never more than sixteen
(16) months old for so long as payment under the variable annuity contracts may
be accepted.
b. Registrant hereby undertakes to include either (1) as part of any
application to purchase a contract offered by the Prospectus, a space that an
applicant can check to request a Statement of Additional Information, or (2) a
postcard or similar written communication affixed to or included in the
Prospectus that the applicant can remove to send for a Statement of Additional
Information.
c. Registrant hereby undertakes to deliver any Statement of Additional
Information and any financial statement required to be made available under this
Form promptly upon written or oral request.
d. Valley Forge Life Insurance Company ("Company") hereby represents that
the fees and charges deducted under the Contracts described in the Prospectus,
in the aggregate, are reasonable in relation to the services rendered, the
expenses to be incurred and the risks assumed by the Company.
REPRESENTATIONS
The Company hereby represents that it is relying upon a No-Action Letter
issued to the American Council of Life Insurance dated November 28, 1988
(Commission ref. IP-6-88) and that the following provisions have been complied
with:
1. Include appropriate disclosure regarding the redemption restrictions
imposed by Section 403(b)(11) in each registration statement, including the
prospectus, used in connection with the offer of the contract;
2. Include appropriate disclosure regarding the redemption restrictions
imposed by Section 403(b)(11) in any sales literature used in connection with
the offer of the contract;
3. Instruct sales representatives who solicit participants to purchase the
contract specifically to bring the redemption restrictions imposed by Section
403(b)(11) to the attention of the potential participants;
4. Obtain from each plan participant who purchases a Section 403(b) annuity
contract, prior to or at the time of such purchase, a signed statement
acknowledging the participant's understanding of (1) the restrictions on
redemption imposed by Section 403(b)(11), and (2) other investment alternatives
available under the employer's Section 403(b) arrangement to which the
participant may elect to transfer his contract value.
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant certifies that it meets the requirements of Securities Act
Rule 485(b) for effectiveness of this Registration Statement and has caused
this Registration Statement to be signed on its behalf, in the City of Chicago,
and the State of Illinois, on this 10th day of February, 2000.
VALLEY FORGE LIFE INSURANCE COMPANY on
behalf of its separate account
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
(Registrant)
By: /S/ DAVID L. STONE
---------------------------------
VALLEY FORGE LIFE INSURANCE COMPANY
(Depositor)
By: /S/ JOEL S. FELDMAN
---------------------------------
As required by the Securities Act of 1933, this registration statement has
been signed by the following persons in the capacities and on the dates
indicated.
Signature Title Date
- - --------- ----- ----
/S/ BERNARD L. HENGESBAUGH 2/10/00
- -------------------------- Chairman of the Board, ---------
Bernard L. Hengesbaugh Chief Executive Officer Date
and Director
/S/ ROBERT V. DEUTSCH 2/10/00
- ---------------------- Chief Financial Officer ---------
Robert V. Deutsch and Director Date
/S/ CAROL DUBNICKI 2/10/00
- ---------------------- Director and Senior ---------
Carol Dubnicki Vice President Date
/S/ JONATHAN D. KANTOR 2/10/00
- ---------------------- Senior Vice President, Secretary ---------
Jonathan D. Kantor General Counsel, Director Date
/S/ DONALD P. LOFE, JR. 2/10/00
- ---------------------- Group Vice President, Director ---------
Donald P. Lofe, Jr. Date
/S/ JOHN M. SQUAROK 2/10/00
- ---------------------- Group Vice President, Director ---------
John M. Squarok Date
VALLEY FORGE LIFE INSURANCE COMPANY VARIABLE ANNUITY SEPARATE ACCOUNT
POST-EFFECTIVE AMENDMENT NO. 1 TO FORM N-4
(FILE NOS. 333-85511 and 811-7547)
INDEX TO EXHIBITS
EXHIBIT NO.
EX-99.B8(h) Form of Participation Agreement among the Company, CNA Investor
Services, Inc., Lazard Asset Management and Lazard Retirement
Series, Inc.
EX-99.B8(i) Form of Participation Agreement among Templeton Variable
Products Series Fund, Franklin Templeton Distributors, Inc. and
the Company.
EX-99.B8(j) Form of Participation Agreement between the Company and Alliance
Variable Products Series Fund
EX-99.B8(k) Form of Shareholder Services Agreement between the Company and
American Century Investment Management, Inc.
EX-99.B8(l) Form of Participation Agreement between the Company and Morgan
Stanley Dean Witter Universal Funds, Inc.
EX-99.B9(b) Consent of Blazzard, Grodd & Hasenauer, P.C.
EX-99.B10 Independent Auditors' Consent
FUND PARTICIPATION AGREEMENT
This Agreement is entered into as of the ___ day of ___________, 1999,
by and among __Valley Forge Life Insurance Co.__ ("Insurer"), a life insurance
company organized under the laws of the State of __Pennsylvania__, __CNA
Investor Services, Inc. an __Illinois__ corporation ("Contract Distributor"),
LAZARD ASSET MANAGEMENT ("LAM"), a division of Lazard Freres & Co. LLC, a New
York limited liability company ("LF & Co."), and LAZARD RETIREMENT SERIES, INC.
("Fund"), a Maryland corporation (collectively, the "Parties").
ARTICLE I.
DEFINITIONS
The following terms used in this Agreement shall have the meanings set out
below:
1.1. "Act" shall mean the Investment Company Act of 1940, as amended.
1.2. "Board" shall mean the Fund's Board of Directors having the responsibility
for management and control of Fund.
1.3. "Business Day" shall mean any day for which Fund calculates net asset value
per share as described in a Portfolio Prospectus.
1.4. "Code" shall mean the Internal Revenue Code of 1986, as amended.
1.5. "Commission" shall mean the Securities and Exchange Commission.
1.6. "Contract" shall mean a variable annuity or variable life insurance
contract that uses a Portfolio or Fund as an underlying investment medium
and that is named on Schedule 1 hereto, as the Parties may amend in writing
from time to time by mutual agreement ("Schedule 1").
1.7. "Contract Prospectus" shall mean the prospectus and, if applicable,
statement of additional information, as currently in effect with the
Commission, with respect to the Contracts, including any supplements or
amendments thereto. All references to "Contract Prospectuses" shall be
deemed to also include all offering documents and other materials relating
to any Contract that is not registered under the Securities Act of 1933, as
amended ("1933 Act").
1.8. "Contractholder" shall mean any person that is a party to a Contract with a
Participating Company. Individuals who participate under a group Contract
are "Participants."
1.9. "Disinterested Board Members" shall mean those members of the Board that
are not deemed to be "interested persons" of Fund, as defined by the Act.
1.10. "General Account" shall mean the general account of Insurer.
1.11."Participating Company" shall mean any insurance company, including
Insurer, that offers variable annuity and/or variable life insurance
contracts to the public and that has entered into an agreement with Fund
for the purpose of making Fund shares available to serve as the underlying
investment medium for Contracts.
1.12. "Portfolio" shall mean each series of Fund named on Schedule 1.
1.13."Portfolio Prospectus" shall mean the prospectus and statement of
additional information, as currently in effect with the Commission, with
respect to the Portfolios, including any supplements or amendments thereto.
1.14."Separate Account" shall mean a separate account duly established by
Insurer in accordance with the laws of the State of __Illinois__ and named
on Schedule 1.
ARTICLE II.
REPRESENTATIONS AND WARRANTIES
2.1. Insurer represents and warrants that:
(a) it is an insurance company duly organized and in good standing under
__Pennsylvania__ law;
(b) it has legally and validly established and shall maintain each
Separate Account pursuant to the insurance laws and regulations of the
State of __Illinois__;
(c) it has registered and shall maintain the registration of each Separate
Account as a unit investment trust under the Act, to the extent
required by the Act, to serve as a segregated investment account for
the Contracts;
(d) each Separate Account is and at all times shall be eligible to invest
in shares of Fund without such investment disqualifying Fund as an
investment medium for insurance company separate accounts supporting
variable annuity contracts and/or variable life insurance contracts;
(e) each Separate Account is and at all times shall be a "segregated asset
account," and interests in each Separate Account that are offered to
the public shall be issued exclusively through the purchase of a
Contract that is and at all times shall be a "variable contract"
within the meaning of such terms under Section 817 of the Code and the
regulations thereunder. Insurer agrees to notify Fund and LAM
immediately upon having a reasonable basis for believing that such
requirements have ceased to be met or that they might not be met in
the future;
(f) the Contracts are and at all times shall be treated as life insurance,
endowment or annuity contracts under applicable provisions of the
Code, and it shall notify Fund immediately upon having a reasonable
basis for believing that the Contracts have ceased to be so treated or
that they might not be so treated in the future.
2.2 Insurer and Distributor represent and warrant that (a) units of interest in
each Separate Account available through the purchase of Contracts are
registered under the 1933 Act, to the extent required thereby; (b) the
Contracts shall be issued in compliance in all material respects with all
applicable federal and state laws; and (c) the sale of the Contracts shall
comply in all material respects with state insurance law requirements.
Insurer agrees to inform Fund promptly of any investment restrictions
imposed by state insurance law and applicable to Fund.
2.3 Distributor represents and warrants that it is and at all times shall be:
(a) registered with the Commission as a broker-dealer, (b) a member in good
standing of the National Association of Securities Dealers, Inc. ("NASD");
and (c) an __Illinois__ corporation duly organized, validly existing, and
in good standing under the laws of the State of, __Illinois__ with full
power, authority, and legal right to execute, deliver, and perform its
duties and comply with its obligations under this Agreement. Distributor is
a limited purpose Broker-Dealer and does not oversee the licensing of sales
practices of registered representatives.
2.4 Fund represents and warrants that:
(a) it is and shall remain registered with the Commission as an open-end,
management investment company under the Act to the extent required
thereby;
(b) its shares are registered under the 1933 Act to the extent required
thereby;
(c) it possesses, and shall maintain, all legal and regulatory licenses,
approvals, consents and/or exemptions required for it to operate and
offer its shares as an underlying investment medium for the Contracts;
(d) each Portfolio is qualified as a regulated investment company under
Subchapter M of the Code, it shall make every effort to maintain such
qualification, and it shall notify Insurer immediately upon having a
reasonable basis for believing that any Portfolio invested in by the
Separate Account has ceased to so qualify or that it might not so
qualify in the future;
(e) each Portfolio's assets shall be managed and invested in a manner that
complies with the requirements of Section 817(h) of the Code and the
regulations thereunder, to the extent applicable; and in the event of
breach of this provision by the Fund it will take all reasonable steps
to: (a) notify the Company of such breach and (b) adequately diversify
the Fund so as to achieve compliance within the grace period afforded
by Regulation 817-5. The Fund shall provide the Company information
reasonably requested in relation Section 817(h) diversification
requirements, including quarterly reports and annual certifications.
And
(f) all of its directors, officers, employees, investment advisers, and
other individuals/entities who deal with the money and/or securities
of Fund are and shall continue to be at all times covered by a blanket
fidelity bond or similar coverage for the benefit of Fund in an amount
not less than that required by Rule 17g-1 under the Act. The aforesaid
bond shall include coverage for larceny and embezzlement and shall be
issued by a reputable bonding company.
2.5 LAM represents and warrants that LF & Co., the principal underwriter of
each Portfolio's shares, that it is and at all times shall be: (a)
registered with the Commission as a broker-dealer, (b) a member in good
standing of the NASD; and (c) a New York limited liability company duly
organized, validly existing, and in good standing under the laws of the
State of New York, with full power, authority, and legal right to execute,
deliver, and perform its duties and comply with its obligations under this
Agreement. LAM further represents and warrants that it shall sell the
shares of the Portfolios to Insurer in compliance in all material respects
with all applicable federal and state securities laws.
ARTICLE III.
FUND SHARES
3.2. Fund agrees to make the shares of each Portfolio available for purchase by
Insurer and each Separate Account at net asset value and without sales
charge, subject to the terms and conditions of this Agreement. Fund may
refuse to sell the shares of any Portfolio to any person, or suspend or
terminate the offering of the shares of any Portfolio if such action is
required by law or by regulatory authorities having jurisdiction or is, in
the sole discretion of the Board, acting in good faith and in light of its
fiduciary duties under federal and any applicable state laws, necessary and
in the best interests of the shareholders of such Portfolio.
3.3. Fund agrees that it shall sell shares of the Portfolios only to persons
eligible to invest in the Portfolios in accordance with Section 817(h) of
the Code and the regulations thereunder, to the extent such Section and
regulations are applicable.
3.4. Except as noted in this Article III, Fund and Insurer agree that orders and
related payments to purchase and redeem Portfolio shares shall be processed
in the manner set out in Schedule 2 hereto, as the Parties may amend in
writing from time to time by mutual agreement.
3.11.Fund shall confirm each purchase or redemption order made by Insurer.
Transfer of Portfolio shares shall be by book entry only. No share
certificates shall be issued to Insurer. Shares ordered from Fund shall be
recorded in an appropriate title for Insurer, on behalf of each Separate or
General Account.
3.13.Fund shall promptly notify Insurer of the amount of dividend and capital
gain, if any, per share of each Portfolio to which Insurer is entitled.
Insurer hereby elects to reinvest all dividends and capital gains of any
Portfolio in additional shares of that Portfolio at the applicable net
asset value, until Insurer otherwise notifies Fund in writing. Insurer
reserves the right to revoke this election and to receive all such income
dividends and capital gain distributions in cash.
ARTICLE IV.
STATEMENTS AND REPORTS
4.1. Fund shall provide Insurer with monthly statements of account by the
fifteenth (15th) Business Day of the following month.
4.2 At least annually, Fund or its designee shall provide Insurer, free of
charge, with as many Portfolio Prospectuses as Insurer may reasonably
request for distribution by Insurer to existing Contractholders and
Participants that have invested in that Portfolio. Fund or its designee
shall provide Insurer, at Insurer's expense, with as many Portfolio
Prospectuses as Insurer may reasonably request for distribution by Insurer
to prospective purchasers of Contracts. The Fund shall bear the cost of
printing the Portfolio Prospectuses. If the Portfolio Prospectuses are
printed by the Insurer in one document with the prospectus for the
Contracts and the prospectuses for other funds, then the expenses of such
printing will be apportioned between the Insurer and the Fund in proportion
to the number of pages of the Contract's prospectus, other fund
prospectuses and the Portfolio prospectuses. This expense will be subject
to an annual maximum. That maximum will be calculated by means of a similar
proportion based upon the total dollars invested in the Portfolios as
compared to the total dollars invested in all portfolios offered in the
Contract. The form of the Fund's prospectus and/or statement of additional
information provided to the Company shall be the final form of prospectus
and statement of additional information as filed with the Securities and
Exchange Commission which form shall include only those Portfolios of the
Fund identified in Schedule 1. If requested by the Insurer in lieu of a
printed copy of the prospectuses, fund or its designee shall provide such
documentation in "camera ready" copy, or , at the request of insurer as a
diskette in the form sent to the financial printer and other assistance as
is reasonably necessary in order for the Parties once a year (or more
frequently if the Portfolio Prospectuses are supplemented or updated) to
have the Contract Prospectuses and the Portfolio Prospectuses printed
together in one document.
4.3 Fund shall provide Insurer with copies of each Portfolio's proxy materials,
notices, periodic reports and other printed materials (which the Portfolio
customarily provides to its shareholders) in quantities as Insurer may
reasonably request for distribution by Insurer to each Contractholder and
Participant that has invested in that Portfolio.
4.4 Fund shall provide to Insurer at least one complete copy of all
registration statements, Portfolio Prospectuses, reports, proxy statements,
sales literature and other promotional materials, applications for
exemptions, requests for no-action letters, and all amendments to any of
the above, that relate to Fund or its shares, contemporaneously with the
filing of such document with the Commission or other regulatory
authorities.
4.5 Insurer shall provide to Fund at least one copy of all registration
statements, Contract Prospectuses, reports, proxy statements, sales
literature which utilizes LAM's name, company or fund information or
statistics, applications for exemptions, requests for no-action letters,
and all amendments to any of the above, that relate to the Contracts or a
Separate Account, contemporaneously with the filing of such document with
the Commission or the NASD.
ARTICLE V.
EXPENSES
5.1. Except as otherwise specifically provided herein, each Party will bear all
expenses incident to its performance under this Agreement.
ARTICLE VI.
EXEMPTIVE RELIEF
6.1. Insurer acknowledges that it has reviewed a copy of Fund's mixed and shared
funding exemptive order ("Order") and, in particular, has reviewed the
conditions to the relief set forth in the related notice ("Notice"). As
required by the conditions set forth in the Notice, Insurer shall report
any potential or existing conflicts promptly to the Board. In addition,
Insurer shall be responsible for assisting the Board in carrying out its
responsibilities under the Order by providing the Board with all
information necessary for the Board to consider any issues raised,
including, without limitation, information whenever Contract voting
instructions are disregarded. Insurer, at least annually, shall submit to
the Board such reports, materials, or data as the Board may reasonably
request so that the Board may carry out fully the obligations imposed upon
it by the Order. Insurer agrees to carry out such responsibilities with a
view to the interests of existing Contractholders.
6.2. If a majority of the Board, or a majority of Disinterested Board Members,
determines that a material irreconcilable conflict exists with regard to
Contractholder investments in Fund, the Board shall give prompt notice to
all Participating Companies. If the Board determines that Insurer is a
Participating Insurance Company for whom the conflict is relevant, Insurer
shall at its sole cost and expense, and to the extent reasonably
practicable (as determined by a majority of the Disinterested Board
Members), take such action as is necessary to remedy or eliminate the
irreconcilable material conflict. Such necessary action may include, but
shall not be limited to:
(a) Withdrawing the assets allocable to some or all Separate Accounts from
Fund or any Portfolio and reinvesting such assets in a different
investment medium, or submitting the question of whether such
segregation should be implemented to a vote of all affected
Contractholders and, as appropriate, segregating the assets of any
appropriate group (i.e. variable annuity or variable life insurance
contract owners) that votes in favor of such segregation; and/or
(b) Establishing a new registered management investment company.
6.3. If a material irreconcilable conflict arises as a result of a decision by
Insurer to disregard Contractholder voting instructions and that decision
represents a minority position or would preclude a majority vote by all
Contractholders having an interest in Fund, Insurer may be required, at the
Board's election, to withdraw the investments of its Separate Accounts in
Fund.
6.4. For the purpose of this Article, a majority of the Disinterested Board
Members shall determine whether any proposed action adequately remedies any
material irreconcilable conflict. In no event shall Fund or LAM or any
other investment adviser of Fund be required to bear the expense of
establishing a new funding medium for any Contract. Insurer shall not be
required by this Article to establish a new funding medium for any Contract
if an offer to do so has been declined by vote of a majority of the
Contractholders materially and adversely affected by the material
irreconcilable conflict.
6.5. No action by Insurer taken or omitted, and no action by the Separate
Account or Fund taken or omitted as a result of any act or failure to act
by Insurer pursuant to this Article VI shall relieve Insurer of its
obligations under or otherwise affect the operation of Article V.
ARTICLE VII.
VOTING OF FUND SHARES
7.1. Insurer shall provide pass-through voting privileges to all Contractholders
or Participants as long as the Commission continues to interpret the Act as
requiring pass-through voting privileges for Contractholders or
Participants. Accordingly, Insurer, where applicable, shall vote shares of
a Portfolio held in each Separate Account in a manner consistent with
voting instructions timely received from its Contractholders or
Participants. Insurer shall be responsible for assuring that the Separate
Account calculates voting privileges in a manner consistent with other
Participating Companies. Insurer shall vote shares for which it has not
received timely voting instructions, as well as shares it owns, in the same
proportion as it votes those shares for which it has received voting
instructions.
7.2. If and to the extent Rule 6e-2 and Rule 6e-3(T) under the Act are amended,
or if Rule 6e-3 is adopted, to provide exemptive relief from any provision
of the Act or the rules thereunder with respect to mixed and shared funding
on terms and conditions materially different from any exemptions granted in
the Order, then Fund, and/or the Participating Companies, as appropriate,
shall take such steps as may be necessary to comply with Rule 6e-2 and Rule
6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such Rules
are applicable.
ARTICLE VIII.
MARKETING
8.1. Fund or LF & Co. shall periodically or upon request furnish Insurer with
Portfolio Prospectuses and sales literature or other promotional materials
for each Portfolio, in quantities as Insurer may reasonably request for
distribution to prospective purchasers of Contract. Expenses for the
printing and distribution of such documents shall be borne by Insurer.
8.2. Insurer shall designate certain persons or entities that shall have the
requisite licenses to solicit applications for the sale of Contracts.
Insurer shall make reasonable efforts to market the Contracts and shall
comply with all applicable federal and state laws in connection therewith.
8.3. Insurer shall furnish, or shall cause to be furnished, to Fund, each piece
of sales literature or other promotional material in which Fund, LAM, LF &
Co., Fund's administrator is named, at least five (5) Business Days prior
to its use. No such material shall be used if the Fund or its designee
reasonably objects to such use within fifteen business days of the receipt
of such material.
8.4. Insurer shall not give any information or make any representations or
statements on behalf of Fund, LAM, LF & Co., or concerning Fund or any
Portfolio in connection with the sale of the Contracts other than the
information or representations contained in the registration statement or a
Portfolio Prospectus, as the same may be amended or supplemented from time
to time, or in reports or proxy statements for each Portfolio, or in sales
literature or other promotional material approved by Fund.
8.5. Fund shall furnish, or shall cause to be furnished, to Insurer, each piece
of the Fund's sales literature or other promotional material in which
Insurer or a Separate Account is named, at least five (5) Business Days
prior to its use. No such material shall be used if the Insurer reasonably
objects to such use within fifteen business days after receipt of such
material.
8.6. Fund shall not, in connection with the sale of Portfolio shares, give any
information or make any representations on behalf of Insurer or concerning
Insurer, a Separate Account, or the Contracts other than the information or
representations contained in a registration statement for the Contracts or
the Contract Prospectus, as the same may be amended or supplemented from
time to time, or in published reports for each Separate Account that are in
the public domain or approved by Insurer for distribution to
Contractholders or Participants, or in sales literature or other
promotional material approved by Insurer.
8.7. For purposes of this Agreement, the phrase "sales literature or other
promotional material" or words of similar import include, without
limitation, advertisements (such as material published, or designed for
use, in a newspaper, magazine or other periodical, radio, television,
telephone or tape recording, videotape display, signs or billboards, motion
pictures or other public media), sales literature (such as any written
communication distributed or made generally available to customers or the
public, including brochures, circulars, research reports, market letters,
form letters, seminar texts, or reprints or excerpts of any other
advertisement, sales literature, or published article), educational or
training materials or other communications distributed or made generally
available to some or all agents or employees, prospectuses, statements of
additional information, shareholder reports and proxy materials, and any
other material constituting sales literature or advertising under the rules
of the National Association of Securities Dealers, Inc. ("NASD"), the Act
or the 1933 Act.
ARTICLE IX.
INDEMNIFICATION
9.1. Insurer and Distributor each agree to indemnify and hold harmless Fund,
LAM, any sub-investment adviser of a Portfolio, and their affiliates, and
each of their respective directors, trustees, general members, officers,
employees, agents and each person, if any, who controls or is associated
with any of the foregoing entities or persons within the meaning of the
1933 Act (collectively, the "Indemnified Parties" for purposes of this
Section), against any and all losses, claims, damages or liabilities joint
or several (including any investigative, legal and other expenses
reasonably incurred in connection with, and any amounts paid in settlement
of, any action, suit or proceeding or any claim asserted) (collectively,
"Losses") for which the Indemnified Parties may become subject, under the
1933 Act or otherwise, insofar as such Losses (or actions in respect to
thereof):
(a) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact (collectively "materially untrue
statement") contained in any registration statement, Contract
Prospectus, Contract, or sales literature or other promotional
material relating to a Separate Account or the Contracts
(collectively, "Account documents"), or arise out of or are based upon
the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading (collectively "material omission");
(b) arise out of or are based upon any materially untrue statement or
material omission made in any registration statement, Portfolio
Prospectus, or sales literature or other promotional material relating
to Fund or a Portfolio (collectively, "Portfolio documents"), provided
such statement or omission was made in reliance upon and in conformity
with information provided in writing to Fund by or on behalf of
Insurer specifically for use therein;
(c) arise out of or as a result of statements or representations (other
than statements or representations contained in any Portfolio document
on which Insurer or Distributor have reasonably relied) or wrongful
conduct of Insurer, Distributor, their respective agents, and persons
under their respective control, with respect to the sale and
distribution of Contracts or Portfolio shares;
(d) arise out of any material breach of any representation and/or warranty
made by Insurer or Distributor in this Agreement, or arise out of or
result from any other material breach of this Agreement by Insurer or
Distributor; or
(e) arise out of Insurer's incorrect calculation and/or untimely reporting
of net purchase or redemption orders.
Insurer and Distributor shall reimburse any Indemnified Party in
connection with investigating or defending any Loss (or actions in
respect to thereof); provided, however, that with respect to clause
(a) above neither Insurer nor Distributor shall be liable in any such
case to the extent that any Loss arises out of or is based upon any
materially untrue statement or material omission made in any Account
documents, which statement or omission was made in reliance upon and
in conformity with written information furnished to Insurer by or on
behalf of Fund specifically for use therein. This indemnity agreement
shall be in addition to any liability that Insurer or Distributor may
otherwise have.
9.2. Fund and LAM each agree to indemnify and hold harmless Insurer and
Distributor and each of their respective directors, officers, employees,
agents and each person, if any, who controls Insurer or Distributor
(collectively, "Indemnified Parties" for purposes of this Section) within
the meaning of the 1933 Act against any Losses to which they or any
Indemnified Party may become subject, under the 1933 Act or otherwise,
insofar as such Losses (or actions in respect thereof):
(a) arise out of or are based upon any materially untrue statement or any
material omission made in any Portfolio document;
(b) arise out of or are based upon any materially untrue statement or any
material omission made in any Account document, provided such
statement or omission was made in reliance upon and in conformity with
information provided in writing to Insurer by or on behalf of Fund
specifically for use therein;
(c) arise out of or as a result of statements or representations (other
than statements or representations contained in any Account document
on which Fund or LAM have reasonably relied) or wrongful conduct of
Fund, LAM, their respective agents, and persons under their respective
control, with respect to the sale of Portfolio Shares; or
(d) arise out of any material breach of any representation and/or warranty
made by Fund or LAM in this Agreement, or arise out of or result from
any other material breach of this Agreement by Fund or LAM.
Fund and LAM shall reimburse any legal or other expenses reasonably
incurred by any Indemnified Party in connection with investigating or
defending any such Loss; provided, however, that with respect to
clause (a) above neither Fund nor LAM shall be liable in any such case
to the extent that any such Loss arises out of or is based upon an
materially untrue statement or material omission made in any Portfolio
document, which statement or omission was made in reliance upon and in
conformity with written information furnished to Fund by or on behalf
of Insurer specifically for use therein. This indemnity agreement
shall be in addition to any liability that Fund or LAM may otherwise
have.
9.3. Fund and LAM shall indemnify and hold Insurer harmless against any Loss
that Insurer may incur, suffer or be required to pay due to Fund's
incorrect calculation of the daily net asset value, dividend rate or
capital gain distribution rate of a Portfolio or incorrect or untimely
reporting of the same; provided, however, that Fund shall have no
obligation to indemnify and hold harmless Insurer if the incorrect
calculation or incorrect or untimely reporting was the result of incorrect
or untimely information furnished by or on behalf of Insurer or otherwise
as a result of or relating to Insurer's breach of this Agreement. In no
event shall Fund be liable for any consequential, incidental, special or
indirect damages resulting to Insurer hereunder.
9.4 Notwithstanding anything herein to the contrary, in no event shall Fund or
LAM be liable to any individual or entity, including without limitation,
Insurer, or any Participating Insurance Company or any Contractholder, with
respect to any Losses that arise out of or result from:
(a) a breach of any representation, warranty, and/or covenant made by
Insurer hereunder or by any Participating Insurance Company under an
agreement containing substantially similar representations, warranties
and covenants;
(b) the failure by Insurer or any Participating Insurance Company to
maintain its separate account (which invests in any Portfolio) as a
legally and validly established segregated asset account under
applicable state law and as a duly registered unit investment trust
under the provisions of the Act (unless exempt therefrom); or
(c) the failure by Insurer or any Participating Insurance Company to
maintain its variable annuity and/or variable life insurance contracts
(with respect to which any Portfolio serves as an underlying funding
vehicle) as life insurance, endowment or annuity contracts under
applicable provisions of the Code.
9.5 Further, neither Fund nor LAM shall have any liability for any failure or
alleged failure to comply with the diversification requirements of Section
817(h) of the Code or the regulations thereunder if Insurer fails to comply
with any of the following clauses, and such failure could be shown to have
materially contributed to the liability:
(a) In the event the Internal Revenue Service ("IRS") asserts in writing
in connection with any governmental audit or review of Insurer or, to
Insurer's knowledge, of any Contractholder, that any Portfolio has
failed or allegedly failed to comply with the diversification
requirements of Section 817(h) of the Code or the regulations
thereunder or Insurer otherwise becomes aware of any facts that could
give rise to any claim against Fund or its affiliates as a result of
such a failure or alleged failure,
(i) Insurer shall promptly notify Fund of such assertion or potential
claim;
(ii) Insurer shall consult with Fund as to how to minimize any
liability that may arise as a result of such failure or alleged
failure;
(iii)Insurer shall use its best efforts to minimize any liability of
Fund or its affiliates resulting from such failure, including,
without limitation, demonstrating, pursuant to Treasury
Regulations Section 1.817-5(a)(2), to the Commissioner of the IRS
that such failure was inadvertent;
(iv) Insurer shall permit Fund, its affiliates and their legal and
accounting advisors to participate in any conferences, settlement
discussions or other administrative or judicial proceeding or
contests (including judicial appeals thereof) with the IRS, any
Contractholder or any other claimant regarding any claims that
could give rise to liability to Fund or its affiliates as a
result of such a failure or alleged failure;
(v) Insurer shall not with respect to any claim of the IRS or any
Contractholder that would give rise to a claim against Fund or
its affiliates compromise or settle any claim, accept any
adjustment on audit, or forego any allowable judicial appeals,
without the express written consent of Fund or its affiliates,
which shall not be unreasonably withheld, provided that Insurer
shall not be required to appeal any adverse judicial decision
unless Fund or its affiliates shall have provided an opinion of
independent counsel to the effect that a reasonable basis exists
for taking such appeal.
9.6 Promptly after receipt by an indemnified party under this Article of notice
of the commencement of any action, such indemnified party shall, if a claim
in respect thereof is to be made against the indemnifying party under this
Article, notify the indemnifying party of the commencement thereof. The
failure to so notify the indemnifying party shall not relieve the
indemnifying party from any liability under this Article IX, except to the
extent that the omission results in a failure of actual notice to the
indemnifying party and such indemnifying party is damaged solely as a
result of the failure to give such notice. In case any such action is
brought against any indemnified party, and it notified the indemnifying
party of the commencement thereof, the indemnifying party shall be entitled
to participate therein and, to the extent that it may wish, assume the
defense thereof, with counsel satisfactory to such indemnified party, and
to the extent that the indemnifying party has given notice to such effect
to the indemnified party and is performing its obligations under this
Article, the indemnifying party shall not be liable for any legal or other
expenses subsequently incurred by such indemnified party in connection with
the defense thereof, other than reasonable costs of investigation.
Notwithstanding the foregoing, in any such proceeding, any indemnified
party shall have the right to retain its own counsel, but the fees and
expenses of such counsel shall be at the expense of such indemnified party
unless (a) the indemnifying party and the indemnified party shall have
mutually agreed to the retention of such counsel or (b) the named parties
to any such proceeding (including any impleaded parties) include both the
indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or
potential differing interests between them. The indemnifying party shall
not be liable for any settlement of any proceeding effected without its
written consent.
A successor by law of any Party to this Agreement shall be entitled to the
benefits of the indemnification contained in this Article IX, which shall
survive any termination of this Agreement.
ARTICLE X.
COMMENCEMENT AND TERMINATION
10.1.This Agreement shall be effective as of the date hereof and shall continue
in force until terminated in accordance with the provisions herein.
10.2.This Agreement shall terminate without penalty as to one or more
Portfolios:
(a) At the option of Insurer, Distributor, Fund, or LAM at any time from
the date hereof upon 120 days' notice, unless a shorter time is agreed
to by the Parties;
(b) At the option of Insurer if it determines that shares of any Portfolio
are not reasonably available to meet the requirements of the
Contracts. Insurer shall furnish prompt notice of election to
terminate and termination shall be effective ten days after receipt of
notice unless Fund makes available a sufficient number of shares to
meet the requirements of the Contracts within such ten day period;
(c) At the option of Insurer or Fund, upon the institution of formal
proceedings against the other or their respective affiliates by the
Commission, the NASD or any other regulatory body, the expected or
anticipated ruling, judgment or outcome of which would, in the
Insurer's or Fund's reasonable judgment, materially impair the other's
ability to meet and perform its obligations and duties hereunder.
Prompt notice of election to terminate shall be furnished by Insurer
or Fund, as the case may be, with termination to be effective upon
receipt of notice;
(d) At the option of Insurer or Fund, if either shall determine, in its
sole judgment reasonably exercised in good faith, that the other has
suffered a material adverse change in its business or financial
condition or is the subject of material adverse publicity and such
material adverse change or material adverse publicity is likely to
have a material adverse impact upon the business and operation of the
Insurer, Fund or LAM, as the case may be. Insurer or Fund shall notify
the other in writing of any such determination and its intent to
terminate this Agreement, which termination shall be effective on the
sixtieth (60th) day following the giving of such notice, provided the
determination of Insurer or Fund, as the case may be, continues to
apply on that date.
(e) Upon termination of the Investment Management Agreement between Fund,
on behalf of its Portfolios, and LAM or its successors unless Insurer
specifically approves the selection of a new investment adviser for
the Portfolios. Fund shall promptly furnish notice of such termination
to Insurer;
(f) In the event Portfolio shares are not registered, issued or sold in
accordance with applicable federal law, or such law precludes the use
of such shares as the underlying investment medium of Contracts issued
or to be issued by Insurer. Termination shall be effective immediately
upon such occurrence without notice;
(g) At the option of Fund upon a determination by the Board in good faith
that it is no longer advisable and in the best interests of
shareholders for Fund to continue to operate pursuant to this
Agreement. Termination shall be effective upon notice by Fund to
Insurer of such termination;
(h) At the option of Fund if the Contracts cease to qualify as annuity
contracts or life insurance policies, as applicable, under the Code,
or if Fund reasonably believes that the Contracts may fail to so
qualify. Termination shall be effective immediately upon such
occurrence or reasonable belief without notice;
(i) At the option of any Party, upon another's breach of any material
provision this Agreement, which breach has not been cured to the
satisfaction of the non-breaching Parties within ten days after
written notice of such breach is delivered to the breaching Party;
(j) At the option of Fund, if the Contracts are not registered, issued or
sold in accordance with applicable federal and/or state law.
Termination shall be effective immediately upon such occurrence
without notice;
(k) Upon assignment of this Agreement, unless made with the written
consent of the non-assigning Parties.
Any such termination pursuant to this Article X shall not affect the
operation of Articles V or IX of this Agreement. The Parties agree that any
termination pursuant to Article VI shall be governed by that Article.
10.3.Notwithstanding any termination of this Agreement pursuant to Section 10.2
hereof, Fund and LAM may, at the option of Fund, continue to make available
additional Portfolio shares for so long as Fund desires pursuant to the
terms and conditions of this Agreement as provided below, for all Contracts
in effect on the effective date of termination of this Agreement
(hereinafter referred to as "Existing Contracts"). Specifically, without
limitation, if Fund so elects to make additional Portfolio shares
available, the owners of the Existing Contracts or Insurer, whichever shall
have legal authority to do so, shall be permitted to reallocate investments
among the Portfolios, redeem investments in the Portfolios and/or invest in
the Portfolios upon the making of additional purchase payments under the
Existing Contracts. In the event of a termination of this Agreement
pursuant to Section 10.2 hereof, Fund, as promptly as is practicable under
the circumstances, shall notify Insurer whether Fund shall continue to make
Portfolio shares available after such termination. If Portfolio shares
continue to be made available after such termination, the provisions of
this Agreement shall remain in effect and thereafter either Fund or Insurer
may terminate the Agreement, as so continued pursuant to this Section 10.3,
upon prior written notice to the other Parties, such notice to be for a
period that is reasonable under the circumstances but, if given by Fund,
need not be for more than six months.
10.1.In the event of any termination of this Agreement pursuant to Section 10.2
hereof, the Parties agree to cooperate and give reasonable assistance to
one another in taking all necessary and appropriate steps for the purpose
of ensuring that a Separate Account owns no shares of a Portfolio beyond
six months from the date of termination. Such steps may include, without
limitation, substituting other mutual fund shares for those of the affected
Portfolio.
ARTICLE XI.
AMENDMENTS
11.1.Any changes in the terms of this Agreement shall be made by agreement in
writing by the Parties hereto.
ARTICLE XII.
NOTICE
12.1.Each notice required by this Agreement shall be given by certified mail,
return receipt requested, to the appropriate Parties at the following
addresses:
Insurer: Valley Forge Life Insurance Company
CNA Plaza
333 Wabash, 43 South
Chicago, IL 60685
Attn: G. Stephen Wastek, Esq.
Distributor: CNA Investor Services
CNA Plaza
333 Wabash, 43 South
Chicago, IL 60685
Attn: Ron Chapon
Fund: Lazard Retirement Series, Inc.
30 Rockefeller Plaza
New York, New York 10112
Attention: Steven Swain
LAM: Lazard Asset Management
30 Rockefeller Plaza
New York, New York 10112
Attention: William Butterly
with copies to: Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York 10038-4982
Attn: Stuart H. Coleman, Esq.
Notice shall be deemed to be given on the date of receipt by the addresses as
evidenced by the return receipt.
ARTICLE XIII.
MISCELLANEOUS
13.1.This Agreement has been executed on behalf of the Parties by the
undersigned duly authorized officers in their capacities as officers of
Insurer, Distributor, LAM, and Fund.
13.1.If any provision of this Agreement is held or made invalid by a court
decision, statute, rule, or otherwise, the remainder of this Agreement will
not be affected thereby.
13.1.The rights, remedies, and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, that the Parties are entitled to under
federal and state laws.
13.1.This Agreement may be executed simultaneously in two or more counterparts,
each of which taken together shall constitute one and the same instrument.
ARTICLE XIV.
LAW
14.1.This Agreement shall be construed in accordance with the internal laws of
the State of New York, without giving effect to principles of conflict of
laws.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement to be duly
executed and attested as of the date first above written.
Valley Forge Life Insurance Company
By:___________________________________
Attest:_____________________
CNA Investor Services
By:____________________________________
Attest:_____________________
LAZARD RETIREMENT SERIES, INC.
By:____________________________________
Attest:_____________________
LAZARD ASSET MANAGEMENT,
a division of Lazard Freres & Co., LLC
By:____________________________________
Attest:______________________
SCHEDULE 1
Portfolios
Lazard Retirement Equity Portfolio
Lazard Retirement Small Cap Portfolio
Separate Accounts and Contracts
1. Valley Forge Life Insurance Company Variable Annuity Separate Acct.
Established October 15, 1995.
a) Contracts: CNA Capital Select Variable Annuity
CNA Capital Select Plus Variable Annuity
2. Valley Forge Life Insurance Company Variable Life Separate Acct.
Established October 15, 1995
a) Contracts: CNA Capital Select Variable Universal Life
SCHEDULE 2
PORTFOLIO SHARE ORDER PROCESSING
TIMELY PRICING AND ORDERS
1. Each Business Day, Fund shall use its best efforts to make each Portfolio's
closing net asset value per share ("NAV") on that Day available to Insurer
by 6:30 p.m. New York time.
2. At the end of each Business Day, Insurer shall use the information
described above to calculate each Separate Account's unit values for that
Day. Using this unit value, Insurer shall process that Day's Contract and
Separate Account transactions to determine the net dollar amount of each
Portfolio's shares to be purchased or redeemed.
3. Insurer shall transmit net purchase or redemption orders to Fund or its
designee by 9:30 a.m. New York time on the Business Day next following
Insurer's receipt of the information relating to such orders in accordance
with paragraph 1 above; provided, however, that Fund shall provide
additional time to Insurer in the event Fund is unable to meet the 6:30
p.m. deadline stated above. Such additional time shall be equal to the
additional time that Fund takes to make the net asset values available to
Insurer. For informational purposes, Insurer shall separately describe the
amount of shares of each Portfolio that is being purchased, redeemed, or
exchanged from one Portfolio to the other. In addition, Insurer shall use
its best efforts to notify Fund in advance of any unusually large purchase
or redemption orders.
TIMELY PAYMENTS
4. Insurer shall pay for any net purchase order by wiring Federal Funds to
Fund or its designated custodial account by 4:00pm New York time on the
same Business Day it transmits the order to Fund pursuant to paragraph 3
above.
5. Fund shall pay for any net redemption order by wiring the redemption
proceeds to Insurer, except as provided below, within two (2) Business Days
or, upon notice to Insurer, such longer period as permitted by the Act or
the rules, orders or regulations thereunder. In the case of any net
redemption order valued at or greater than $1 million, Fund shall wire such
amount to Insurer within seven days of the order. In the case of any net
redemption order requesting the application of proceeds from the redemption
of one Portfolio's shares to the purchase of another Portfolio's shares,
Fund shall so apply such proceeds the same Business Day that Insurer
transmits such order to Fund.
APPLICABLE PRICE
6. Fund shall execute purchase and redemption orders for a Portfolio's shares
that relate to Contract transactions at that Portfolio's NAV next
determined after Fund or its designated agent receives the order. For this
purpose, Fund hereby appoints Insurer as its agent for the limited purpose
of receiving orders for the purchase and redemption of shares of each
Portfolio for each Separate Account; provided that Fund receives both the
notice of the order in accordance with paragraph 3 above and any related
purchase payments in accordance with paragraph 4 above.
7. Fund shall execute purchase and redemption orders for a Portfolio's shares
that relate to Insurer's General Account, or that do not relate to Contract
transactions, at that Portfolio's NAV next determined after Fund (not
Insurer) receives the order and any related purchase payments in accordance
with paragraph 4 above.
8. Fund shall execute purchase and redemption orders for a Portfolio Shares
that relate to Contracts funded by registered and unregistered Separate
Accounts in the same manner, but only to the extent that Insurer represents
and warrants that it is legally or contractually obligated to treat such
orders in the same manner. Each order for Portfolio shares placed by
Insurer that is attributable, in whole or in part, to Contracts funded by
an unregistered Separate Account, shall be deemed to constitute such
representation and warranty by Insurer unless the order specifically states
to the contrary. Otherwise, Fund shall treat orders attributable to
unregistered Separate Account Contracts in the same manner as orders for
Insurer's General Account. For these purposes, a registered Separate
Account is one that is registered under the Act; an unregistered Separate
Account is one that is not.
9. Fund shall execute purchase or redemption orders for a Portfolio's shares
that do not satisfy the conditions specified in paragraphs 3 and 4 above,
as applicable, at the Portfolio's NAV next determined after such conditions
have been satisfied and in accordance with paragraphs 6 or 7, whichever
applies.
10. If Fund does not receive payment in Federal Funds for any net purchase
order in accordance with paragraph 4 above, Insurer shall promptly, upon
Fund's request, reimburse Fund for any charges, costs, fees, interest or
other expenses incurred by Fund in connection with any advances to, or
borrowings or overdrafts by, Fund, or any similar expenses incurred by
Fund, as a result of portfolio transactions effected by Fund based upon
such purchase request.
11. If Fund provides Insurer with materially incorrect net asset value per
share information through no fault of Insurer, Insurer, on behalf of the
Separate Account, shall be entitled to an adjustment to the number of
shares purchased or redeemed to reflect the correct net asset value per
share in accordance with Fund's current policies for correcting pricing
errors. Any material error in the calculation of net asset value per share,
dividend or capital gain information shall be reported promptly upon
discovery to Insurer.
PARTICIPATION AGREEMENT
AMONG TEMPLETON VARIABLE PRODUCTS SERIES FUND,
FRANKLIN TEMPLETON DISTRIBUTORS, INC. AND
VALLEY FORGE LIFE INSURANCE COMPANY
THIS AGREEMENT made as of January 1, 2000 among Templeton Variable
Products Series Fund (the "Trust"), an open-end management investment company
organized as a business trust under Massachusetts law, Franklin Templeton
Distributors, Inc., a California corporation, the Trust's principal underwriter
("Underwriter"), and Valley Forge Life Insurance Company, a life insurance
company organized as a corporation under Pennsylvania law (the "Company"), on
its own behalf and on behalf of each segregated asset account of the Company set
forth in Schedule A, as may be amended from time to time (the "Accounts").
W I T N E S S E T H:
WHEREAS, the Trust is registered with the Securities and Exchange
Commission (the "SEC") as an open-end management investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"), and has an
effective registration statement relating to the offer and sale of the various
series of its shares under the Securities Act of 1933, as amended (the "1933
Act");
WHEREAS, the Trust and the Underwriter desire that Trust shares be used
as an investment vehicle for separate accounts established for variable life
insurance policies and variable annuity contracts to be offered by life
insurance companies which have entered into fund participation agreements with
the Trust (the "Participating Insurance Companies");
WHEREAS, the beneficial interest in the Trust is divided into several
series of shares, each series representing an interest in a particular managed
portfolio of securities and other assets, and certain of those series, named in
Schedule A, (the "Portfolios") are to be made available for purchase by the
Company for the Accounts; and
WHEREAS, the Trust has received an order from the SEC, dated November
16, 1993 (File No. 812-8546), granting Participating Insurance Companies and
their separate accounts exemptions from the provisions of Sections 9(a), 13(a),
15(a) and 15(b) of the 1940 Act, and Rules 6e-2 (b) (15) and 6e-3 (T) (b) (15)
thereunder, to the extent necessary to permit shares of the Trust to be sold to
and held by variable annuity and variable life insurance separate accounts of
both affiliated and unaffiliated life insurance companies and certain qualified
pension and retirement plans (the "Shared Funding Exemptive Order");
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act unless an exemption from registration
under the 1940 Act is available and the Trust has been so advised; and has
registered or will register certain variable annuity contracts and variable life
insurance policies, listed on Schedule A attached hereto, under which the
portfolios are to be made available as investment vehicles (the "Contracts")
under the 1933 Act unless such interests under the Contracts in the Accounts are
exempt from registration under the 1933 Act and the Trust has been so advised;
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution of the Board of Directors of the
Company, on the date shown for such account on Schedule A hereto, to set aside
and invest assets attributable to one or more Contracts; and
WHEREAS, the Underwriter is registered as a broker dealer with the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended (the "1934 Act"), and is a member in good standing of the National
Association of Securities Dealers, Inc. ("NASD"); and
WHEREAS, each investment adviser listed on Schedule A (each, an
"Adviser") is duly registered as an investment adviser under the Investment
Advisers Act of 1940, as amended ("Advisers Act") and any applicable state
securities laws;
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios on behalf
of each Account to fund certain of the aforesaid Contracts and the Underwriter
is authorized to sell such shares to separate accounts such as each Account at
net asset value;
NOW THEREFORE, in consideration of their mutual promises, the parties
agree as follows:
ARTICLE I.
PURCHASE AND REDEMPTION OF TRUST PORTFOLIO SHARES
1.1 For purposes of this Article I, the Company shall be the Trust's
agent for receipt of purchase orders and requests for redemption relating to
each Portfolio from each Account, provided that the Company notifies the Trust
of such purchase orders and requests for redemption by 9:00 a.m. Eastern time on
the next following Business Day, as defined in Section 1.3.
1.2 The Trust agrees to make shares of the Portfolios available to the
Accounts for purchase at the net asset value per share next computed after
receipt of a purchase order by the Trust (or its agent), as established in
accordance with the provisions of the then current prospectus of the Trust
describing Portfolio purchase procedures on those days on which the Trust
calculates its net asset value pursuant to rules of the SEC, and the Trust shall
use its best efforts to calculate such net asset value on each day on which the
New York Stock Exchange ("NYSE") is open for trading. The Company will transmit
orders from time to time to the Trust for the purchase of shares of the
Portfolios. The Trustees of the Trust (the "Trustees") may refuse to sell shares
of any Portfolio to any person, or suspend or terminate the offering of shares
of any Portfolio if such action is required by law or by regulatory authorities
having jurisdiction or if, in the sole discretion of the Trustees acting in good
faith and in light of their fiduciary duties under federal and any applicable
state laws, such action is deemed in the best interests of the shareholders of
such Portfolio. Without limiting the foregoing, the Trustees have determined
that there is a significant risk that the Trust and its shareholders may be
adversely affected by investors whose purchase and redemption activity follows a
market timing pattern, and have authorized the Trust, the Underwriter and the
Trust's transfer agent to adopt procedures and take other action (including
without limitation rejecting specific purchase orders) as they deem necessary to
reduce, discourage or eliminate market timing activity. The Company agrees to
cooperate with the Trust to assist the Trust in implementing the Trust's
restrictions on Market Timers.
1.3 The Company shall submit payment for the purchase of shares of a
Portfolio on behalf of an Account no later than the close of business on the
next Business Day after the Trust receives the purchase order. Payment shall be
made in federal funds transmitted by wire to the Trust or its designated
custodian. Upon receipt by the Trust of the federal funds so wired, such funds
shall cease to be the responsibility of the Company and shall become the
responsibility of the Trust for this purpose. "Business Day" shall mean any day
on which the NYSE is open for trading and on which the Trust calculates its net
asset value pursuant to the rules of the SEC.
1.4 The Trust will redeem for cash any full or fractional shares of any
Portfolio, when requested by the Company on behalf of an Account, at the net
asset value next computed after receipt by the Trust (or its agent) of the
request for redemption, as established in accordance with the provisions of the
then current prospectus of the Trust describing Portfolio redemption procedures.
The Trust shall make payment for such shares in the manner established from time
to time by the Trust. Redemption with respect to a Portfolio will normally be
paid to the Company for an Account in federal funds transmitted by wire to the
Company before the close of business on the next Business Day after the receipt
of the request for redemption. Such payment may be delayed if, for example, the
Portfolio's cash position so requires or if extraordinary market conditions
exist, but in no event shall payment be delayed for a greater period than is
permitted by the 1940 Act.
1.5 Payments for the purchase of shares of the Trust's Portfolios by
the Company under Section 1.3 and payments for the redemption of shares of the
Trust's Portfolios under Section 1.4 may be netted against one another on any
Business Day for the purpose of determining the amount of any wire transfer on
that Business Day.
1.6 Issuance and transfer of the Trust's Portfolio shares will be by
book entry only. Stock certificates will not be issued to the Company or the
Account. Portfolio Shares purchased from the Trust will be recorded in the
appropriate title for each Account or the appropriate subaccount of each
Account.
1.7 The Trust shall furnish, on or before the ex-dividend date, notice
to the Company of any income dividends or capital gain distributions payable on
the shares of any Portfolio of the Trust. The Company hereby elects to receive
all such income dividends and capital gain distributions as are payable on a
Portfolio's shares in additional shares of the Portfolio. The Trust shall notify
the Company of the number of shares so issued as payment of such dividends and
distributions.
1.8 The Trust shall calculate the net asset value of each Portfolio on
each Business Day, as defined in Section 1.3. The Trust shall make the net asset
value per share for each Portfolio available to the Company or its designated
agent on a daily basis as soon as reasonably practical after the net asset value
per share is calculated (normally by 6:30 p.m. Eastern time) and shall use
reasonable efforts to make such net asset value per share available by 7:00 p.m.
Eastern time each Business Day.
1.9 The Trust agrees that its Portfolio shares will be sold only to
Participating Insurance Companies and their separate accounts and to certain
qualified pension and retirement plans to the extent permitted by the Shared
Funding Exemptive Order. No shares of any Portfolio will be sold directly to the
general public. The Company agrees that it will use Trust shares only for the
purposes of funding the Contracts through the Accounts listed in Schedule A, as
amended from time to time.
1.10 The Company agrees that all net amounts available under the
Contracts shall be invested in the Trust, in such other Funds advised by an
Adviser or its affiliates as may be mutually agreed to in writing by the parties
hereto, or in the Company's general account, provided that such amounts may also
be invested in an investment company other than the Trust if: (a) such other
investment company, or series thereof, has investment objectives or policies
that are substantially different from the investment objectives and policies of
the Portfolios; or (b) the Company gives the Trust and the Underwriter 45 days
written notice of its intention to make such other investment company available
as a funding vehicle for the Contracts; or (c) such other investment company is
available as a funding vehicle for the Contracts at the date of this Agreement
and the Company so informs the Trust and the Underwriter prior to their signing
this Agreement (a list of such investment companies appearing on Schedule B to
this Agreement); or (d) the Trust or Underwriter consents to the use of such
other investment company.
1.11 The Trust agrees that all Participating Insurance Companies shall
have the obligations and responsibilities regarding pass-through voting and
conflicts of interest corresponding to those contained in Section 2.10 and
Article IV of this Agreement.
1.12 Each party to this Agreement shall have the right to rely on
information or confirmations provided by any other party (or by any affiliate of
any other party), and shall not be liable in the event that an error results
from any incorrect information or confirmations supplied by any other party. If
an error is made in reliance upon incorrect information or confirmations, any
amount required to make a Contract owner's account whole shall be borne by the
party who provided the incorrect information or confirmation.
ARTICLE II.
OBLIGATIONS OF THE PARTIES; FEES AND EXPENSES
2.1 The Trust shall prepare and be responsible for filing with the SEC
and any state regulators requiring such filing all shareholder reports, notices,
proxy materials (or similar materials such as voting instruction solicitation
materials), prospectuses and statements of additional information of the Trust.
The Trust shall bear the costs of registration and qualification of its shares
of the Portfolios, preparation and filing of the documents listed in this
Section 2.1 and all taxes to which an issuer is subject on the issuance and
transfer of its shares.
2.2 At the option of the Company, the Trust or the Underwriter shall
either (a) provide the Company with as many copies of portions of the Trust's
current prospectus, annual report, semi-annual report and other shareholder
communications, including any amendments or supplements to any of the foregoing,
pertaining specifically to the Portfolios as the Company shall reasonably
request; or (b) provide the Company with a camera ready copy of such documents
in a form suitable for printing and from which information relating to series of
the Trust other than the Portfolios has been deleted to the extent practicable.
The Trust or the Underwriter shall provide the Company with a copy of its
current statement of additional information, including any amendments or
supplements, in a form suitable for duplication by the Company. Expenses of
furnishing such documents for marketing purposes shall be borne by the Company
and expenses of furnishing such documents for current contract owners invested
in the Trust shall be borne by the Trust or the Underwriter.
2.3 The Trust (at its expense) shall provide the Company with copies of
any Trust-sponsored proxy materials in such quantity as the Company shall
reasonably require for distribution to Contract owners. The Company shall bear
the costs of distributing proxy materials (or similar materials such as voting
solicitation instructions), prospectuses and statements of additional
information to Contract owners. The Company assumes sole responsibility for
ensuring that such materials are delivered to Contract owners in accordance with
applicable federal and state securities laws.
2.4 If and to the extent required by law, the Company shall: (i)
solicit voting instructions from Contract owners; (ii) vote the Trust shares in
accordance with the instructions received from Contract owners; and (iii) vote
Trust shares for which no instructions have been received in the same proportion
as Trust shares of such Portfolio for which instructions have been received; so
long as and to the extent that the SEC continues to interpret the 1940 Act to
require pass-through voting privileges for variable contract owners. The Company
reserves the right to vote Trust shares held in any segregated asset account in
its own right, to the extent permitted by law.
2.5 Except as provided in section 2.6, the Company shall not use any
designation comprised in whole or part of the names or marks "Franklin" or
"Templeton" or any other Trademark relating to the Trust or Underwriter without
prior written consent, and upon termination of this Agreement for any reason,
the Company shall cease all use of any such name or mark as soon as reasonably
practicable.
2.6 The Company shall furnish, or cause to be furnished to the Trust or
its designee, at least one complete copy of each registration statement,
prospectus, statement of additional information, retirement plan disclosure
information or other disclosure documents or similar information, as applicable
(collectively "disclosure documents"), as well as any report, solicitation for
voting instructions, sales literature and other promotional materials, and all
amendments to any of the above that relate to the Contracts or the Accounts
prior to its first use. The Company shall furnish, or shall cause to be
furnished, to the Trust or its designee each piece of sales literature or other
promotional material in which the Trust or an Adviser is named, at least 15
Business Days prior to its use. No such material shall be used if the Trust or
its designee reasonably objects to such use within five Business Days after
receipt of such material. For purposes of this paragraph, "sales literature or
other promotional material" includes, but is not limited to, portions of the
following that use any Trademark related to the Trust or Underwriter or refer to
the Trust or affiliates of the Trust: advertisements (such as material published
or designed for use in a newspaper, magazine or other periodical, radio,
television, telephone or tape recording, videotape display, signs or billboards,
motion pictures or electronic communication or other public media), sales
literature (i.e., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts or
any other advertisement, sales literature or published article or electronic
communication), educational or training materials or other communications
distributed or made generally available to some or all agents or employees, and
disclosure documents, shareholder reports and proxy materials.
2.7 The Company and its agents shall not give any information or make
any representations or statements on behalf of the Trust or concerning the
Trust, the Underwriter or an Adviser in connection with the sale of the
Contracts other than information or representations contained in and accurately
derived from the registration statement or prospectus for the Trust shares (as
such registration statement and prospectus may be amended or supplemented from
time to time), annual and semi-annual reports of the Trust, Trust-sponsored
proxy statements, or in sales literature or other promotional material approved
by the Trust or its designee, except as required by legal process or regulatory
authorities or with the written permission of the Trust or its designee.
2.8 The Trust shall use reasonable efforts to provide the Company, on a
timely basis, with such information about the Trust, the Portfolios and each
Adviser, in such form as the Company may reasonably require, as the Company
shall reasonably request in connection with the preparation of disclosure
documents and annual and semi-annual reports pertaining to the Contracts.
2.9 The Trust shall not give any information or make any
representations or statements on behalf of the Company or concerning the
Company, the Accounts or the Contracts other than information or representations
contained in and accurately derived from disclosure documents for the Contracts
(as such disclosure documents may be amended or supplemented from time to time),
or in materials approved by the Company for distribution including sales
literature or other promotional materials, except as required by legal process
or regulatory authorities or with the written permission of the Company.
2.10 So long as, and to the extent that, the SEC interprets the 1940
Act to require pass-through voting privileges for Contract owners, the Company
will provide pass-through voting privileges to Contract owners whose Contract
values are invested, through the registered Accounts, in shares of one or more
Portfolios of the Trust. The Trust shall require all Participating Insurance
Companies to calculate voting privileges in the same manner and the Company
shall be responsible for assuring that the Accounts calculate voting privileges
in the manner established by the Trust. With respect to each registered Account,
the Company will vote shares of each Portfolio of the Trust held by a registered
Account and for which no timely voting instructions from Contract owners are
received in the same proportion as those shares held by that registered Account
for which voting instructions are received. The Company and its agents will in
no way recommend or oppose or interfere with the solicitation of proxies for
Portfolio shares held to fund the Contracts without the prior written consent of
the Trust, which consent may be withheld in the Trust's sole discretion.
2.11 The Trust and Underwriter shall pay no fee or other compensation
to the Company under this Agreement except as provided on Schedule C, if
attached. Nevertheless, the Underwriter or an affiliate may make payments (other
than pursuant to a Rule 12b-1 Plan) to the Company or its affiliates or to the
Contracts' underwriter in amounts agreed to by the Underwriter or an affiliate
in writing and such payments may be made out of fees otherwise payable to the
Underwriter or its affiliates, profits of the Underwriter or its affiliates, or
other resources available to the Underwriter or its affiliates.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
3.1 The Company represents and warrants that it is an insurance company
duly organized and in good standing under the laws of its state of incorporation
and that it has legally and validly established each Account as a segregated
asset account under such law as of the date set forth in Schedule A.
3.2 The Company represents and warrants that, with respect to each
Account, (1) the Company has registered or, prior to any issuance or sale of the
Contracts, will register the Account as a unit investment trust in accordance
with the provisions of the 1940 Act to serve as a segregated asset account for
the Contracts, or (2) if the Account is exempt from registration as an
investment company under Section 3(c) of the 1940 Act, the Company will make
every effort to maintain such exemption and will notify the Trust and the
Adviser immediately upon having a reasonable basis for believing that such
exemption no longer applies or might not apply in the future.
3.3 The Company represents and warrants that, with respect to each Contract, (1)
the Contract will be registered under the 1933 Act, or (2) if the Contract is
exempt from registration under Section 3(a)(2) of the 1933 Act or under Section
4(2) and Regulation D of the 1933 Act, the Company will make every effort to
maintain such exemption and will notify the Trust and the Adviser immediately
upon having a reasonable basis for believing that such exemption no longer
applies or might not apply in the future. The Company further represents and
warrants that the Contracts will be sold by broker-dealers, or their registered
representatives, who are registered with the SEC under the 1934 Act and who are
members in good standing of the NASD; the Contracts will be issued and sold in
compliance in all material respects with all applicable federal and state laws;
and the sale of the Contracts shall comply in all material respects with state
insurance suitability requirements. CNA Investor Services, Inc., the distributor
of the products, is a limited purpose broker-dealer and not directly responsible
for suitability or compliance issues related to the products or registered
representative. However, the Company represents that CNA Investor Services, Inc.
has selling agreements only with broker-dealers that perform appropriate
supervision of their registered representatives to ensure that appropriate
suitability determinations are made with respect to the sale of products.
For any unregistered Accounts which are exempt from registration under
the `40 Act in reliance upon Sections 3(c)(1) or 3(c)(7) thereof, the Company
represents and warrants that:
(a) each Account and sub-account thereof has a principal underwriter
which is registered as a broker-dealer under the Securities
Exchange Act of 1934, as amended;
(b) Trust shares are and will continue to be the only investment
securities held by the corresponding Account sub-accounts; and
(c) with regard to each Portfolio, the Company, on behalf of the
corresponding sub-account, will:
(1) seek instructions from all Contract owners with regard to
the voting of all proxies with respect to Trust shares and
vote such proxies only in accordance with such instructions
or vote such shares held by it in the same proportion as the
vote of all other holders of such shares; and
(2) refrain from substituting shares of another security for
such shares unless the SEC has approved such substitution in
the manner provided in Section 26 of the `40 Act.
3.4 The Trust represents and warrants that it is duly organized and
validly existing under the laws of the State of Massachusetts and that it does
and will comply in all material respects with the 1940 Act and the rules and
regulations thereunder.
3.5 The Trust represents and warrants that the Portfolio shares offered
and sold pursuant to this Agreement will be registered under the 1933 Act and
the Trust shall be registered under the 1940 Act prior to and at the time of any
issuance or sale of such shares. The Trust shall amend its registration
statement under the 1933 Act and the 1940 Act from time to time as required in
order to effect the continuous offering of its shares. The Trust shall register
and qualify its shares for sale in accordance with the laws of the various
states only if and to the extent deemed advisable by the Trust or the
Underwriter.
3.6 The Trust represents and warrants that the investments of each
Portfolio will comply with the diversification requirements for variable
annuity, endowment or life insurance contracts set forth in Section 817(h) of
the Internal Revenue Code of 1986, as amended ("Code"), and the rules and
regulations thereunder, including without limitation Treasury Regulation
1.817-5, and will notify the Company immediately upon having a reasonable basis
for believing any Portfolio has ceased to comply or might not so comply and will
in that event immediately take all reasonable steps to adequately diversify the
Portfolio to achieve compliance within the grace period afforded by Regulation
1.817-5.
3.7 The Trust represents and warrants that it is currently qualified as
a "regulated investment company" under Subchapter M of the Code, that it will
make every effort to maintain such qualification and will notify the Company
immediately upon having a reasonable basis for believing it has ceased to so
qualify or might not so qualify in the future.
3.8 The Trust represents and warrants that should it ever desire to
make any payments to finance distribution expenses pursuant to Rule 12b-1 under
the 1940 Act, the Trustees, including a majority who are not "interested
persons" of the Trust under the 1940 Act ( "disinterested Trustees" ), will
formulate and approve any plan under Rule 12b-1 to finance distribution
expenses.
3.9 The Trust represents and warrants that it, its directors, officers,
employees and others dealing with the money or securities, or both, of a
Portfolio shall at all times be covered by a blanket fidelity bond or similar
coverage for the benefit of the Trust in an amount not less that the minimum
coverage required by Rule 17g-1 or other regulations under the 1940 Act. Such
bond shall include coverage for larceny and embezzlement and be issued by a
reputable bonding company.
3.10 The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals or entities
dealing with the money and/or securities of the Trust are and shall be at all
times covered by a blanket fidelity bond or similar coverage for the benefit of
the Trust, in an amount not less than $5 million. The aforesaid bond shall
include coverage for larceny and embezzlement and shall be issued by a reputable
bonding company. The Company agrees to make all reasonable efforts to see that
this bond or another bond containing these provisions is always in effect, and
agrees to notify the Trust and the Underwriter in the event that such coverage
no longer applies.
3.11 The Underwriter represents that each Adviser is duly organized and
validly existing under applicable corporate law and that it is registered and
will during the term of this Agreement remain registered as an investment
adviser under the Advisers Act.
3.12 The Trust currently intends for one or more classes of shares
(each, a "Class") to make payments to finance its distribution expenses,
including service fees, pursuant to a Plan adopted under Rule 12b-1 under the
1940 Act ("Rule 12b-1"), although it may determine to discontinue such practice
in the future. To the extent that any Class of the Trust finances its
distribution expenses pursuant to a Plan adopted under Rule 12b-1, the Trust
undertakes to comply with any then current SEC and SEC staff interpretations
concerning Rule 12b-1 or any successor provisions.
ARTICLE IV.
POTENTIAL CONFLICTS
4.1 The parties acknowledge that a Portfolio's shares may be made
available for investment to other Participating Insurance Companies. In such
event, the Trustees will monitor the Trust for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
Participating Insurance Companies. An irreconcilable material conflict may arise
for a variety of reasons, including: (a) an action by any state insurance
regulatory authority; (b) a change in applicable federal or state insurance,
tax, or securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretative letter, or any similar action by insurance,
tax, or securities regulatory authorities; (c) an administrative or judicial
decision in any relevant proceeding; (d) the manner in which the investments of
any Portfolio are being managed; (e) a difference in voting instructions given
by variable annuity contract and variable life insurance contract owners; or (f)
a decision by an insurer to disregard the voting instructions of contract
owners. The Trust shall promptly inform the Company of any determination by the
Trustees that an irreconcilable material conflict exists and of the implications
thereof.
4.2 The Company agrees to promptly report any potential or existing
conflicts of which it is aware to the Trustees. The Company will assist the
Trustees in carrying out their responsibilities under the Shared Funding
Exemptive Order by providing the Trustees with all information reasonably
necessary for the Trustees to consider any issues raised including, but not
limited to, information as to a decision by the Company to disregard Contract
owner voting instructions. All communications from the Company to the Trustees
may be made in care of the Trust.
4.3 If it is determined by a majority of the Trustees, or a majority of
the disinterested Trustees, that a material irreconcilable conflict exists that
affects the interests of Contract owners, the Company shall, in cooperation with
other Participating Insurance Companies whose contract owners are also affected,
at its own expense and to the extent reasonably practicable (as determined by
the Trustees) take whatever steps are necessary to remedy or eliminate the
irreconcilable material conflict, which steps could include: (a) withdrawing the
assets allocable to some or all of the Accounts from the Trust or any Portfolio
and reinvesting such assets in a different investment medium, including (but not
limited to) another Portfolio of the Trust, or submitting the question of
whether or not such withdrawal should be implemented to a vote of all affected
Contract owners and, as appropriate, withdrawing the assets of any appropriate
group (i.e. , annuity contract owners, life insurance policy owners, or variable
contract owners of one or more Participating Insurance Companies) that votes in
favor of such withdrawal, or offering to the affected Contract owners the option
of making such a change; and (b) establishing a new registered management
investment company or managed separate account.
4.4 If a material irreconcilable conflict arises because of a decision
by the Company to disregard Contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Trust's election, to withdraw the affected Account's
investment in the Trust and terminate this Agreement with respect to such
Account; provided, however, that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable conflict
as determined by a majority of the disinterested Trustees. Any such withdrawal
and termination must take place within six (6) months after the Trust gives
written notice that this provision is being implemented. Until the end of such
six (6) month period, the Trust shall continue to accept and implement orders by
the Company for the purchase and redemption of shares of the Trust.
4.5 If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with a
majority of other state regulators, then the Company will withdraw the affected
Account's investment in the Trust and terminate this Agreement with respect to
such Account within six (6) months after the Trustees inform the Company in
writing that it has determined that such decision has created an irreconcilable
material conflict; provided, however, that such withdrawal and termination shall
be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested Trustees. Until the
end of such six (6) month period, the Trust shall continue to accept and
implement orders by the Company for the purchase and redemption of shares of the
Trust.
4.6 For purposes of Sections 4.3 through 4.6 of this Agreement, a
majority of the disinterested Trustees shall determine whether any proposed
action adequately remedies any irreconcilable material conflict, but in no event
will the Trust be required to establish a new funding medium for the Contracts.
In the event that the Trustees determine that any proposed action does not
adequately remedy any irreconcilable material conflict, then the Company will
withdraw the Account's investment in the Trust and terminate this Agreement
within six (6) months after the Trustees inform the Company in writing of the
foregoing determination; provided, however, that such withdrawal and termination
shall be limited to the extent required by any such material irreconcilable
conflict as determined by a majority of the disinterested Trustees.
4.7 The Company shall at least annually submit to the Trustees such
reports, materials or data as the Trustees may reasonably request so that the
Trustees may fully carry out the duties imposed upon them by the Shared Funding
Exemptive Order, and said reports, materials and data shall be submitted more
frequently if reasonably deemed appropriate by the Trustees.
4.8 If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended,
or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
1940 Act or the rules promulgated thereunder with respect to mixed or shared
funding (as defined in the Shared Funding Exemptive Order) on terms and
conditions materially different from those contained in the Shared Funding
Exemptive Order, then the Trust and/or the Participating Insurance Companies, as
appropriate, shall take such steps as may be necessary to comply with Rules 6e-2
and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such rules are
applicable.
ARTICLE V.
INDEMNIFICATION
5.1 Indemnification By the Company
(a) The Company agrees to indemnify and hold harmless
the Underwriter, the Trust and each of its Trustees, officers,
employees and agents and each person, if any, who controls the
Trust within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" and individually the
"Indemnified Party" for purposes of this Article V) against
any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the
Company, which consent shall not be unreasonably withheld) or
expenses (including the reasonable costs of investigating or
defending any alleged loss, claim, damage, liability or
expense and reasonable legal counsel fees incurred in
connection therewith) (collectively, "Losses"), to which the
Indemnified Parties may become subject under any statute or
regulation, or at common law or otherwise, insofar as such
Losses are related to the sale or acquisition of Trust Shares
or the Contracts and
(i) arise out of or are based upon any
untrue statements or alleged untrue statements of any
material fact contained in a disclosure document for
the Contracts or in the Contracts themselves or in
sales literature generated or approved by the Company
on behalf of the Contracts or Accounts (or any
amendment or supplement to any of the foregoing)
(collectively, "Company Documents" for the purposes
of this Article V), or arise out of or are based upon
the omission or the alleged omission to state therein
a material fact required to be stated therein or
necessary to make the statements therein not
misleading, provided that this indemnity shall not
apply as to any Indemnified Party if such statement
or omission or such alleged statement or omission was
made in reliance upon and was accurately derived from
written information furnished to the Company by or on
behalf of the Trust for use in Company Documents or
otherwise for use in connection with the sale of the
Contracts or Trust shares; or
(ii) arise out of or result from statements
or representations (other than statements or
representations contained in and accurately derived
from Trust Documents as defined in Section 5.2
(a)(i)) or wrongful conduct of the Company or persons
under its control, with respect to the sale or
acquisition of the Contracts or Trust shares; or
(iii) arise out of or result from any untrue
statement or alleged untrue statement of a material
fact contained in Trust Documents as defined in
Section 5.2(a)(i) or the omission or alleged omission
to state therein a material fact required to be
stated therein or necessary to make the statements
therein not misleading if such statement or omission
was made in reliance upon and accurately derived from
written information furnished to the Trust by or on
behalf of the Company; or
(iv) arise out of or result from any failure
by the Company to provide the services or furnish the
materials required under the terms of this Agreement;
or
(v) arise out of or result from any material
breach of any representation and/or warranty made by
the Company in this Agreement or arise out of or
result from any other material breach of this
Agreement by the Company.
(b) The Company shall not be liable under this
indemnification provision with respect to any Losses to which
an Indemnified Party would otherwise be subject by reason of
such Indemnified Party's willful misfeasance, bad faith, or
gross negligence in the performance of such Indemnified
Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations and duties under this
Agreement or to the Trust or Underwriter, whichever is
applicable. The Company shall also not be liable under this
indemnification provision with respect to any claim made
against an Indemnified Party unless such Indemnified Party
shall have notified the Company in writing within a reasonable
time after the summons or other first legal process giving
information of the nature of the claim shall have been served
upon such Indemnified Party (or after such Indemnified Party
shall have received notice of such service on any designated
agent), but failure to notify the Company of any such claim
shall not relieve the Company from any liability which it may
have to the Indemnified Party against whom such action is
brought otherwise than on account of this indemnification
provision. In case any such action is brought against the
Indemnified Parties, the Company shall be entitled to
participate, at its own expense, in the defense of such
action. Unless the Indeminfied Party releases the Company from
any further obligations under this Section 5.1, the Company
also shall be entitled to assume the defense thereof, with
counsel satisfactory to the party named in the action. After
notice from the Company to such party of the Company's
election to assume the defense thereof, the Indemnified Party
shall bear the fees and expenses of any additional counsel
retained by it, and the Company will not be liable to such
party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in
connection with the defense thereof other than reasonable
costs of investigation.
(c) The Indemnified Parties will promptly notify the
Company of the commencement of any litigation or proceedings
against them in connection with the issuance or sale of the
Trust shares or the Contracts or the operation of the Trust.
5.2 Indemnification By The Underwriter
(a) The Underwriter agrees to indemnify and hold harmless the
Company, the underwriter of the Contracts and each of its directors and
officers and each person, if any, who controls the Company within the
meaning of Section 15 of the 1933 Act (collectively, the "Indemnified
Parties" and individually an "Indemnified Party" for purposes of this
Section 5.2) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the
Underwriter, which consent shall not be unreasonably withheld) or
expenses (including the reasonable costs of investigating or defending
any alleged loss, claim, damage, liability or expense and reasonable
legal counsel fees incurred in connection therewith) (collectively,
"Losses") to which the Indemnified Parties may become subject under any
statute, at common law or otherwise, insofar as such Losses are related
to the sale or acquisition of the Trust's Shares or the Contracts and:
(i) arise out of or are based upon any untrue
statements or alleged untrue statements of any material fact
contained in the Registration Statement, prospectus or sales
literature of the Trust (or any amendment or supplement to any
of the foregoing) (collectively, the "Trust Documents") or
arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify shall
not apply as to any Indemnified Party if such statement or
omission of such alleged statement or omission was made in
reliance upon and in conformity with information furnished to
the Underwriter or Trust by or on behalf of the Company for
use in the Registration Statement or prospectus for the Trust
or in sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the Contracts
or Trust shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or representations
contained in the disclosure documents or sales literature for
the Contracts not supplied by the Underwriter or persons under
its control) or wrongful conduct of the Trust, Adviser or
Underwriter or persons under their control, with respect to
the sale or distribution of the Contracts or Trust shares; or
(iii) arise out of any untrue statement or alleged
untrue statement of a material fact contained in a disclosure
document or sales literature covering the Contracts, or any
amendment thereof or supplement thereto, or the omission or
alleged omission to state therein a material fact required to
be stated therein or necessary to make the statement or
statements therein not misleading, if such statement or
omission was made in reliance upon information furnished to
the Company by or on behalf of the Trust; or
(iv) arise as a result of any failure by the Trust to
provide the services and furnish the materials under the terms
of this Agreement (including a failure, whether unintentional
or in good faith or otherwise, to comply with the
qualification representation specified in Section 3.7 of this
Agreement and the diversification requirements specified in
Section 3.6 of this Agreement); or
(v) arise out of or result from any material breach
of any representation and/or warranty made by the Underwriter
in this Agreement or arise out of or result from any other
material breach of this Agreement by the Underwriter; as
limited by and in accordance with the provisions of Sections
5.2(b) and 5.2(c) hereof.
(b) The Underwriter shall not be liable under this
indemnification provision with respect to any Losses to which an
Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or gross negligence
in the performance of such Indemnified Party's duties or by reason of
such Indemnified Party's reckless disregard of obligations and duties
under this Agreement or to each Company or the Account, whichever is
applicable.
(c) The Underwriter shall not be liable under this
indemnification provision with respect to any claim made against an
Indemnified Party unless such Indemnified Party shall have notified the
Underwriter in writing within a reasonable time after the summons or
other first legal process giving information of the nature of the claim
shall have been served upon such Indemnified Party (or after such
Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify the Underwriter of any such
claim shall not relieve the Underwriter from any liability which it may
have to the Indemnified Party against whom such action is brought
otherwise than on account of this indemnification provision. In case
any such action is brought against the Indemnified Parties, the
Underwriter will be entitled to participate, at its own expense, in the
defense thereof. Unless the Indemified Party releases the Underwriter
from any further obligations under this Section 5.2, the Underwriter
also shall be entitled to assume the defense thereof, with counsel
satisfactory to the party named in the action. After notice from the
Underwriter to such party of the Underwriter's election to assume the
defense thereof, the Indemnified Party shall bear the expenses of any
additional counsel retained by it, and the Underwriter will not be
liable to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
(d) The Company agrees promptly to notify the Underwriter of
the commencement of any litigation or proceedings against it or any of
its officers or directors in connection with the issuance or sale of
the Contracts or the operation of each Account.
5.3 Indemnification By The Trust
(a) The Trust agrees to indemnify and hold harmless the
Company, and each of its directors and officers and each person, if
any, who controls the Company within the meaning of Section 15 of the
1933 Act (collectively, the "Indemnified Parties" for purposes of this
Section 5.3) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the
Trust, which consent shall not be unreasonably withheld) or litigation
(including legal and other expenses) to which the Indemnified Parties
may become subject under any statute, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) or settlements result from the gross
negligence, bad faith or willful misconduct of the Board or any member
thereof, are related to the operations of the Trust, and arise out of
or result from any material breach of any representation and/or
warranty made by the Trust in this Agreement or arise out of or result
from any other material breach of this Agreement by the Trust; as
limited by and in accordance with the provisions of Section 5.3(b) and
5.3(c) hereof. It is understood and expressly stipulated that neither
the holders of shares of the Trust nor any Trustee, officer, agent or
employee of the Trust shall be personally liable hereunder, nor shall
any resort be had to other private property for the satisfaction of any
claim or obligation hereunder, but the Trust only shall be liable.
(b) The Trust shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation incurred or assessed against any Indemnified Party as such
may arise from such Indemnified Party's willful misfeasance, bad faith,
or gross negligence in the performance of such Indemnified Party's
duties or by reason of such Indemnified Party's reckless disregard of
obligations and duties under this Agreement or to the Company, the
Trust, the Underwriter or each Account, whichever is applicable.
(c) The Trust shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party
unless such Indemnified Party shall have notified the Trust in writing
within a reasonable time after the summons or other first legal process
giving information of the nature of the claims shall have been served
upon such Indemnified Party (or after such Indemnified Party shall have
received notice of such service on any designated agent), but failure
to notify the Trust of any such claim shall not relieve the Trust from
any liability which it may have to the Indemnified Party against whom
such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against
the Indemnified Parties, the Trust will be entitled to participate, at
its own expense, in the defense thereof. Unless the Indemnified Party
releases the Trust from any further obligations under this Section 5.3,
the Trust also shall be entitled to assume the defense thereof, with
counsel satisfactory to the party named in the action. After notice
from the Trust to such party of the Trust's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses
of any additional counsel retained by it, and the Trust will not be
liable to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
(d) The Company and the Underwriter agree promptly to notify
the Trust of the commencement of any litigation or proceedings against
it or any of its respective officers or directors in connection with
this Agreement, the issuance or sale of the Contracts, with respect to
the operation of either the Account, or the sale or acquisition of
share of the Trust.
ARTICLE VI.
TERMINATION
6.1 This Agreement may be terminated by any party in its entirety or
with respect to one, some or all Portfolios for any reason by ninety (90) days
advance written notice delivered to the other parties, and shall terminate
immediately in the event of its assignment, as that term is used in the 1940
Act.
6.2 This Agreement may be terminated immediately by either the Trust or
the Underwriter upon written notice to the Company if:
(a) the Company notifies the Trust or the Underwriter that
the exemption from registration under Section 3(c) of the 1940 Act no
longer applies, or might not apply in the future, to the unregistered
Accounts, or that the exemption from registration under Section 4(2) or
Regulation D promulgated under the 1933 Act no longer applies or might
not apply in the future, to interests under the unregistered Contracts;
or
(b) either one or both the Trust or the Underwriter
respectively, shall determine, in their sole judgment exercised in good
faith, that the Company has suffered a material adverse change in its
business, operations, financial condition or prospects since the date
of this Agreement or is the subject of material adverse publicity; or
(c) the Company gives the Trust and the Underwriter the
written notice specified in Section 1.10 hereof and at the same time
such notice was given there was no notice of termination outstanding
under any other provision of this Agreement; provided, however, that
any termination under this Section 6.2(c) shall be effective forty-five
(45) days after the notice specified in section 1.10 was given; or
6.3 If this Agreement is terminated for any reason, except under
Article IV (Potential Conflicts) above, the Trust shall, at the option of the
Company, continue to make available additional shares of any Portfolio and
redeem shares of any Portfolio pursuant to all of the terms and conditions of
this Agreement for all Contracts in effect on the effective date of termination
of this Agreement. If this Agreement is terminated pursuant to Article IV, the
provisions of Article IV shall govern.
6.4 The provisions of Articles II (Representations and Warranties) and
V (Indemnification) shall survive the termination of this Agreement. All other
applicable provisions of this Agreement shall survive the termination of this
Agreement, as long as shares of the Trust are held on behalf of Contract owners
in accordance with Section 6.3, except that the Trust and the Underwriter shall
have no further obligation to sell Trust shares with respect to Contracts issued
after termination.
6.5 The Company shall not redeem Trust shares attributable to the
Contracts (as opposed to Trust shares attributable to the Company's assets held
in the Account) except (i) as necessary to implement Contract owner initiated or
approved transactions, (ii) as required by state and/or federal laws or
regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption"), or (iii) as
permitted by an order of the SEC pursuant to Section 26(b) of the 1940 Act. Upon
request, the Company will promptly furnish to the Trust and the Underwriter the
opinion of counsel for the Company (which counsel shall be reasonably
satisfactory to the Trust and the Underwriter) to the effect that any redemption
pursuant to clause (ii) above is a Legally Required Redemption. Furthermore,
except in cases where permitted under the terms of the Contracts, the Company
shall not prevent Contract owners from allocating payments to a Portfolio that
was otherwise available under the Contracts without first giving the Trust or
the Underwriter 90 days notice of it s intention to do so.
ARTICLE VII.
NOTICES.
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Trust:
Templeton Variable Products Series Fund
500 E. Broward Boulevard
Fort Lauderdale, FL 33394-3091
Attention: Barbara J. Green, Trust Secretary
WITH A COPY TO:
Franklin Resources
777 Mariners Island Boulevard
San Mateo, CA 94404
Attention: Karen L. Skidmore, Associate General
Counsel
If to the Underwriter:
Franklin Templeton Distributors, Inc.
777 Mariners Island Boulevard
San Mateo, CA 94404
Attention: Deborah R. Gatzek, Senior Vice President
and Assistant Secretary
If to the Company:
Valley Forge Life Insurance Company
CNA Plaza
333 S. Wabash, 43 South
Chicago, IL 60685
Attention: G. Stephen Wastek, Esq.
ARTICLE VIII.
MISCELLANEOUS
8.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
8.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
8.3 If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
8.4 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of Florida. It
shall also be subject to the provisions of the federal securities laws and the
rules and regulations thereunder and to any orders of the SEC on behalf of the
Trust granting exemptive relief therefrom and the conditions of such orders.
Copies of any such orders shall be promptly forwarded by the Trust to the
Company.
8.5 The parties to this Agreement acknowledge and agree that all
liabilities of the Trust arising, directly or indirectly, under this Agreement,
of any and every nature whatsoever, shall be satisfied solely out of the assets
of the Trust and that no Trustee, officer, agent or holder of shares of
beneficial interest of the Trust shall be personally liable for any such
liabilities.
8.6 Each party shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD, and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
8.7 Each party hereto shall treat as confidential the names and
addresses of the Contract owners and all information reasonably identified as
confidential in writing by any other party hereto, and, except as permitted by
this Agreement or as required by legal process or regulatory authorities, shall
not disclose, disseminate, or utilize such names and addresses and other
confidential information until such time as they may come into the public
domain, without the express written consent of the affected party. Without
limiting the foregoing, no party hereto shall disclose any information that such
party has been advised is proprietary, except such information that such party
is required to disclose by any appropriate governmental authority (including,
without limitation, the SEC, the NASD, and state securities and insurance
regulators).
8.8 The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to under
state and federal laws.
8.9 The parties to this Agreement acknowledge and agree that this
Agreement shall not be exclusive in any respect, except as provided in Section
1.10.
8.10 Neither this Agreement nor any rights or obligations hereunder may
be assigned by either party without the prior written approval of the other
party.
8.11 No provisions of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by both
parties.
IN WITNESS WHEREOF, the parties have caused their duly
authorized officers to execute this Participation Agreement as of the date and
year first above written.
The Company:
Valley Forge Life Insurance Company
By its authorized officer
By: S/David L. Stone
---------------------
Name: David L. Stone
Title: Vice President
The Trust:
Templeton Variable Products Series Fund
By its authorized officer
By: S/Karen L. Skidmore
-----------------------
Name: Karen L. Skidmore
Title: Assistant Vice President, Assistant Secretary
The Underwriter:
Franklin Templeton Distributors, Inc.
By its authorized officer
By: S/Philip J. Kearns
-------------------------
Name: Philip J. Kearns
Title: Vice President
<TABLE>
<CAPTION>
SCHEDULE A
CONTRACTS ISSUED BY VALLEY FORGE LIFE
INSURANCE COMPANY
Contract 1 Contract 2 Contract 3
<S> <C> <C> <C>
CONTRACT/PRODUCT CNA Capital Select VA CNA Capital Select VUL
Name and Type
REGISTERED (Y/N) Yes Yes
SEC REGISTRATION NUMBER--1933 333-01087 333-01949
Act
REPRESENTATIVE V100-1128-A V100-1132-A
Form Numbers
SEPARATE ACCOUNT Valley Forge Life Insurance Valley Forge Life Insurance
Name/Date Company Variable Annuity Company Variable Life Separate
Established Separate Account / October 15, 1995 Account / October 15, 1995
SEC REGISTRATION
Number-1940
Act
TEMPLETON TVP--Templeton Developing TVP--Templeton Developing
Variable Markets Fund-Class 2-Templeton Markets Fund-Class 2-Templeton
Products Series Asset Management, Ltd. Asset Management, Ltd.
Fund ("TVP") -
Portfolios and VP-Templeton Asset Allocation TVP-Templeton Asset Allocation
Classes - Adviser T Fund-Class 2-Templeton Fund-Class 2-Templeton
Investment Counsel, Inc. Investment Counsel, Inc.
</TABLE>
SCHEDULE B
OTHER PORTFOLIOS AVAILABLE UNDER THE CONTRACTS
FIDELITY
MFS
FEDERATED
FRED ALGER
JANUS
SOGEN
VAN ECK
SCHEDULE C
RULE 12B-1 PLANS
COMPENSATION SCHEDULE
Each Portfolio named below shall pay the following amounts pursuant to the terms
and conditions referenced below under its Class 2 Rule 12b-1 Distribution Plan,
stated as a percentage per year of Class 2's average daily net assets
represented by shares of Class 2.
Portfolio Name Maximum Annual Payment Rate
- -------------- ---------------------------
Templeton Developing Markets Fund 0.25%
Templeton Asset Allocation Fund 0.25%
Agreement Provisions
If the Company, on behalf of any Account, purchases Trust Portfolio
shares (Eligible Shares") which are subject to a Rule 12b-1 Plan adopted under
the 1940 Act (the "Plan"), the Company may participate in the Plan.
To the extent the Company or its affiliates, agents or designees
(collectively "you") you provide administrative and other services which assist
in the promotion and distribution of Eligible Shares or Variable Contracts
offering Eligible Shares, the Underwriter, the Trust or their affiliates
(collectively, "we") may pay you a Rule 12b-1 fee. "Administrative and other
services" may include, but are not limited to, furnishing personal services to
owners of Contracts which may invest in Eligible Shares ("Contract Owners"),
answering routine inquiries regarding a Portfolio, coordinating responses to
Contract Owner inquiries regarding the Portfolios, maintaining such accounts or
providing such other enhanced services as a Trust Portfolio or Contract may
require, maintaining customer accounts and records, or providing other services
eligible for service fees as defined under NASD rules. Your acceptance of such
compensation is your acknowledgment that eligible services have been rendered.
All Rule 12b-1 fees, shall be based on the value of Eligible Shares owned by the
Company on behalf of its Accounts, and shall be calculated on the basis and at
the rates set forth in the Compensation Schedule stated above. The aggregate
annual fees paid pursuant to each Plan shall not exceed the amounts stated as
the "annual maximums" in the Portfolio's prospectus, unless an increase is
approved by shareholders as provided in the Plan. These maximums shall be a
specified percent of the value of a Portfolio's net assets attributable to
Eligible Shares owned by the Company on behalf of its Accounts (determined in
the same manner as the Portfolio uses to compute its net assets as set forth in
its effective Prospectus).
You shall furnish us with such information as shall reasonably be
requested by the Trust's Boards of Trustees ("Trustees") with respect to the
Rule 12b-1 fees paid to you pursuant to the Plans. We shall furnish to the
Trustees, for their review on a quarterly basis, a written report of the amounts
expended under the Plans and the purposes for which such expenditures were made.
The Plans and provisions of any agreement relating to such Plans must
be approved annually by a vote of the Trustees, including the Trustees who are
not interested persons of the Trust and who have no financial interest in the
Plans or any related agreement ("Disinterested Trustees"). Each Plan may be
terminated at any time by the vote of a majority of the Disinterested Trustees,
or by a vote of a majority of the outstanding shares as provided in the Plan, on
sixty (60) days' written notice, without payment of any penalty. The Plans may
also be terminated by any act that terminates the Underwriting Agreement between
the underwriter and the Trust, and/or the management or administration agreement
between Franklin Advisers, Inc. or Templeton Investment Counsel, Inc. or their
affiliates and the Trust. Continuation of the Plans is also conditioned on
Disinterested Trustees being ultimately responsible for selecting and nominating
any new Disinterested Trustees. Under Rule 12b-1, the Trustees have a duty to
request and evaluate, and persons who are party to any agreement related to a
Plan have a duty to furnish, such information as may reasonably be necessary to
an informed determination of whether the Plan or any agreement should be
implemented or continued. Under Rule 12b-1, the Trust is permitted to implement
or continue Plans or the provisions of any agreement relating to such Plans from
year-to-year only if, based on certain legal considerations, the Trustees are
able to conclude that the Plans will benefit each affected Trust Portfolio and
class. Absent such yearly determination, the Plans must be terminated as set
forth above. In the event of the termination of the Plans for any reason, the
provisions of this Schedule C relating to the Plans will also terminate.
Any obligation assumed by the Trust pursuant to this Agreement shall be limited
in all cases to the assets of the Trust and no person shall seek satisfaction
thereof from shareholders of the Trust. You agree to waive payment of any
amounts payable to you by Underwriter under a Plan until such time as the
Underwriter has received such fee from the Fund.
The provisions of the Plans shall control over the provisions of the
Participation Agreement, including this Schedule C, in the event of any
inconsistency.
You agree to provide complete disclosure as required by all applicable statutes,
rules and regulations of all rule 12b-1 fees received from us in the prospectus
of the contracts.
PARTICIPATION AGREEMENT
AMONG
VALLEY FORGE LIFE INSURANCE COMPANY,
CNA INVESTOR SERVICES, INC.,
ALLIANCE CAPITAL MANAGEMENT L.P.
AND
ALLIANCE FUND DISTRIBUTORS, INC.
DATED AS OF
DECEMBER 1, 1999
PARTICIPATION AGREEMENT
THIS AGREEMENT, made and entered into as of the 1st day of December, 1999
("Agreement"), by and among Valley Forge Life Insurance Company, a Pennsylvania
life insurance company ("Insurer") (on behalf of itself and its "Separate
Account," defined below); CNA Investor Services, Inc., an Illinois corporation
("Contracts Distributor"), the principal underwriter with respect to the
Contracts referred to below; Alliance Capital Management L.P., a Delaware
limited partnership ("Adviser"), the investment adviser of the Fund referred to
below; and Alliance Fund Distributors, Inc., a Delaware corporation
(Distributor"), the Fund's principal underwriter (collectively, the "Parties"),
WITNESSETH THAT:
WHEREAS Insurer, the Distributor, and Alliance Variable Products Series
Fund, Inc. (the "Fund") desires that Class B shares of the Fund's Growth and
Income and Premiere Growth Portfolios (the "Portfolios"; reference herein to the
"Fund" includes reference to each Portfolio to the extent the context requires)
be made available by Distributor to serve as underlying investment media for
variable life and annuity contracts (the "Contracts"), to be offered through
Contracts Distributor and other registered broker-dealer firms as agreed to by
Insurer and Contracts Distributor; and
WHEREAS the Contracts provide for the allocation of net amounts received by
Insurer to separate series (the "Divisions"; reference herein to the "Separate
Account" includes reference to each Division to the extent the context requires)
of the Separate Account for investment in Class B shares of corresponding
Portfolios of the Fund that are made available through the Separate Account to
act as underlying investment media,
NOW, THEREFORE, in consideration of the mutual benefits and promises
contained herein, the Fund and Distributor will make Class B shares of the
Portfolios available to Insurer for this purpose at net asset value and with no
sales charges, all subject to the following provisions:
Section 1. Additional Portfolios
The Fund has and may, from time to time, add additional Portfolios, which
will become subject to this Agreement, if, upon the written consent of each of
the Parties hereto, they are made available as investment media for the
Contracts.
Section 2. Processing Transactions
2.1 Timely Pricing and Orders.
The Adviser or its designated agent will provide closing net asset value,
dividend and capital gain information for each Portfolio to Insurer at the close
of trading on each day (a "Business Day") on which (a) the New York Stock
Exchange is open for regular trading, (b) the Fund calculates the Portfolio's
net asset value and (c) Insurer is open for business. The Fund or its designated
agent will use its best efforts to provide this information by 6:00 p.m.,
Eastern time. Insurer will use these data to calculate unit values, which in
turn will be used to process transactions that receive that same Business Day's
Separate Account Division's unit values. Such Separate Account processing will
be done the same evening, and corresponding orders with respect to Fund shares
will be placed the morning of the following Business Day. Insurer will use its
best efforts to place such orders with the Fund by 10:00 a.m., Eastern time.
2.2 Timely Payments.
Insurer will transmit orders for purchases and redemptions of Fund shares
to Distributor, and will wire payment for net purchases to a custodial account
designated by the Fund on the day the order for Fund shares is placed, to the
extent practicable. Payment for net redemptions will be wired by the Fund to an
account designated by Insurer on the same day as the order is placed, to the
extent practicable, and in any event be made within six calendar days after the
date the order is placed in order to enable Insurer to pay redemption proceeds
within the time specified in Section 22(e) of the Investment Company Act of
1940, as amended (the "1940 Act").
2.3 Redemption in Kind.
The Fund reserves the right to pay any portion of a redemption in kind of
portfolio securities, if the Fund's board of directors (the "Board of
Directors") determines that it would be detrimental to the best interests of
shareholders to make a redemption wholly in cash.
2.4 Applicable Price.
The Parties agree that Portfolio share purchase and redemption orders
resulting from Contract owner purchase payments, surrenders, partial
withdrawals, routine withdrawals of charges, or other transactions under
Contracts will be executed at the net asset values as determined as of the close
of regular trading on the New York Stock Exchange on the Business Day that
Insurer receives such orders and processes such transactions, which, Insurer
agrees shall occur not earlier than the Business Day prior to Distributor's
receipt of the corresponding orders for purchases and redemptions of Portfolio
shares. For the purposes of this section, Insurer shall be deemed to be the
agent of the Fund for receipt of such orders from holders or applicants of
contracts, and receipt by Insurer shall constitute receipt by the Fund. All
other purchases and redemptions of Portfolio shares by Insurer, will be effected
at the net asset values next computed after receipt by Distributor of the order
therefor, and such orders will be irrevocable. Insurer hereby elects to reinvest
all dividends and capital gains distributions in additional shares of the
corresponding Portfolio at the record-date net asset values until Insurer
otherwise notifies the Fund in writing, it being agreed by the Parties that the
record date and the payment date with respect to any dividend or distribution
will be the same Business Day.
Section 3. Costs and Expenses
3.1 General.
Except as otherwise specifically provided herein, each Party will bear all
expenses incident to its performance under this Agreement.
3.2 Registration.
The Fund will bear the cost of its registering as a management investment
company under the 1940 Act and registering its shares under the Securities Act
of 1933, as amended (the "1933 Act"), and keeping such registrations current and
effective; including, without limitation, the preparation of and filing with the
SEC of Forms N-SAR and Rule 24f-2 Notices respecting the Fund and its shares and
payment of all applicable registration or filing fees with respect to any of the
foregoing. Insurer will bear the cost of registering the Separate Account as a
unit investment trust under the 1940 Act and registering units of interest under
the Contracts under the 1933 Act and keeping such registrations current and
effective; including, without limitation, the preparation and filing with the
SEC of Forms N-SAR and Rule 24f-2 Notices respecting the Separate Account and
its units of interest and payment of all applicable registration or filing fees
with respect to any of the foregoing.
3.3 Other (Non-Sales-Related) Expenses.
The Fund will bear the costs of preparing, filing with the SEC and setting
for printing the Fund's prospectus, statement of additional information and any
amendments or supplements thereto (collectively, the "Fund Prospectus"),
periodic reports to shareholders, Fund proxy material and other shareholder
communications and any related requests for voting instructions from
Participants (as defined below). Insurer will bear the costs of preparing,
filing with the SEC and setting for printing, the Separate Account's prospectus,
statement of additional information and any amendments or supplements thereto
(collectively, the "Separate Account Prospectus"), any periodic reports to
owners, annuitants or participants under the Contracts (collectively,
"Participants"), and other Participant communications. The Fund and Insurer each
will bear the costs of printing in quantity and delivering to existing
Participants the documents as to which it bears the cost of preparation as set
forth above in this Section 3.3, it being understood that reasonable cost
allocations will be made in cases where any such Fund and insurer documents are
printed or mailed on a combined or coordinated basis. If requested by Insurer,
the Fund will provide annual Prospectus text to Insurer on diskette for printing
and binding with the Separate Account Prospectus.
3.4 Other Sales-Related Expenses.
Expenses of distributing the Portfolio's shares and the Contracts will be
paid by Contracts Distributor and other parties, as they shall determine by
separate agreement.
3.5 Parties to Cooperate.
The Adviser, Insurer, Contracts Distributor, and Distributor each agrees to
cooperate with the others, as applicable, in arranging to print, mail and/or
deliver combined or coordinated prospectuses or other materials of the Fund and
Separate Account.
Section 4. Legal Compliance
4.1 Tax Laws
(a) The Adviser will use its best efforts to qualify and to maintain
qualification of each Portfolio as a regulated investment company ("RIC") under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and
the Adviser or Distributor will notify Insurer immediately upon having a
reasonable basis for believing that a Portfolio has ceased to so qualify or that
it might not so qualify in the future.
(b) Insurer represents that it believes, in good faith, that the Contracts
will be treated as annuity and life insurance contracts under applicable
provisions of the Code and that it will make every effort to maintain such
treatment. Insurer will notify the Fund and Distributor immediately upon having
a reasonable basis for believing that any of the Contacts have ceased to be so
treated of that they might not be so treated in the future.
(c) The Fund will use its best efforts to comply and to maintain each
Portfolio's compliance with the diversification requirements set forth in
Section 817(h) of the Code and Section 1.817-5(b) of the regulations under the
Code, and the Fund, Adviser or Distributor will notify Insurer immediately upon
having a reasonable basis for believing that a Portfolio has ceased to so comply
or that a Portfolio might not so comply in the future.
(d) Insurer represents that it believes, in good faith, that the Separate
Account is a "segregated asset account" and that interests in the Separate
Account are offered exclusively through the purchase of or transfer into a
"variable account," within the meaning of such terms under Section 817(h) of the
Code and the regulations thereunder. Insurer will make every effort to continue
to meet such definitional requirements, and it will notify the Fund and
Distributor immediately upon having a reasonable basis for believing that such
requirements have ceased to be met or that they might not be met in the future.
(e) The Adviser will manage the Fund as a RIC in compliance with Subchapter
M of the Code and will use its best efforts to manage to be in compliance with
Section 817(h) of the Code and regulations thereunder. The Fund has adopted and
will maintain procedures for ensuring that the Fund is managed in compliance
with Subchapter M and Section 817(h) and regulations thereunder.
(f) Should the Distributor or Adviser become aware of a failure of Fund, or
any of its Portfolios, to be in compliance with Subchapter M of the Code or
Section 817(h) of the Code and regulations thereunder, they represent and agree
that they will immediately notify Insurer of such in writing.
4.2 Insurance and Certain Other Laws.
(a) The Adviser will use its best efforts to cause the Fund to comply with
any applicable state insurance laws or regulations, to the extent specifically
requested in writing by Insurer. If it cannot comply, it will so notify Insurer
in writing.
(b) Insurer represents and warrants that (i) it is an insurance company
duly organized, validly existing and in good standing under the laws of the
State of Pennsylvania and has full corporate power, authority and legal right to
execute, deliver and perform its duties and comply with its obligations under
this Agreement, (ii) it has legally and validly established and maintains the
Separate Account as a segregated asset account under Illinois State Law, and
(iii) the Contracts comply in all material respects with all other applicable
federal and state laws and regulations.
(c) Insurer and Contracts Distributor represent and warrant that Contracts
Distributor is a business corporation duly organized, validly existing, and in
good standing under the laws of the State of Illinois and has full corporate
power, authority and legal right to execute, deliver, and perform its duties and
comply with its obligations under this Agreement.
(d) Distributor represents and warrants that it is a business corporation
duly organized, validly existing, and in good standing under the laws of the
State of Delaware and has full corporate power, authority and legal right to
execute, deliver, and perform its duties and comply with its obligations under
this Agreement.
(e) Distributor represents and warrants that the Fund is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
Maryland and has full power, authority and legal right to execute, deliver, and
perform its duties and comply with its obligations under this Agreement.
(f) Adviser represents and warrants that it is a limited partnership duly
organized, validly existing, and in good standing under the laws of the State of
Delaware and has full power, authority and legal right to execute, deliver, and
perform its duties and comply with its obligations under this Agreement.
4.3 Securities Laws.
(a) Insurer represents and warrants that (i) interests in the Separate
Account pursuant to the Contracts will be registered under the 1933 Act to the
extent required by the 1933 Act and the Contracts will be duly authorized for
issuance and sold in compliance with applicable state law, (ii) the Separate
Account is and will remain registered under the 1940 Act to the extent required
by the 1940 Act, (iii) the Separate Account does and will comply in all material
respects with the requirements of the 1940 Act and the rules thereunder, (iv)
the Separate Account's 1933 Act registration statement relating to the
Contracts, together with any amendments thereto, will, at all times comply in
all material respects with the requirements of the 1933 Act and the rules
thereunder, and (v) the Separate Account Prospectus will at all times comply in
all material respects with the requirements of the 1933 Act and the rules
thereunder.
(b) The Adviser and Distributor represent and warrant that (i) Fund shares
sold pursuant to this Agreement will be registered under the 1933 Act to the
extent required by the 1933 Act and duly authorized for issuance and sold in
compliance with Maryland law, (ii) the Fund is and will remain registered under
the 1940 Act to the extent required by the 1940 Act, (iii) the Fund will amend
the registration statement for its shares under the 1933 Act and itself under
the 1940 Act from time to time as required in order to effect the continuous
offering of its shares, (iv) the Fund does and will comply in all material
respects with the requirements of the 1940 Act and the rules thereunder, (v) the
Fund's 1933 Act registration statement, together with any amendments thereto,
will at all times comply in all material respects with the requirements of the
1933 Act and rules thereunder, and (vi) the Fund Prospectus will at all times
comply in all material respects with the requirements of the 1933 Act and the
rules thereunder.
(c) The Fund will register and qualify its shares for sales in accordance
with the laws of any state or other jurisdiction only if and to the extent
reasonably deemed advisable by the Fund, Insurer or any other life insurance
company utilizing the Fund.
(d) Distributor and Contracts Distributor each represents and warrants that
it is registered as a broker-dealer with the SEC under the Securities Exchange
Act of 1934, as amended, and is a member in good standing of the National
Association of Securities Dealers Inc. (the "NASD").
4.4. Notice of Certain Proceedings and Other Circumstances.
(a) Distributor or the Fund shall immediately notify Insurer of (i) the
issuance by any court or regulatory body of any stop order, cease and desist
order, or other similar order with respect to the Fund's registration statement
under the 1933 Act or the Fund Prospectus, (ii) any request by the SEC for any
amendment to such registration statement or Fund Prospectus, (iii) the
initiation of any proceedings for that purpose or for any other purpose relating
to the registration or offering of the Fund's shares , or (iv) any other action
or circumstances that may prevent the lawful offer or sale of Fund shares in any
state or jurisdiction, including, without limitation, any circumstances in which
(x) the Fund's shares are not registered and, in all material respects, issued
and sold in accordance with applicable state and federal law or (y) such law
precludes the use of such shares as an underlying investment medium of the
Contracts issued or to be issued by Insurer. Distributor and the Fund will make
every reasonable effort to prevent the issuance of any such stop order, cease
and desist order or similar order and, if any such order is issued, to obtain
the lifting thereof at the earliest possible time.
(b) Insurer and Contracts Distributor shall immediately notify the Fund of
(i) the issuance by any court or regulatory body of any stop order, cease and
desist order or similar order with respect to the Separate Account's
registration statement under the 1933 Act relating to the Contracts or the
Separate Account Prospectus, (ii) any request by the SEC for any amendment to
such registration statement or Separate Account Prospectus, (iii) the initiation
of any proceedings for that purpose or for any other purpose relating to the
registration or offering of the Separate Account interests pursuant to the
Contracts, or (iv) any other action or circumstances that may prevent the lawful
offer or sale of said interests in any state or jurisdiction, including, without
limitation, any circumstances in which said interests are not registered and, in
all material respects, issued and sold in accordance with applicable state and
federal law. Insurer and Contracts Distributor will make every reasonable effort
to prevent the issuance of any such stop order, cease and desist order or
similar order and, if any such order is issued, to obtain the lifting thereof at
the earliest possible time.
4.5 Insurer to Provide Documents.
Upon request, Insurer will provide the Fund and the Distributor one
complete copy of SEC registration statements, Separate Account Prospectuses,
reports, any preliminary and final voting instruction solicitation material,
applications for exemptions, requests for no-action letters, and amendments to
any of the above, that relate to the Separate Account or the Contracts,
contemporaneously with the filing of such document with the SEC or other
regulatory authorities.
4.6 Fund to Provide Documents.
Upon request, the Fund will provide to Insurer one complete copy of SEC
registration statements, Fund Prospectuses, reports, any preliminary and final
proxy material, applications for exemptions, requests for no-action letters, and
all amendments to any of the above, that relate to the Fund or its shares,
contemporaneously with the filing of such document with the SEC or other
regulatory authorities.
Section 5. Mixed and Shared Funding
5.1 General.
The Fund has obtained an order exempting it from certain provisions of the
1940 Act and rules thereunder so that the Fund is available for investment by
certain other entities, including, without limitation, separate accounts funding
variable life insurance policies and separate accounts of insurance companies
unaffiliated with Insurer ("Mixed and Shared Funding Order"). The Parties
recognize that the SEC has imposed terms and conditions for such orders that are
substantially identical to many of the provisions of this Section 5.
5.2 Disinterested Directors.
The Fund agrees that its Board of Directors shall at all times consist of
directors a majority of whom (the "Disinterested Directors") are not interested
persons of Adviser or Distributor within the meaning of Section 2(a)(19) of the
1940 Act.
5.3 Monitoring for Material Irreconcilable Conflicts.
The Fund agrees that its Board of Directors will monitor for the existence
of any material irreconcilable conflict between the interests of the
participants in all separate accounts of life insurance companies utilizing the
Fund, including the Separate Account. Insurer agrees to inform the Board of
Directors of the Fund of the existence of or any potential for any such material
irreconcilable conflict of which it is aware. The concept of a "material
irreconcilable conflict" is not defined by the 1940 Act or the rules thereunder,
but the Parties recognize that such a conflict may arise for a variety of
reasons, including, without limitation:
(a) an action by any state insurance or other regulatory authority;
(b) a change in applicable federal or state insurance, tax, or securities laws
or regulations, or a public ruling, private letter ruling, no-action or
interpretative letter, or any similar action by insurance, tax, or
securities regulatory authorities;
(c) an administrative or judicial decision in any relevant proceeding;
(d) the manner in which the investments of any Portfolio are being managed;
(e) a difference in voting instructions given by variable annuity contract and
variable life insurance contract participants or by participants of
different life insurance companies utilizing the Fund; or
(f) a decision by a life insurance company utilizing the Fund to disregard the
voting instructions of participants.
Insurer will assist the Board of Directors in carrying out its
responsibilities by providing the Board of Directors with all information
reasonably necessary for the Board of Directors to consider any issue raised,
including information as to a decision by Insurer to disregard voting
instructions of Participants.
5.4 Conflict Remedies.
(a) It is agreed that if it is determined by a majority of the members of the
Board of Directors or a majority of the Disinterested Directors that a
material irreconcilable conflict exists, Insurer and the other life
insurance companies utilizing the Fund will, at their own expense and to
the extent reasonably practicable (as determined by a majority of the
Disinterested Directors), take whatever steps are necessary to remedy or
eliminate the material irreconcilable conflict, which steps may include,
but are not limited to:
(i) withdrawing the assets allocable to some or all of the separate
accounts from the Fund or any Portfolio and reinvesting such assets in
a different investment medium, including another Portfolio of the
Fund, or submitting the question whether such segregation should be
implemented to a vote of all affected participants and, as
appropriate, segregating the assets of any particular group (e.g.,
annuity contract owners or participants, life insurance contract
owners or all contract owners and participants of one or more life
insurance companies utilizing the Fund) that votes in favor of such
segregation, or offering to the affected contract owners or
participants the option of making such a change; and
(ii) establishing a new registered investment company of the type defined
as a "Management Company" in section 4(3) of the 1940 Act or a new
separate account that is operated as a Management Company.
(b) If the material irreconcilable conflict arises because of Insurer's
decision to disregard Participant voting instructions and that decision
represents a minority position or would preclude a majority vote, Insurer
may be required, at the Fund's election, to withdraw the Separate Account's
investment in the Fund. No charge or penalty will be imposed as a result of
such withdrawal. Any such withdrawal must take place within six months
after the Fund gives notice to Insurer that this provision is being
implemented, and until such withdrawal Distributor and the Fund shall
continue to accept and implement orders by Insurer for the purchase and
redemption of shares of the Fund.
(c) If a material irreconcilable conflict arises because a particular state
insurance regulator's decision applicable to Insurer conflicts with the
majority of other state regulators, then Insurer will withdraw the Separate
Account's investment in the Fund within six months after the Fund's Board
of Directors informs Insurer that it has determined that such decision has
created a material irreconcilable conflict, and until such withdrawal
Distributor and Fund shall continue to accept and implement orders by
Insurer for the purchase and redemption of shares of the Fund.
(d) Insurer agrees that any remedial action taken by it in resolving any
material irreconcilable conflict will be carried out at its expense and
with a view only to the interests of Participants.
(e) For purposes hereof, a majority of the Disinterested Directors will
determine whether or not any proposed action adequately remedies any
material irreconcilable conflict. In no event, however, will the Fund or
Distributor be required to establish a new funding medium for any
Contracts. Insurer will not be required by the terms hereof to establish a
new funding medium for any Contracts if an offer to do so has been declined
by vote of a majority of Participants materially adversely affected by the
material irreconcilable conflict.
5.5 Notice to Insurer.
The Fund will promptly make known in writing to Insurer the Board of
Directors' determination of the existence of a material irreconcilable conflict,
a description of the facts that give rise to such conflict and the implications
of such conflict.
5.6 Information Requested by Board of Directors.
Insurer and the Fund will at least annually submit to the Board of
Directors of the Fund such reports, materials or data as the Board of Directors
may reasonably request so that the Board of Directors may fully carry out the
obligations imposed upon it by the provisions hereof, and said reports,
materials and data will be submitted at any reasonable time deemed appropriate
by the Board of Directors. All reports received by the Board of Directors of
potential or existing conflicts, and all Board of Directors actions with regard
to determining the existence of a conflict, notifying life insurance companies
utilizing the Fund of a conflict, and determining whether any proposed action
adequately remedies a conflict, will be properly recorded in the minutes of the
Board of Directors or other appropriate records, and such minutes or other
records will be made available to the SEC upon request.
5.7 Compliance with SEC Rules.
If, at any time during which the Fund is serving an investment medium for
variable life insurance policies, 1940 Act Rules 6e-3(T) or, if applicable, 6e-2
are amended or Rule 6e-3 is adopted to provide exemptive relief with respect to
mixed and shared funding, the Parties agree that they will comply with the terms
and conditions thereof and that the terms of this Section 5 shall be deemed
modified if and only to the extent required in order also to comply with the
terms and conditions of such exemptive relief that is afforded by any of said
rules that are applicable.
Section 6. Termination
6.1 Events of Termination.
Subject to Section 6.4 below, this Agreement will terminate as to a
Portfolio:
(a) at the option of Insurer or Distributor upon 120 days written notice to the
other Parties, or
(b) at the option of the Fund upon (i) at least ninety days advance written
notice to the other parties, and (ii) approval by (x) a majority of the
disinterested Directors upon finding that a continuation of this Contract
is contrary to the best interests of the Fund, or (y) a majority vote of
the shares of the affected Portfolio in the corresponding Division of the
Separate Account (pursuant to the procedures set forth in Section 11 of
this Agreement for voting Trust shares in accordance with Participant
instructions).
(c) at the option of the Fund upon institution of formal proceedings against
Insurer or Contracts Distributor by the NAD, the SEC, any state insurance
regulator or any other regulatory body regarding Insurer's obligations
under this Agreement or related to the sale of the Contracts, the operation
of the Separate Account, or the purchase of the Fund shares, if, in each
case, the Fund reasonably determines that such proceedings, or the facts on
which such proceedings would be based, have a material likelihood of
imposing material adverse consequences on the Portfolio to be terminated;
or
(d) at the option of Insurer upon institution of formal proceedings against the
Fund, Adviser, or Distributor by the NASD, the SEC, or any state insurance
regulator or any other regulatory body regarding the Fund's, Adviser's or
Distributor's obligations under this Agreement or related to the operation
or management of the Fund or the purchase of Fund shares, if, in each case,
Insurer reasonably determines that such proceedings, or the facts on which
such proceedings would be based, have a material likelihood of imposing
material adverse consequences on Insurer, Contracts Distributor or the
Division corresponding to the Portfolio to be terminated; or
(e) at the option of any Party in the event that (i) the Portfolio's shares are
not registered and, in all material respects, issued and sold in accordance
with any applicable state and federal law or (ii) such law precludes the
use of such shares as an underlying investment medium of the Contracts
issued or to be issued by Insurer; or
(f) upon termination of the corresponding Division's investment in the
Portfolio pursuant to Section 5 hereof; or
(g) at the option of Insurer if the Portfolio ceases to qualify as a RIC under
Subchapter M of the Code or under successor or similar provisions; or
(h) at the option of Insurer if the Portfolio fails to comply with Section
817(h) of the Code or with successor or similar provisions; or
(i) at the option of Insurer if Insurer reasonably believes that any change in
a Fund's investment adviser or investment practices will materially
increase the risks incurred by Insurer.
6.2 Funds to Remain Available.
Except (i) as necessary to implement Participant-initiated transactions,
(ii) as required by state insurance laws or regulations, (iii) as required
pursuant to Section 5 of this Agreement, or (iv) with respect to any Portfolio
as to which this Agreement has terminated, Insurer shall not (x) redeem Fund
shares attributable to the Contracts, or (y) prevent Participants from
allocating payments to or transferring amounts from a Portfolio that was
otherwise available under the Contracts, until, in either case, 90 calendar days
after Insurer shall have notified the Fund or Distributor of its intention to do
so.
6.3 Survival or Warranties and Indemnifications.
All warranties and indemnifications will survive the termination of this
Agreement.
6.4 Continuance of Agreement for Certain Purposes.
Notwithstanding any termination of this Agreement, the Distributor shall
continue to make available shares of the Portfolios pursuant to the terms and
conditions of this Agreement, for all Contracts in effect on the effective date
or termination of this Agreement (the "Existing Contracts"), except as otherwise
provided under Section 5 of this Agreement. Specifically, and without
limitation, the Distributor shall facilitate the sale and purchase of shares of
the Portfolios as necessary in order to process premium payments, surrenders and
other withdrawals, and transfers or reallocations of values under Existing
Contracts.
Section 7. Parties to Cooperate Respecting Termination
The other Parties hereto agree to cooperate with and give reasonable
assistance to Insurer in taking all necessary and appropriate steps for the
purpose of ensuring that the Separate Account owns no shares of a Portfolio
after the Final Termination Date with respect thereto.
Section 8. Assignment
This Agreement may not be assigned by any Party, except with the written
consent of each other Party.
Section 9. Class B Distribution Payments
From time to time during the term of this Agreement the Distributor may
make payments to the Contracts Distributor pursuant to a distribution plan
adopted by the Fund with respect to the Class B shares of the Portfolios
pursuant to Rule 12b-1 under the 1940 Act (the "Rule 12b-1 Plan) in
consideration of the Contracts Distributor's furnishing distribution services
relating to the Class B shares of the Portfolios and providing administrative,
accounting and other services, including personal service and/or the maintenance
of Participant accounts, with respect to such shares. The Distributor has no
obligation to make any such payments, and the Contracts Distributor waives any
such payment, until the Distributor receives monies therefor from the Fund. Any
such payments made pursuant to this Section 9 shall by subject to the following
terms and conditions:
(a) Any such payments shall be in such amounts as the Distributor may from
time to time advise the Contacts Distributor in writing but in any event not in
excess of the amounts permitted by the Rule 12b-1 Plan. Such payments may
include a service fee in the amount of .25 of 1% per annum of the average daily
net assets of the Fund attributable to the Class B shares of a Portfolio held by
clients of the Contracts Distributor. Any such service fee shall be paid solely
for personal service and/or the maintenance of Participant accounts.
(b) The provisions of this Section 9 relate to a plan adopted by the Fund
pursuant to Rule 12b-1. In accordance with Rule 12b-1, any person authorized to
direct the disposition of monies paid or payable by the Fund pursuant to this
Section 9 shall provide the Fund's Board of Directors, and the Directors shall
review, at least quarterly, a written report of the amounts so expended and the
purposes for which such expenditures were made.
(c) The provisions of this Section 9 shall remain in effect for not more
than a year and thereafter for successive annual periods only so long as such
continuance is specifically approved at least annually in conformity with Rule
12b-1 and the 1940 Act. The provisions of this Section 9 shall automatically
terminate in the event of the assignment (as defined by the 1940 Act) of this
Agreement, in the event the Rule 12b-1 Plan terminates or is not continued or in
the event this Agreement terminates or ceases to remain in effect. In addition,
the provisions of this Section 9 may be terminated at any time, without penalty,
by either the Distributor or the Contracts Distributor with respect to any
Portfolio on not more than 60 days' nor less than 30 days' written notice
delivered or mailed by registered mail, postage prepaid, to the other party.
Section 10. Notices
Notices and communications required or permitted by Section 2 hereof will
be given by means mutually acceptable to the Parties concerned. Each other
notice or communication required or permitted by this Agreement will be given to
the following persons at the following addresses and facsimile numbers, or such
other persons, addresses or facsimile numbers at the Party receiving such
notices or communications may subsequently direct in writing:
Valley Forge Life Insurance Company
333 S. Wabash, 43 South
Chicago, IL 60685
Attn: G. Stephen Wastek, Esq.
CNA Investor's Services, Inc.
333 S. Wabash, 34 South
Chicago, IL 60685
Attn: Ron Chapon
Alliance Fund Distributors, Inc.
1345 Avenue of the Americas
New York NY 10105
Attn: Edmund P. Bergan
FAX: (212) 969-2290
Alliance Capital Management L.P.
1345 Avenue of the Americas
New York NY 10105
Attn: Edmund P. Bergan
FAX: (212) 969-2290
Section 11. Voting Procedures
Subject to the cost allocation procedures set forth in Section 3 hereof,
Insurer will distribute all proxy material furnished by the Fund to Participants
and will vote Fund shares in accordance with instructions received from
Participants. Insurer will vote Fund shares that are (a) not attributable to
Participants or (b) attributable to Participants, but for which no instructions
have been received, in the same proportion as Fund shares for which said
instructions have been received from Participants. Insurer agrees that it will
disregard Participant voting instructions only to the extent if would be
permitted to do so pursuant to Rule 6e-3 (T)(b)(15)(iii) under the 1940 Act if
the Contracts were variable life insurance policies subject to that rule. Other
participating life insurance companies utilizing the Fund will be responsible
for calculating voting privileges in a manner consistent with that of Insurer,
as prescribed by this Section 11.
Section 12. Foreign Tax Credits
The Adviser agrees to consult in advance with Insurer concerning any
decision to elect or not to elect pursuant to Section 853 of the Code to pass
through the benefit of any foreign tax credits to the Fund's shareholders.
Section 13. Indemnification
13.1 Of Fund, Distributor and Adviser by Insurer.
(a) Except to the extent provided in Sections 13.1(b) and 13.1(c), below,
Insurer agrees to indemnify and hold harmless the Fund, Distributor and
Adviser, each of their directors and officers, and each person, if any, who
controls the Fund, Distributor or Adviser within the meaning of Section 15
of the 1933 Act (collectively, the "Indemnified Parties" for purposes of
this Section 13.1) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of Insurer)
or actions in respect thereof (including, to the extent reasonable, legal
and other expenses), to which the Indemnified Parties may become subject
under any statute, regulation, at common law or otherwise, insofar as such
losses, claims, damages, liabilities or actions are related to the sale,
acquisition, or holding of the Fund's shares and:
(i) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Separate Account's
1933 Act registration statement, the Separate Account Prospectus, the
Contracts or, to the extent prepared by Insurer or Contracts
Distributor, sales literature or advertising for the Contracts (or any
amendment or supplement to any of the foregoing), or arise out of or
are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading; provided that this agreement to
indemnify shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission was made
in reliance upon and in conformity with information furnished to
Insurer or Contracts Distributor by or on behalf of the Fund,
Distributor or Adviser for use in the Separate Account's 1933 Act
registration statement, the Separate Account Prospectus, the
Contracts, or sales literature or advertising (or any amendment or
supplement to any of the foregoing); or
(ii) arise out of or as a result of any other statements or representations
(other than statements or representations contained in the Fund's 1933
Act registration statement, Fund Prospectus, sales literature or
advertising of the Fund, or any amendment or supplement to any of the
foregoing, not supplied for use therein by or on behalf of Insurer or
Contracts Distributor) or the negligent, illegal or fraudulent conduct
of Insurer or Contracts Distributor or persons under their control
(including, without limitation, their employees and "Associated
Persons," as that term is defined in paragraph (m) of Article I of the
NASD's By-Laws), in connection with the sale or distribution of the
Contracts or Fund shares; or
(iii)arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Fund's 1933 Act
registration statement, Fund Prospectus, sales literature or
advertising of the Fund, or any amendment or supplement to any of the
foregoing, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading if such a statement or omission was
made in reliance upon and in conformity with information furnished to
the Fund, Adviser or Distributor by or on behalf of Insurer or
Contracts Distributor for use in the Fund's 1933 Act registration
statement, Fund Prospectus, sales literature or advertising of the
Fund, or any amendment or supplement to any of the foregoing; or
(iv) arise as a result of any failure by Insurer or Contracts Distributor
to perform the obligations, provide the services and furnish the
materials required of them under the terms of this Agreement.
(b) Insurer shall not be liable under this Section 13.1 with respect to any
losses, claims, damages, liabilities or actions to which an Indemnified
Party would otherwise be subject by reason of willful misfeasance, bad
faith, or gross negligence in the performance by that Indemnified Party of
its duties or by reason of that Indemnified Party's reckless disregard of
obligations or duties under this Agreement or to Distributor or to the
Fund.
(c) Insurer shall not be liable under this Section 13.1 with respect to any
action against an Indemnified Party unless the Fund, Distributor or Adviser
shall have notified Insurer in writing within a reasonable time after the
summons or other first legal process giving information of the nature of
the action shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify Insurer of any such action shall
not relieve Insurer from any liability which it may have to the Indemnified
Party against whom such action is brought otherwise than on account of this
Section 13.1 in case any such action is brought against an Indemnified
Party, Insurer shall be entitled to participate, at its own expense, in the
defense of such action. Insurer shall be entitled to assume the defense
thereof. After notice from Insurer to such Indemnified Party of Insurer's
election to assume the defense thereof, the Indemnified Party will
cooperate fully with Insurer and shall bear the fees and expenses of any
additional counsel retained by it, and Insurer will not be liable to such
Indemnified Party under this Agreement for any legal or other expenses
subsequently incurred by such Indemnified Party independently in connection
with the defense thereof, other than reasonable costs of investigation.
13.2 Indemnification of Insurer and Contracts Distributor by Adviser.
(a) Except to the extent provided in Sections 13.2(d) and 13.2(e), below,
Adviser agrees to indemnify and hold harmless Insurer and Contracts
Distributor, each of their directors and officers, and each person, if any,
who controls Insurer or Contracts Distributor within the meaning of Section
15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of
this Section 13.2) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of Adviser)
or actions in respect thereof (including, to the extent reasonable, legal
and other expenses) to which the Indemnified Parties may become subject
under any statute, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or actions are related to the sale,
acquisition, or holding of the Fund's shares and:
(i) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Fund's 1933 Act
registration statement, Fund Prospectus, sales literature or
advertising of the Fund or, to the extent not prepared by Insurer or
Contracts Distributor, sales literature or advertising for the
Contracts (or any amendment or supplement to any of the foregoing), or
arise out of or are based upon the omission or the alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided that
this agreement to indemnify shall not apply as to any Indemnified
Party if such statement or omission or such alleged statement or
omission was made in reliance upon and in conformity with information
furnished to Distributor, Adviser or the Fund by or on behalf of
Insurer or Contracts Distributor for use in the funds 1933 act
registration statement, Fund Prospectus, or in sales literature or
advertising (or any amendment or supplement to any of the foregoing);
or
(ii) arise out of or as a result of any other statements or representations
(other than statements or representations contained in the Separate
Account's 1933 Act registration statement, Separate Account
Prospectus, sales literature or advertising for the Contracts, or any
amendment or supplement to any of the foregoing, not supplied for use
therein by or on behalf of Distributor, Adviser, or the Fund) or the
negligent, illegal or fraudulent conduct of the Fund, Distributor,
Adviser or persons under their control (including, without limitation,
their employees and Associated Persons), in connection with the sale
or distribution of the Contracts or Fund shares; or
(iii)arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Separate Account's
1933 Act registration statement, Separate Account Prospectus, sales
literature or advertising covering the Contracts, or any amendment or
supplement to any of the foregoing, or the omission or alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statement therein not misleading, if
such statement or omission was made in reliance upon and in conformity
with information furnished to Insurer or Contracts Distributor by or
on behalf of the Fund, Distributor or Adviser for use in the Separate
Account's 1933 Act registration statement, Separate Account
Prospectus, sales literature or advertising covering the Contracts, or
any amendment or supplement to any of the foregoing; or
(iv) arise as a result of any failure by the Fund, Adviser or Distributor
to perform the obligations, provide the services and furnish the
materials required of them under the terms of this Agreement;
(b) Except to the extent provided in Sections 13.2(d) and 13.2(e) hereof,
Adviser agrees to indemnify and hold harmless the Indemnified Parties from and
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement thereof with, except as set forth in Section 13.2(c) below, the
written consent of Adviser) or actions in respect thereof (including, to the
extent reasonable, legal and other expenses) to which the Indemnified Parties
may become subject directly or indirectly under any statute, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or actions
directly or indirectly result from or arise out of the failure of any Portfolio
to operate as a regulated investment company in compliance with (i) Subchapter M
of the Code and regulations thereunder and (ii) Section 817(h) of the Code and
regulations thereunder (except to the extent that such failure is caused by
Insurer), including, without limitation, any income taxes and related penalties,
rescission charges, liability under state law to Contract owners or Participants
asserting liability against Insurer or Contracts Distributor pursuant to the
Contracts, the costs of any ruling and closing agreement or other settlement
with the Internal Revenue Service, and the cost of any substitution by Insurer
of shares of another investment company or portfolio for those of any adversely
affected Portfolio as a funding medium for the Separate Account that Insurer
deems necessary or appropriate as a result of the noncompliance.
(c) The written consent of Adviser referred to in Section 13.2(b) above
shall not be required with respect to amounts paid in connection with any ruling
and closing agreement or other settlement with the Internal Revenue Service.
(d) Adviser shall not be liable under this Section 13.2 with respect to any
losses, claims; damages, liabilities or actions to which an Indemnified Party
would otherwise be subject by reason of willful misfeasance, bad faith, or gross
negligence in the performance by that Indemnified Party of its duties or by
reason of such Indemnified Party's reckless disregard of its obligations and
duties under this Agreement or to Insurer, Contracts Distributor or to the
Separate Account.
(e) Adviser shall not be liable under this Section 13.2 with respect to any
action against an Indemnified Party unless Insurer or Contracts Distributor
shall have notified Adviser in writing within a reasonable time after the
summons or other first legal process giving information of the nature of the
action shall have been served upon such Indemnified Party (or after such
Indemnified Party shall have received notice of such service on any designated
agent), but failure to notify Adviser of any such action shall not relieve
Adviser from any liability which it may have to the Indemnified Party against
whom such action is brought otherwise than on account of this Section 13.2. In
case any such action is brought against an Indemnified Party, Adviser will be
entitled to participate, at its own expense, in the defense of such action.
Adviser also shall be entitled to assume the defense thereof (which shall
include, without limitation, the conduct of any ruling request and closing
agreement or other settlement proceeding with the Internal Revenue Service).
After notice from Adviser to such Indemnified Party of Adviser's election to
assume the defense thereof, the Indemnified Party will cooperate fully with
Adviser and shall bear the fees and expenses of any additional counsel retained
by it, and Adviser will not be liable to such Indemnified Party under this
Agreement for any legal or other expenses subsequently incurred by such
Indemnified Party independently in connection with the defense thereof, other
than reasonable costs of investigation.
13.3 Effect of Notice.
Any notice given by the indemnifying Party to an Indemnified Party referred
to in Section 13.1(c) or 13.2(e) above of participation in or control of any
action by the indemnifying Party will in no event be deemed to be an admission
by the indemnifying Party of liability, culpability, or responsibility, and the
indemnifying Party will remain free to contest liability with respect to the
claim among the Parties or otherwise.
Section 13. Applicable Law
This Agreement will be construed and the provisions hereof interpreted
under and in accordance with New York law, without regard for that state's
principles of conflict of laws.
Section 14. Execution in Counterparts
This Agreement may be executed simultaneously in two or more counterparts,
each of which taken together will constitute one and the same instrument.
Section 15. Severability
If any provision of this Agreement is held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement will not
be affected thereby.
Section 16. Rights Cumulative
The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, that the Parties are entitled to under federal and state
laws.
Section 17. Restrictions on Sales of Fund Shares
Insurer agrees that the Fund will be permitted (subject to the other terms
of this Agreement) to make its shares available to separate accounts of other
life insurance companies.
Section 18. Headings
The Table of Contents and headings used in this Agreement are for purposes
of reference only and shall not limit or define the meaning of the provisions of
this Agreement.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed
in their names and on their behalf by and through their duly authorized officers
signing below.
VALLEY FORGE LIFE INSURANCE
COMPANY
By: S/David L. Stone
-------------------------
Name: David L. Stone
Title: Vice President
CNA INVESTOR SERVICES, INC.
By: S/Ronald Chapon
------------------------
Name: Ronald Chapon
Title: Vice President
ALLIANCE CAPITAL MANAGEMENT LP
By: Alliance Capital Management Corporation,
its General Partner
By: __________________________________
Name: /s/
Title: /s/
ALLIANCE FUND DISTRIBUTORS, INC.
By: ___________________________________
Name: /s/
Title: Senior Vice President
SHAREHOLDER SERVICES AGREEMENT
THIS SHAREHOLDER SERVICES AGREEMENT is made and entered into as of December
31, 1999 by and between VALLEY FORGE LIFE INSURANCE COMPANY (the "Company"), and
AMERICAN CENTURY INVESTMENT MANAGEMENT, INC. ("ACIM").
WHEREAS, the Company offers to the public certain group and individual
variable annuity and variable life insurance contracts (the "Contracts"); and
WHEREAS, the Company wishes to make available as investment options under
the Contracts VP Income & Growth and VP Value (the "Funds"), each of which is a
series of mutual fund shares registered under the Investment Company Act of
1940, as amended, and issued by American Century Variable Portfolios, Inc. (the
"Issuer"); and
WHEREAS, on the terms and conditions hereinafter set forth, ACIM desires to
make shares of the Funds available as investment options under the Contracts and
to retain the Company to perform certain administrative services on behalf of
the Funds, and the Company is willing and able to furnish such services;
NOW, THEREFORE, the Company and ACIM agree as follows:
1. TRANSACTIONS IN THE FUNDS. Subject to the terms and conditions of this
Agreement, ACIM will cause the Issuer to make shares of the Funds available to
be purchased, exchanged, or redeemed, by or on behalf of the Accounts (defined
in SECTION 7(A) below) through a single account per Fund at the net asset value
applicable to each order. The Funds' shares shall be purchased and redeemed on a
net basis in such quantity and at such time as determined by the Company to
satisfy the requirements of the Contracts for which the Funds serve as
underlying investment media. Dividends and capital gains distributions will be
automatically reinvested in full and fractional shares of the Funds.
2. ADMINISTRATIVE SERVICES. The Company agrees to provide all
administrative services for the Contract owners, including but not limited to
those services specified in EXHIBIT A (the "Administrative Services"). Neither
ACIM nor the Issuer shall be required to provide Administrative Services for the
benefit of Contract owners. The Company agrees that it will maintain and
preserve all records as required by law to be maintained and preserved in
connection with providing the Administrative Services, and will otherwise comply
with all laws, rules and regulations applicable to the marketing of the
Contracts and the provision of the Administrative Services. Upon request, the
Company will provide ACIM or its representatives reasonable information
regarding the quality of the Administrative Services being provided and its
compliance with the terms of this Agreement.
3. TIMING OF TRANSACTIONS. ACIM hereby appoints the Company as agent for
the Funds for the limited purpose of accepting purchase and redemption orders
for Fund shares from the Contract owners. On each day the New York Stock
Exchange (the "Exchange") is open for business (each, a "Business Day"), the
Company may receive instructions from the Contract owners for the purchase or
redemption of shares of the Funds ("Orders"). Orders received and accepted by
the Company prior to the close of regular trading on the Exchange (the "Close of
Trading") on any given Business Day (currently, 4:00 p.m. Eastern time) and
transmitted to the Funds' transfer agent by 10:00 p.m. Eastern time on such
Business Day will be executed at the net asset value determined as of the Close
of Trading on such Business Day. Any Orders received by the Company on such day
but after the Close of Trading, and all Orders that are transmitted to the
Funds' transfer agent after 10:00 p.m. Eastern time on such Business Day, will
be executed at the net asset value determined as of the Close of Trading on the
next Business Day following the day of receipt of such Order. The day as of
which an Order is executed by the Funds' transfer agent pursuant to the
provisions set forth above is referred to herein as the "Trade Date". All orders
are subject to acceptance or rejection by ACIM or the Funds in the sole
discretion of either of them.
4. PROCESSING OF TRANSACTIONS.
(a) If transactions in Fund shares are to be settled through the National
Securities Clearing Corporation's Mutual Fund Settlement, Entry, and
Registration Verification (Fund/SERV) system, the terms of the FUND/SERV
AGREEMENT, between Company and American Century Services Corporation, shall
apply.
(b) If transactions in Fund shares are to be settled directly with the
Funds' transfer agent, the following provisions shall apply:
(1) By 6:30 p.m. Eastern time on each Business Day, ACIM (or one of
its affiliates) will provide to the Company via facsimile or other
electronic transmission acceptable to the Company the Funds' net asset
value, dividend and capital gain information and, in the case of income
funds, the daily accrual for interest rate factor (mil rate), determined at
the Close of Trading.
(2) By 10:00 p.m. Eastern time on each Business Day, the Company will
provide to ACIM via facsimile or other electronic transmission acceptable
to ACIM a report stating whether the instructions received by the Company
from Contract owners by the Close of Trading on such Business Day resulted
in the Accounts being a net purchaser or net seller of shares of the Funds.
As used in this Agreement, the phrase "other electronic transmission
acceptable to ACIM" includes the use of remote computer terminals located
at the premises of the Company, its agents or affiliates, which terminals
may be linked electronically to the computer system of ACIM, its agents or
affiliates (hereinafter, "Remote Computer Terminals").
(3) Upon the timely receipt from the Company of the report described
in (2) above, the Funds' transfer agent will execute the purchase or
redemption transactions (as the case may be) at the net asset value
computed as of the Close of Trading on the Trade Date. Payment for net
purchase transactions shall be made by wire transfer to the applicable Fund
custodial account designated by the Funds on the Business Day next
following the Trade Date. Such wire transfers shall be initiated by the
Company's bank prior to 4:00 p.m. Eastern time and received by the Funds
prior to 6:00 p.m. Eastern time on the Business Day next following the
Trade Date ("T+1"). If payment for a purchase Order is not timely received,
such Order will be, at ACIM's option, either (i) executed at the net asset
value determined on the Trade Date, and the Company shall be responsible
for all costs to ACIM or the Funds resulting from such delay, or (ii)
executed at the net asset value next computed following receipt of payment.
Payments for net redemption transactions shall be made by wire transfer by
the Issuer to the account(s) designated by the Company on T+1; provided,
however, the Issuer reserves the right to settle redemption transactions
within the time period set forth in the applicable Fund's then-current
prospectus. On any Business Day when the Federal Reserve Wire Transfer
System is closed, all communication and processing rules will be suspended
for the settlement of Orders. Orders will be settled on the next Business
Day on which the Federal Reserve Wire Transfer System is open and the
original Trade Date will apply.
5. PROSPECTUS AND PROXY MATERIALS.
(a) ACIM shall provide the Company with copies of the Issuer's proxy
materials, periodic fund reports to shareholders and other materials that are
required by law to be sent to the Issuer's shareholders. In addition, ACIM shall
provide the Company with a sufficient quantity of prospectuses of the Funds to
be used in conjunction with the transactions contemplated by this Agreement,
together with such additional copies of the Issuer's prospectuses as may be
reasonably requested by Company. If the Company provides for pass-through voting
by the Contract owners, or if the Company determines that pass-through voting is
required by law, ACIM will provide the Company with a sufficient quantity of
proxy materials for each, as directed by the Company.
(b) The cost of preparing, printing and shipping of the prospectuses, proxy
materials, periodic fund reports and other materials of the Issuer to the
Company shall be paid by ACIM or its agents or affiliates; provided, however,
that if at any time ACIM or its agent reasonably deems the usage by the Company
of such items to be excessive, it may, prior to the delivery of any quantity of
materials in excess of what is deemed reasonable, request that the Company
demonstrate the reasonableness of such usage. If ACIM believes the
reasonableness of such usage has not been adequately demonstrated, it may
request that the party responsible for such excess usage pay the cost of
printing (including press time) and delivery of any excess copies of such
materials. Unless the Company agrees to make such payments, ACIM may refuse to
supply such additional materials and ACIM shall be deemed in compliance with
this SECTION 5 if it delivers to the Company at least the number of prospectuses
and other materials as may be required by the Issuer under applicable law.
(c) The cost of any distribution of prospectuses, proxy materials, periodic
fund reports and other materials of the Issuer to the Contract owners shall be
paid by the Company and shall not be the responsibility of ACIM or the Issuer.
6. COMPENSATION AND EXPENSES.
(a) The Accounts shall be the sole shareholder of Fund shares purchased for
the Contract owners pursuant to this Agreement (the "Record Owner"). The Record
Owner shall properly complete any applications or other forms required by ACIM
or the Issuer from time to time.
(b) ACIM acknowledges that it will derive a substantial savings in
administrative expenses, such as a reduction in expenses related to postage,
shareholder communications and recordkeeping, by virtue of having a single
shareholder account per Fund for the Accounts rather than having each Contract
owner as a shareholder. In consideration of the Administrative Services and
performance of all other obligations under this Agreement by the Company, ACIM
will pay the Company a fee (the "Administrative Services Fee") equal to 25 basis
points (0.25%) per annum of the average aggregate amount invested by the Company
under this Agreement.
(c) The payments received by the Company under this Agreement are for
administrative and shareholder services only and do not constitute payment in
any manner for investment advisory services or for costs of distribution.
(d) For the purposes of computing the payment to the Company contemplated
by this SECTION 6, the average aggregate amount invested by the Company on
behalf of the Accounts in the Funds over a one month period shall be computed by
totaling the Company's aggregate investment (share net asset value multiplied by
total number of shares of the Funds held by the Company) on each Business Day
during the month and dividing by the total number of Business Days during such
month.
(e) ACIM will calculate the amount of the payment to be made pursuant to
this SECTION 6 at the end of each calendar quarter and will make such payment to
the Company within 30 days thereafter. The check for such payment will be
accompanied by a statement showing the calculation of the amounts being paid by
ACIM for the relevant months and such other supporting data as may be reasonably
requested by the Company and shall be mailed to:
CNA
100 CNA Drive
Nashville, TN 37214
Attention: Carol Kuntz
Phone No.: (615) 871-1806
Fax No.: (615) 871-1448
7. REPRESENTATIONS.
(a) The Company represents and warrants that (i) this Agreement has been
duly authorized by all necessary corporate action and, when executed and
delivered, shall constitute the legal, valid and binding obligation of the
Company, enforceable in accordance with its terms; (ii) it has established the
Valley Forge Life Insurance Company Variable Annuity and Variable Life Separate
Account (the "Account"), which is a duly authorized and established separate
account under Illinois Insurance law, and has registered each Account as a unit
investment trust under the Investment Company Act of 1940 (the "1940 Act") to
serve as an investment vehicle for the Contracts; (iii) each Contract provides
for the allocation of net amounts received by the Company to an Account for
investment in the shares of one or more specified investment companies selected
among those companies available through the Account to act as underlying
investment media; (iv) selection of a particular investment company is made by
the Contract owner under a particular Contract, who may change such selection
from time to time in accordance with the terms of the applicable Contract; and
(v) the activities of the Company contemplated by this Agreement comply in all
material respects with all provisions of federal and state securities laws
applicable to such activities.
(b) ACIM represents that (i) this Agreement has been duly authorized by all
necessary corporate action and, when executed and delivered, shall constitute
the legal, valid and binding obligation of ACIM, enforceable in accordance with
its terms; (ii) the prospectus of each Fund complies in all material respects
with federal and state securities laws, and (iii) shares of the Issuer are
registered and authorized for sale in accordance with all federal and state
securities laws.
8. ADDITIONAL COVENANTS AND AGREEMENTS.
(a) Each party shall comply with all provisions of federal and state laws
applicable to its respective activities under this Agreement. All obligations of
each party under this Agreement are subject to compliance with applicable
federal and state laws.
(b) Each party shall promptly notify the other parties in the event that it
is, for any reason, unable to perform any of its obligations under this
Agreement.
(c) The Company covenants and agrees that all Orders accepted and
transmitted by it hereunder with respect to each Account on any Business Day
will be based upon instructions that it received from the Contract owners, in
proper form prior to the Close of Trading of the Exchange on that Business Day.
The Company shall time stamp all Orders or otherwise maintain records that will
enable the Company to demonstrate compliance with SECTION 8(C) hereof.
(d) The Company covenants and agrees that all Orders transmitted to the
Issuer, whether by telephone, telecopy, or other electronic transmission
acceptable to ACIM, shall be sent by or under the authority and direction of a
person designated by the Company as being duly authorized to act on behalf of
the owner of the Accounts. ACIM shall be entitled to rely on the existence of
such authority and to assume that any person transmitting Orders for the
purchase, redemption or transfer of Fund shares on behalf of the Company is "an
appropriate person" as used in Sections 8-107 and 8-401 of the Uniform
Commercial Code with respect to the transmission of instructions regarding Fund
shares on behalf of the owner of such Fund shares. The Company shall maintain
the confidentiality of all passwords and security procedures issued, installed
or otherwise put in place with respect to the use of Remote Computer Terminals
and assumes full responsibility for the security therefor. The Company further
agrees to be responsible for the accuracy, propriety and consequences of all
data transmitted to ACIM by the Company by telephone, telecopy or other
electronic transmission acceptable to ACIM.
(e) The Company agrees that, to the extent it is able to do so, it will use
its best efforts to give equal emphasis and promotion to shares of the Funds as
is given to other underlying investments of the Accounts, subject to applicable
Securities and Exchange Commission and/or National Association of Security
Dealers rules. In addition, the Company shall not impose any fee, condition, or
requirement for the use of the Funds as investment options for the Contracts
that operates to the specific prejudice of the Funds vis-a-vis the other
investment media made available for the Contracts by the Company.
(f) The Company shall not, without the written consent of ACIM, make
representations concerning the Issuer or the shares of the Funds except those
contained in the then-current prospectus and in current printed sales literature
approved by ACIM or the Issuer.
(g) Advertising and sales literature with respect to the Issuer or the
Funds prepared by the Company, its agents or ACIM, if any, for use in marketing
shares of the Funds as underlying investment media to Contract owners shall be
submitted to the Company or ACIM for review and approval before such material is
used. No such material shall be used if either party reasonably objects to such
use within twenty-one (21) business days of receipt of such material.
9. USE OF NAMES. Except as otherwise expressly provided for in this
Agreement, neither ACIM nor any of its affiliates or the Funds shall use any
trademark, trade name, service mark or logo of the Company, or any variation of
any such trademark, trade name, service mark or logo, without the Company's
prior written consent, the granting of which shall be at the Company's sole
option. Except as otherwise expressly provided for in this Agreement, the
Company shall not use any trademark, trade name, service mark or logo of the
Issuer, ACIM or any of its affiliates or any variation of any such trademarks,
trade names, service marks, or logos, without the prior written consent of
either the Issuer or ACIM, as appropriate, the granting of which shall be at the
sole option of ACIM and/or the Issuer.
10. PROXY VOTING.
(a) The Company shall provide pass-through voting privileges to all
Contract owners so long as the SEC continues to interpret the 1940 Act as
requiring such privileges. It shall be the responsibility of the Company to
assure that it and the separate accounts of the other Participating Companies
(as defined in SECTION 12(A) below) participating in any Fund calculate voting
privileges in a consistent manner.
(b) The Company will distribute to Contract owners all proxy material
furnished by ACIM and will vote shares in accordance with instructions received
from such Contract owners. The Company shall vote Fund shares for which no
voting instructions are received in the same proportion as shares for which such
instructions have been received. The Company and its agents shall not oppose or
interfere with the solicitation of proxies for Fund shares held for such
Contract owners.
11. INDEMNITY.
(a) ACIM agrees to indemnify and hold harmless the Company and its
officers, directors, employees, agents, affiliates and each person, if any, who
controls the Company within the meaning of the Securities Act of 1933
(collectively, the "Indemnified Parties" for purposes of this SECTION 11(A))
against any losses, claims, expenses, damages or liabilities (including amounts
paid in settlement thereof) or litigation expenses (including legal and other
expenses) (collectively, "Losses"), to which the Indemnified Parties may become
subject, insofar as such Losses result from a breach by ACIM of a material
provision of this Agreement. ACIM will reimburse any legal or other expenses
reasonably incurred by the Indemnified Parties in connection with investigating
or defending any such Losses. ACIM shall not be liable for indemnification
hereunder if such Losses are attributable to the negligence or misconduct of the
Company in performing its obligations under this Agreement.
(b) The Company agrees to indemnify and hold harmless ACIM and the Issuer,
and their respective officers, directors, employees, agents, affiliates and each
person, if any, who controls Issuer or ACIM within the meaning of the Securities
Act of 1933 (collectively, the "Indemnified Parties" for purposes of this
SECTION 11(B)) against any Losses to which the Indemnified Parties may become
subject, insofar as such Losses result from a breach by the Company of a
material provision of this Agreement or the use by any person of the Remote
Computer Terminals. The Company will reimburse any legal or other expenses
reasonably incurred by the Indemnified Parties in connection with investigating
or defending any such Losses. The Company shall not be liable for
indemnification hereunder if such Losses are attributable to the negligence or
misconduct of ACIM or the Issuer in performing their obligations under this
Agreement.
(c) Promptly after receipt by an indemnified party hereunder of notice of
the commencement of action, such indemnified party will, if a claim in respect
thereof is to be made against the indemnifying party hereunder, notify the
indemnifying party of the commencement thereof; but the omission so to notify
the indemnifying party will not relieve it from any liability which it may have
to any indemnified party otherwise than under this SECTION 11. In case any such
action is brought against any indemnified party, and it notifies the
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate therein and, to the extent that it may wish to, assume
the defense thereof, with counsel satisfactory to such indemnified party, and
after notice from the indemnifying party to such indemnified party of its
election to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this SECTION 11 for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation.
(d) If the indemnifying party assumes the defense of any such action, the
indemnifying party shall not, without the prior written consent of the
indemnified parties in such action, settle or compromise the liability of the
indemnified parties in such action, or permit a default or consent to the entry
of any judgment in respect thereof, unless in connection with such settlement,
compromise or consent, each indemnified party receives from such claimant an
unconditional release from all liability in respect of such claim.
12. POTENTIAL CONFLICTS
(a) The Company has received a copy of an application for exemptive relief,
as amended, filed by the Issuer on December 21, 1987, with the SEC and the order
issued by the SEC in response thereto (the "Shared Funding Exemptive Order").
The Company has reviewed the conditions to the requested relief set forth in
such application for exemptive relief. As set forth in such application, the
Board of Directors of the Issuer (the "Board") will monitor the Issuer for the
existence of any material irreconcilable conflict between the interests of the
contract owners of all separate accounts ("Participating Companies") investing
in funds of the Issuer. An irreconcilable material conflict may arise for a
variety of reasons, including: (i) an action by any state insurance regulatory
authority; (ii) a change in applicable federal or state insurance, tax, or
securities laws or regulations, or a public ruling, private letter ruling,
no-action or interpretative letter, or any similar actions by insurance, tax or
securities regulatory authorities; (iii) an administrative or judicial decision
in any relevant proceeding; (iv) the manner in which the investments of any
portfolio are being managed; (v) a difference in voting instructions given by
variable annuity contract owners and variable life insurance contract owners; or
(vi) a decision by an insurer to disregard the voting instructions of contract
owners. The Board shall promptly inform the Company if it determines that an
irreconcilable material conflict exists and the implications thereof.
(b) The Company will report any potential or existing conflicts of which it
is aware to the Board. The Company will assist the Board in carrying out its
responsibilities under the Shared Funding Exemptive Order by providing the Board
with all information reasonably necessary for the Board to consider any issues
raised. This includes, but is not limited to, an obligation by the Company to
inform the Board whenever contract owner voting instructions are disregarded.
(c) If a majority of the Board, or a majority of its disinterested Board
members, determines that a material irreconcilable conflict exists with regard
to contract owner investments in a Fund, the Board shall give prompt notice to
all Participating Companies. If the Board determines that the Company is
responsible for causing or creating said conflict, the Company shall at its sole
cost and expense, and to the extent reasonably practicable (as determined by a
majority of the disinterested Board members), take such action as is necessary
to remedy or eliminate the irreconcilable material conflict. Such necessary
action may include but shall not be limited to:
(i) withdrawing the assets allocable to the Accounts from the Fund and
reinvesting such assets in a different investment medium or submitting the
question of whether such segregation should be implemented to a vote of all
affected contract owners and as appropriate, segregating the assets of any
appropriate group (i.e., annuity contract owners, life insurance contract
owners, or variable contract owners of one or more Participating Companies)
that votes in favor of such segregation, or offering to the affected
contract owners the option of making such a change; and/or
(ii) establishing a new registered management investment company or
managed separate account.
(d) If a material irreconcilable conflict arises as a result of a decision
by the Company to disregard its contract owner voting instructions and said
decision represents a minority position or would preclude a majority vote by all
of its contract owners having an interest in the Issuer, the Company at its sole
cost, may be required, at the Board's election, to withdraw an Account's
investment in the Issuer and terminate this Agreement; provided, however, that
such withdrawal and termination shall be limited to the extent required by the
foregoing material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
(e) For the purpose of this SECTION 12, a majority of the disinterested
Board members shall determine whether or not any proposed action adequately
remedies any irreconcilable material conflict, but in no event will the Issuer
be required to establish a new funding medium for any Contract. The Company
shall not be required by this SECTION 12 to establish a new funding medium for
any Contract if an offer to do so has been declined by vote of a majority of the
Contract owners materially adversely affected by the irreconcilable material
conflict.
13. TERMINATION; WITHDRAWAL OF OFFERING. This Agreement may be terminated
by either party upon 120 days' prior written notice to the other parties.
Notwithstanding the above, the Issuer reserves the right, without prior notice,
to suspend sales of shares of any Fund, in whole or in part, or to make a
limited offering of shares of any of the Funds in the event that (A) any
regulatory body commences formal proceedings against the Company, ACIM,
affiliates of ACIM, or the Issuer, which proceedings ACIM reasonably believes
may have a material adverse impact on the ability of ACIM, the Issuer or the
Company to perform its obligations under this Agreement or (B) in the judgment
of ACIM, declining to accept any additional instructions for the purchase or
sale of shares of any such Fund is warranted by market, economic or political
conditions. Notwithstanding the foregoing, this Agreement may be terminated
immediately (i) by any party as a result of any other breach of this Agreement
by another party, which breach is not cured within 30 days after receipt of
notice from the other party, or (ii) by any party upon a determination that
continuing to perform under this Agreement would, in the reasonable opinion of
the terminating party's counsel, violate any applicable federal or state law,
rule, regulation or judicial order. Termination of this Agreement shall not
affect the obligations of the parties to make payments under SECTION 4 for
Orders received by the Company prior to such termination and shall not affect
the Issuer's obligation to maintain the Accounts as set forth by this Agreement.
Following termination, ACIM shall not have any Administrative Services payment
obligation to the Company (except for payment obligations accrued but not yet
paid as of the termination date).
14. NON-EXCLUSIVITY. Each of the parties acknowledges and agrees that this
Agreement and the arrangement described herein are intended to be non-exclusive
and that each of the parties is free to enter into similar agreements and
arrangements with other entities.
15. SURVIVAL. The provisions of SECTION 9 (use of names) and SECTION 11
(indemnity) of this Agreement shall survive termination of this Agreement.
16. AMENDMENT. Neither this Agreement, nor any provision hereof, may be
amended, waived, discharged or terminated orally, but only by an instrument in
writing signed by all of the parties hereto.
17. NOTICES. All notices and other communications hereunder shall be given
or made in writing and shall be delivered personally, or sent by telex,
telecopier, express delivery or registered or certified mail, postage prepaid,
return receipt requested, to the party or parties to whom they are directed at
the following addresses, or at such other addresses as may be designated by
notice from such party to all other parties.
To the Company:
Valley Forge Life Insurance Company
CNA Plaza, 43 South
Chicago, Illinois 60685
Attn: G. Stephen Wasteck, Esq.
(312) 822-5971 (office number)
(312) 822-1186 (telecopy number)
To the Issuer or ACIM:
American Century Investment Management, Inc.
4500 Main Street
Kansas City, Missouri 64111
Attention: Charles A. Etherington, Esq.
(816) 340-4051 (office number)
(816) 340-4964 (telecopy number)
Any notice, demand or other communication given in a manner prescribed in this
SECTION 17 shall be deemed to have been delivered on receipt.
18. SUCCESSORS AND ASSIGNS. This Agreement may not be assigned without the
written consent of all parties to the Agreement at the time of such assignment.
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective permitted successors and assigns.
19. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one agreement, and
any party hereto may execute this Agreement by signing any such counterpart.
20. SEVERABILITY. In case any one or more of the provisions contained in
this Agreement should be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby.
21. ENTIRE AGREEMENT. This Agreement, including the attachments hereto,
constitutes the entire agreement between the parties with respect to the matters
dealt with herein, and supersedes all previous agreements, written or oral, with
respect to such matters.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date set forth above.
VALLEY FORGE LIFE INSURANCE AMERICAN CENTURY INVESTMENT
COMPANY MANAGEMENT, INC.
By:_______________________ By:_____________________
Name:_____________________ William M. Lyons
Title:____________________ Executive Vice President
EXHIBIT A
ADMINISTRATIVE SERVICES
Pursuant to the Agreement to which this is attached, the Company shall perform
all administrative and shareholder services required or requested under the
Contracts with respect to the Contract owners, including, but not limited to,
the following:
1. Maintain separate records for each Contract owner, which records shall
reflect the shares purchased and redeemed and share balances of such Contract
owners. The Company will maintain a single master account with each Fund on
behalf of the Contract owners and such account shall be in the name of the
Company (or its nominee) as the record owner of shares owned by the Contract
owners.
2. Disburse or credit to the Contract owners all proceeds of redemptions of
shares of the Funds and all dividends and other distributions not reinvested in
shares of the Funds.
3. Prepare and transmit to the Contract owners, as required by law or the
Contracts, periodic statements showing the total number of shares owned by the
Contract owners as of the statement closing date, purchases and redemptions of
Fund shares by the Contract owners during the period covered by the statement
and the dividends and other distributions paid during the statement period
(whether paid in cash or reinvested in Fund shares), and such other information
as may be required, from time to time, by the Contracts.
4. Transmit purchase and redemption orders to the Funds on behalf of the
Contract owners in accordance with the procedures set forth in SECTION 4 to the
Agreement.
5. Distribute to the Contract owners copies of the Funds' prospectus, proxy
materials, periodic fund reports to shareholders and other materials that the
Funds are required by law or otherwise to provide to their shareholders or
prospective shareholders.
6. Maintain and preserve all records as required by law to be maintained
and preserved in connection with providing the Administrative Services for the
Contracts.
PARTICIPATION AGREEMENT
Among
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
MORGAN STANLEY DEAN WITTER
INVESTMENT MANAGEMENT INC.
MILLER ANDERSON & SHERRERD, LLP
And
VALLEY FORGE LIFE INSURANCE COMPANY
DATED AS OF
January 1, 2000
TABLE OF CONTENTS
Page
ARTICLE I. Purchase of Funds Shares
ARTICLE II. Representations and Warranties
ARTICLE III. Prospectuses, Reports to Shareholders
And Proxy Statements, Voting
ARTICLE IV. Sales Material and Information
ARTICLE V. Fees and Expenses
ARTICLE VI. Diversification
ARTICLE VII. Potential Conflicts
ARTICLE VIII. Indemnification
ARTICLE IX. Applicable Law
ARTICLE X. Termination
ARTICLE XI. Notices
ARTICLE XII. Miscellaneous
SCHEDULE A Separate Accounts and Associated Contracts
SCHEDULE B Portfolios of Morgan Stanley Dean
Witter Universal Funds, Inc. Available
Under this Agreement
SCHEDULE C Proxy Voting Procedures
THIS AGREEMENT, made and entered into as of the 1st day of January,
2000 by and among VALLEY FORGE LIFE INSURANCE COMPANY (hereinafter the
"Company"), a Pennsylvania corporation, on its own behalf and on behalf of each
separate account of the Company set forth on Schedule A hereto as may be amended
from time to time (each such account hereafter referred to as the "Account") and
MORGAN STANLEY DEN WITTER UNIVERSAL FUNDS, INC. (hereinafter the "Fund"), a
Maryland corporation, and MORGAN STANLEY DEAN WITTER INVESTMENT MANAGEMENT, INC.
and MILLER ANDERSON & SHERRERD, LLP (hereinafter collectively the "Advisers" and
individually the "Adviser"), a Delaware corporation and a Pennsylvania limited
liability partnership, respectively.
WHEREAS, the Fund engages in business as an open-end management
investment company and is available to act as (i) the investment vehicle for
separate accounts established by insurance companies for individual and group
life insurance policies and annuity contracts with variable accumulation and/or
pay-out provisions (hereinafter referred to individually and/or collectively as
"Variable Insurance Products") and (ii) the investment vehicle for certain
qualified pension and retirement plans (hereinafter "Qualified Plans"); and
WHEREAS, insurance companies desiring to utilize the Fund as an
investment vehicle under their Variable Insurance Products enter into
participation agreements with the Fund and the Advisers (the "Participating
Insurance Companies"); and
WHEREAS, shares of the Fund are divided into several series of shares,
each representing the interest in a particular managed portfolio of securities
and other assets, any one or more of which may be made available under this
Agreement; and
WHEREAS, the Fund intends to offer shares of the series set forth on
Schedule B hereto (each such series hereinafter referred to as a "Portfolio") as
may be amended from time to time by mutual agreement of the parties hereto, to
the Account(s) of the Company; and
WHEREAS, the Fund has obtained an order from the Securities and
Exchange Commission, dated September 19, 1996 (file No. 812-10118), granting
Participating Insurance Companies and Variable Insurance Product separate
accounts exemptions from the provisions of Section 9(a), 13(a), 15(a), and 15(b)
of the Investment Company Act of 1940, as amended (hereinafter the "1940 Act"),
and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to
permit shares of the Fund to be sold to and held by Variable Insurance Product
separate accounts of both affiliated and unaffiliated life insurance companies
and Qualified Plans (hereinafter the "Shared Funding Exemptive Order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, each Adviser is duly registered as an investment adviser under
the Investment Advisers Act of 1940, as amended, and any applicable state
securities laws; and
WHEREAS, each Adviser manages certain Portfolios of the Fund; and
WHEREAS, Morgan Stanley & Co. Incorporated (the "Underwriter") is
registered as a broker/dealer under the Securities Exchange Act of 1934, as
amended (hereinafter the "1934 Act"), is a member in good standing of the
National Association of Securities Dealers, Inc. (hereinafter "NASD") and serves
as principal underwriter of the shares of the Fund; and
WHEREAS, the Company has registered or will register under the 1933 Act
the Variable Insurance Products identified on Schedule A hereto (the
"Contracts"), as such Schedule may be amended from time to time by mutual
written agreement of the parties hereto; and
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution or under authority of the Board of
Directors of the Company, on the date shown for such Account on Schedule A
hereto, to set aside and invest assets attributable to the Contracts; and
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares of the Portfolios on behalf
of each Account to fund the Contracts and the Underwriter is authorized to sell
such shares to each such Account at net asset value.
NOW, THEREFORE, in consideration of their mutual promises, the Company,
the Fund and the Advisers agree as follows:
ARTICLE I. PURCHASE OF FUND SHARES
1.1 The Fund agrees to make available for purchase by the Company
shares of the Portfolios and shall execute order placed for each Account on a
daily basis at the net asset value next computed after receipt by the Fund or
its designee of such order. For purposes of this Section 1.1, the Company shall
be the designee of the Fund for receipt of such orders from each Account and
receipt by such designee shall constitute receipt by the Fund, provided that the
Fund receives notice of such order by 10:00 a.m. Eastern time on the next
following Business Day. "Business Day" shall mean any day on which the New York
Stock Exchange is open for trading and on which the Fund calculates its net
asset value pursuant to the rules of the Securities and Exchange Commission.
1.2 The Fund, so long as this Agreement is in effect, agrees to make
its shares available indefinitely for purchase at the applicable net asset value
per share by the Company and its Accounts on those days on which the Fund
calculates its net asset value pursuant to rules of the Securities and Exchange
commission and the Fund shall use reasonable efforts to calculate such net asset
value of each day which the New York Stock Exchanged is open for trading.
Notwithstanding the foregoing, the Board of Directors of the Fund (hereinafter
the "Board") may refuse to permit the Fund to sell shares of any Portfolio to
any person, or suspend or terminate the offering of shares of any Portfolio if
such action is required by law or by regulatory authorities having jurisdiction
or is, in the sole discretion of the Board acting in good faith and in light of
their fiduciary duties under federal and any applicable state laws, necessary in
the best interests of the shareholders of such Portfolio.
1.3 The Fund agrees that shares of the Fund will be sold only to Participating
Insurance Companies and their separate accounts and to certain Qualified Plans.
No shares of any Portfolio will be sold to the general public.
1.4 The Fund agrees to redeem for cash, on the Company's request, any full or
fractional shares of the Fund held by the Company, executing such requests on
a daily basis at the net asset value next computed after receipt by the Fund
or its designee of the request for redemption. For purposes of this Section
1.4, the Company shall be the designee of the Fund for receipt of requests for
redemption from each Account and receipt by such designee shall constitute
receipt by the Fund; provided that the Fund receives notice of such request
for redemption by 10:00 a.m. Eastern time on the next following Business Day.
1.5 The Company agrees that purchases and redemptions of Portfolio shares
offered by the then current prospectus of the Fund shall be made in accordance
with the provisions of such prospectus. The Company will give the Fund and the
Advisers 45 days written notice of its intention to make available in the
future, as a funding vehicle under the Contracts, any other investment company.
1.6 The Company shall pay for Fund shares on the next Business Day after an
order to purchase Fund shares is made in accordance with the provisions of
Section 1.1 hereof. Payment shall be in federal funds transmitted by wire. For
purposes of Section 2.10 and 2.11, upon receipt by the Fund of the federal funds
so wired, such funds shall cease to be the responsibility of the Company and
shall become the responsibility of the Fund.
1.7 Issuance and transfer of the Fund's shares will be by book entry only. Stock
certificates will not be issued to the Company or any Account. Shares ordered
from the Fund will be recorded in an appropriate title for each Account or the
appropriate subaccount of each Account.
1.8 The Fund shall furnish same day notice (by wire or telephone, followed by
written confirmation) to the Company of any income, dividends or capital gain
distributions payable on the Portfolio's shares. The Company hereby elects to
receive all such income dividends and capital gain distributions as are payable
on the Portfolio shares in additional shares of that Portfolio. The Company
reserves the right to revoke this election and to receive all such income
dividends and capital gain distributions in cash. The Fund shall notify the
Company of the number of shares so issued as payment of such dividends and
distributions.
1.9 The Fund shall make the net asset value per share for each Portfolio
available to the Company on a daily basis as soon as reasonably practical after
the net asset value per share is calculated (normally by 6:30 p.m. Eastern time)
and shall use its best efforts to make such net asset value per share available
by 7:00 p.m.
Eastern time.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1 The Company represents and warrants that the Contracts are or will be
registered under the 1933 Act, that the Contracts will be issued in compliance
in all material respects with all applicable federal and state laws; and that
the Company will require of every person distributing the Contracts that (i) the
contracts be offered and sold in compliance in all material respects with all
applicable federal and state laws and (ii) each Contract, at the time it is
issued, be a suitable purchase for the applicant therefor under applicable state
insurance laws. The Company further represents and warrants that: (I) it is an
insurance company duly organized and in good standing under applicable law, (ii)
it has legally and validly established each Account prior to any issuance or
sale thereof as a segregated asset account under applicable laws and
regulations, and (iii) it has registered or, prior to any issuance or sale of
the Contracts, will register each Account as a unit investment trust in
accordance with the provisions of the 1940 Act to serve as a segregated
investment account for the Contracts.
2.2 The Fund represents and warrants that Fund shares sold pursuant to this
Agreement shall be registered under the 1933 Act, duly authorized for issuance
and sold in compliance with the laws of the State of Maryland and all applicable
federal and state securities laws and that the Fund is and shall remain
registered under the 1940 Act. The Fund shall amend the registration statement
for its shares under the 1933 Act and the 1940 Act from time to time as required
in order to effect the continuous offering of its shares. The Fund shall
register and qualify the share for sale in accordance with the laws of the
various states only if and to the extent deemed advisable by the Fund.
2.3 The Fund represents that it is currently qualified as a Regulated Investment
Company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), and that it will make every effort to maintain such qualification
(under Subchapter M or any successor similar provision) and that it will notify
the Company immediately upon having a reasonable basis for believing that it has
ceased to so qualify.
2.4 The Company represents that the Contracts are currently treated as life
insurance policies or annuity contracts, under applicable provisions of the Code
and that it will make every effort to maintain such treatment and that it will
notify the Fund immediately upon having a reasonable basis for believing that it
has ceased to so qualify.
2.5 The Fund represents that to the extent that it decides to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act, the Fund
undertakes to have a board of directors, a majority of whom are not interested
persons of the Fund, formulate and approve any plan under Rule 12b-1 to finance
distribution expenses.
2.6 The Fund makes no representation as to whether any aspect of its operations
(including, but not limited to, fees and expenses and investment policies)
complies with the insurance laws or regulations of the various states except
that the Fund represents that the Portfolios' investment policies, fees and
expenses are and shall at all times remain in compliance wit the laws of the
State of Maryland that the Portfolios' operation are and shall at all times
remain in material compliance with the laws of the State of Maryland to the
extent required to perform this Agreement.
2.7 The Fund represents that it is lawfully organized and validly existing under
the laws of the State of Maryland and that it does and will comply in all
material respects with the 1940 Act.
2.8 Each Adviser represents and warrants that it is and shall remain duly
registered in all material respects under all applicable federal and state
securities laws and that it will perform its obligations for the Fund in
compliance in all material respects with the laws of its state of domicile and
any applicable state and federal securities laws.
2.9 The Fund represents and warrants that its directors, officers, employees,
and other individuals/entities dealing with the money and/or securities of the
Fund are and shall continue to be at all times covered by a blanket fidelity
bond or similar coverage for the benefit of the Fund in an amount not less than
the minimal coverage as required currently by Rule 17g-(1) of the 1940 Act or
related provisions as may be promulgated from time to time. The aforesaid
blanket fidelity bond shall include coverage for larceny and embezzlement and
shall be issued by a reputable bonding company.
2.10 The Company represents and warrants that all of its directors, officers,
employees, investment advisers, and other individuals/entities dealing with the
money and/or securities of the Fund are covered by a blanket fidelity bond or
similar coverage, in such amount as is customary for companies engaged in
similar businesses and industries and as reasonably necessary in light of the
Company's obligations under this Agreement. The aforesaid includes coverage for
larceny and embezzlement and shall be issued by a reputable bonding company. The
Company agrees to make all reasonable efforts to see that this bond or another
bond containing these provisions is always in effect, and agrees to notify the
Fund and the Advisers in the event that such coverage no longer applies.
ARTICLE III. PROSPECTUSES, REPORTS TO SHAREHOLDERS AND PROXY STATEMENTS; VOTING
3.1 The Fund or its designee shall provide the Company with as many printed
copies of the Fund's current prospectus and statement of additional information
as the Company may reasonably request. If requested by the Company, in lieu of
providing printed copies the Fund shall provide camera-ready film or computer
diskettes containing the Fund's prospectus and statement of additional
information, and such other assistance as is reasonably necessary in order for
the Company once each year (or more frequently if the prospectus and/or
statement of additional information for the Fund is amended during the year) to
have the prospectus for the Contracts and the Fund's prospectus printed together
in one document, and to have the statement of additional information for the
Fund and the statement of additional information for the Contracts printed
together in one document. Alternatively, the Company may print the Fund's
prospectus and/or its statement of additional information in combination with
other fund companies' prospectuses and statements of additional information.
3.2 Except as provided in this Section 3.2, all expenses of preparing, setting
in type, printing and distributing Fund prospectuses and statements of
additional information shall be the expense of the Company. For prospectuses and
statements of additional information provided by the Company to its Contract
owners who currently own shares of one or more Portfolios ("Existing Contract
Owners"), in order to update disclosure as required by the 1933 Act and/or the
1940 Act, the cost of printing shall be borne by the Fund. If the Company
chooses to receive camera-ready film or computer diskettes in lieu of receiving
printed copies of the Fund's prospectus, the Fund shall bear the cost of
typesetting to provide the Fund's prospectus to the Company in the format in
which the Fund is accustomed to formatting prospectuses, and the Company shall
bear the expense of adjusting or changing the format to conform with any of its
prospectuses. In such event, the Fund will reimburse the Company in an amount
equal to the product of x and y where x is the number of such prospectuses
distributed to Existing Contract Owners, and y is the Fund's per unit cost of
typesetting and printing the Fund' s prospectus. The same procedures shall be
followed with respect to the Fund's statement of additional information. The
Company agrees to provide the Fund or its designee with such information as may
be reasonably requested by the Fund to assure that the Fund's expenses do not
include the cost of printing, typesetting or distributing any prospectuses or
statements of additional information other than those actually distributed to
Existing Contract Owners.
3.3 The Fund's statement of additional information shall be obtainable from the
Fund, the Company or such other person as the Fund may designate, as agreed upon
by the parties.
3.4 The Fund, at its expense, shall provide the Company with Copies of its proxy
statements, reports to shareholders, and other communications (except for
prospectuses and statements of additional information, which are covered in
section 3.1) to shareholders in such quantity as the Company shall reasonably
require for distributing to Contract owners.
3.5 If and to the extent required by law the Company shall:
(i) solicit voting instructions from Contract Owners;
(ii) vote the Fund shares in accordance with instructions received from
Contract owners; and
(iii)vote Fund shares for which no instructions have been received in the
same proportion as Funds of such Portfolio for which instructions have
been received;
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund shares
held in any segregated asset account in its own right, to the extent permitted
by low. The Fund and the Company shall follow the procedures, and shall have the
corresponding responsibilities, for the handling of proxy and voting instruction
solicitations, as set forth in Schedule C attached hereto and incorporated
herein by reference. Participating Insurance Companies shall be responsible for
ensuring that each of their separate accounts participating in the Fund
calculates voting privileges in a manner consistent with the standards set forth
on Schedule C, which standards will also be provided to the other Participating
Insurance Companies.
3.6. The Fund will comply with all provisions of the 1940 Act requiring voting
by shareholders, and in particular the Fund will either provide for annual
meetings or comply with Section 16(c) of the 1940 Act (although the Fund is
not one of the trusts described in Section 16(c) as well as with Sections
16(a) and, if and when applicable, 16(b). Further, the Fund will act in
accordance with the Securities and Exchange Commission's interpretation of
the requirements of Section 16(a) with respect to periodic elections of
directors and with whatever rules the Commission may promulgate with
respect thereto.
3.7 The Fund shall use reasonable efforts to provide Fund prospectuses,
reports to shareholders, proxy materials and other Fund communications (or
camera-ready equivalents) to the Company sufficiently in advance of the
Company's mailing dates to enable the Company to complete, at reasonable cost,
the printing, assembling and/or distribution of the communications in accordance
with applicable laws and regulations.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1.a. The Company shall furnish, or shall cause to be furnished, to
the Fund or its designee, each piece of sales literature or other promotional
material in which the Fund or an Adviser is named, at least ten Business Days
prior to its use. No such material shall be used without the prior approval of
the Fund or its designee. The Fund shall use its reasonable best efforts to
review any such material as soon as practicable after receipt and no later than
ten Business Days after receipt of such material.
4.1.b. The Fund shall furnish, or shall cause to be furnished, to the
Company or its designee, each piece of sales literature or other promotional
material in which the Company is named, at least ten Business Days prior to its
use. No such material shall be used without the prior approval of the Company or
its designee. The Company shall use its reasonable best efforts to review any
such material as soon as practicable after receipt and no later than ten
Business Days after receipt of such material.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or prospectus for the
Fund shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or its
designee, except with the permission of the Fund.
4.3. The Fund or its designee shall furnish, or shall cause to be
furnished, to the Company or its designee, each piece of sales literature or
other promotional material in which the Company and/or its Account(s) is named
at least ten Business Days prior to its use. No such material shall be used if
the Company or its designee reasonably objects to such use within ten Business
Days after receipt of such material.
4.4. The Fund and the Advisers shall not give any information or make
any representations on behalf of the Company or concerning the Company, each
Account, or the Contracts, other than the information or representations
contained in a registration statement or prospectus for the Contracts, as such
registration statement and prospectus may be amended or supplemented from time
to time, or in published reports for each Account which are in the public domain
or approved by the Company for distribution to Contact owners, or in sales
literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one complete copy of
all registration statements, prospectuses, statements of additional information,
reports, proxy statements, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Fund or its shares and are relevant to
the Company or the Contracts.
4.6. The Company will provide to the Fund at least one complete copy of
all registration statements, prospectuses, statements of additional information,
reports, solicitations for voting instructions, sales literature and other
promotional materials, applications for exemptions, requests for no action
letters, and all amendments to any of the above, that relate to the investment
in the Fund under the Contracts.
4.7 For purposes of this Article IV, the phrase "sales literature or other
promotional material" includes, but is not limited to, any of the following that
refer to the Fund or any affiliate of the Fund: advertisements (such as material
published, or designed for use in, a newspaper, magazine, or other periodical,
radio, television, telephone or tape recording, videotape display, signs or
billboards, motion pictures, or other public media), sales literature (i.e..,
any written communication distributed or made generally available to customers
or the public, including brochures, circulars, research reports, market letters,
form letters, seminar texts, reprints or excerpts of any other advertisement,
sales literature, or published article), educational or training materials or
other communications distributed or made generally available to some or all
agents or employees, and registration statements, prospectuses, statements of
additional information, shareholder reports, and proxy materials.
ARTICLE V. FEES AND EXPENSES
5.1. The Fund shall pay no fee or other compensation to the Company
under this Agreement, except that if the Fund or any Portfolio adopts and
implements a plan pursuant to Rule 12b-I to finance distribution expenses, then
the Underwriter may make payments to the Company or to the underwriter for the
Contracts if and in amounts agreed to by the Underwriter in writing.
5.2. All expenses incident to performance by the Fund under this Agreement shall
be paid by the Fund. The Fund shall see to it that all its shares are registered
and authorized for issuance in accordance with applicable federal law and, if
and to the extent deemed advisable by the Fund, in accordance with applicable
state laws prior to their sale. Except as otherwise set forth in Section 3.2 of
this Agreement, the Fund shall bear the expenses for the cost of registration
and qualification of the Fund's shares, preparation and filing of the Fund's
prospectus and registration statement, proxy materials and reports, setting the
prospectus in type, setting in type and printing the proxy materials and reports
to shareholders, the preparation of all statements and notices required by any
federal or state law, and all taxes on the issuance or transfer of the Fund's
shares.
5.3 The Company shall bear the expenses of distributing the Fund's
prospectus, proxy materials and reports to owners of Contracts issued by the
Company.
ARTICLE VI. DIVERSIFICATION
6.1. The Fund will at all times invest money from the Contracts in such
a manner as to ensure that the Contracts will be treated as variable contracts
under the Code and the regulations issued thereunder. Without limiting the scope
of the foregoing, the Fund will at all times comply with Section 817(h) of the
Code and Treasury Regulation 1.817-5, relating to the diversification
requirements for variable annuity, endowment, or life insurance contracts and
any amendments or other modifications to such Section or Regulations. In the
event of a breach of this Article VI by the Fund, it will take all reasonable
steps (a) to notify Company of such breach and (b) to adequately diversify the
Fund so as to achieve compliance within the grace period afforded by Regulation
817-5.
ARTICLE VII. POTENTIAL CONFLICTS
7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict may
arise for a variety of reasons, including: (a) an
action by any state insurance regulatory authority; (b) a change in applicable
federal or state insurance, tax, or securities laws or regulations, or a public
ruling, private letter ruling, no-action or interpretative letter, or any
similar action by insurance, tax, or securities regulatory authorities; (c)
administrative or judicial decision in any relevant proceeding; (d) the manner
in which the investments of any Portfolio are being managed; (e) a difference in
voting instructions given by Contract owners; or (f) a decision by a
Participating Insurance Company to disregard the voting instructions of Contract
owners. The Board shall promptly inform the Company if it determines that an
irreconcilable material conflict exists and the implications thereof.
7.2 The Company will report any potential or existing conflicts of which it is
aware to the Board. The Company will assist the Board in carrying out its
responsibilities under the Shared Funding Exemptive Order, by providing the
Board with all information reasonably necessary for the Board to consider any
issues raised. This includes, but is not limited to, an obligation by the
Company to inform the Board whenever contract owner voting instructions are
disregarded.
7.3 If it is determined by a majority of the Board, or a majority of its
disinterested members, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense and
to the extent reasonably practicable (as determined by a majority of the
disinterested directors), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1)
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a vote
of all affected Contract owners and, as appropriate, segregating the assets of
any appropriate group (i.e., annuity contract owners, life insurance policy
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
Contract owners the option of making such a change; and (2) establishing a new
registered management investment company of managed separate account.
7.4 If a material irreconcilable conflict arises because of a decision by the
Company to disregard contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's
investment in the Fund and terminate this Agreement with respect to such Account
(at the Company's expense); provided, however that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested members
of the Board.
7.5 If a material irreconcilable conflict arises because a particular state
insurance regulator's decision applicable to the Company conflicts with the
majority of other state regulators, then the Company will withdraw the affected
Account's investment in the Fund and terminate this Agreement with respect to
such Account within six months after the Board informs the Company in writing
that it has determined that such decision has created an irreconcilable material
conflict; provided, however, that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable conflict
as determined by a majority of the disinterested members of the Board. Until the
end of the foregoing six month period, the Underwriter and Fund shall continue
to accept and implement orders by the Company for the purchase (and redemption)
of shares of the Fund.
7.6. For purposes of Sections 7.3 through 7.5 of this Agreement, a majority of
the disinterested members of the Board shall determine whether any proposed
action adequately remedies any irreconcilable material conflict, but in no event
will the Fund be required to establish a new funding medium for the Contracts.
The Company shall not be required by Section 7.3 to establish a new funding
medium for the Contracts if an offer to do so has been declined by vote of a
majority of Contract owners materially adversely affected by the irreconcilable
material conflict.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or Rule
6e-3 is adopted, to provide exemptive relief from any provision of the 1940 Act
or the rules promulgated thereunder with respect to mixed or shared funding (as
defined in the Shared Funding Exemptive order) on terms and conditions
materially different from those contained in the Shared Funding Exemptive Order,
then (a) the fund and/or the Participating Insurance Companies, as appropriate,
shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T),
as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable;
and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall
continue in effect only to the extent that terms and conditions substantially
identical to such Sections are contained in such Rule(s) as so amended or
adopted.
ARTICLE VIII. INDEMNIFICATION
8.1 Indemnification by the Company
8.1(a). The Company agrees to indemnify and hold harmless the Fund and
each member of the board and officers, and each Adviser and each director and
officer of each Adviser, and each person, if any, who controls the Fund or the
Adviser within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" and individually, "Indemnified Party," for purposes of
this Section 8.1) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the company)
or litigation (including reasonable legal and other expenses), to which the
Indemnified Parties may become subject under any statute, regulation, at common
law or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) of settlements are related to the sale
or acquisition of the Fund' shares or the Contracts and:
(i) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained n
the registration statement or prospectus for the Contracts
or contained in the Contracts or sales literature for the
contracts (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission
or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the
statements therein not misleading, provided that this
agreement to indemnify shall not apply as to any Indemnified
Party if such statement or omission or such alleged
statement or omission was made in reliance upon and in
conformity with information furnished to the Company by or
on behalf of the Fund for use in the registration statement
or prospectus for the Contracts or in the contracts or sales
literature (or any amendment or supplement) or otherwise for
use in connection with the sale of the Contracts or Fund
shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
registration statement, prospectus or sales literature of
the Fund not supplied by the Company, or persons under its
control and other than statements or representations
authorized by the Fund or an Adviser)d or unlawful conduct
of the Company or persons under its control, with respect to
the sale or distribution of the Contracts or Fund shares; or
(iii)arise out of or as a result of any untrue statement or
alleged untrue statement of a material fact contained in a
registration statement, prospectus, or sales literature of
the Fund or any amendment thereof or supplement thereto or
the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the
statements therein not misleading if such a statement or
omission was made in reliance upon and in conformity with
information furnished to the Fund by or on behalf of the
Company; or
(iv) arise as a result of any failure by the Company to provide
the services and furnish the materials under the terms of
this Agreement; or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Company.
Each of paragraphs (i) through (v) above is limited by and in accordance with
the provisions of Sections 8.1(b) and 8.1(c) below.
8.1(b). The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this Agreement.
8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Company of any
such claim shall not relieve the Company from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified parties, the Company shall be entitled to participate,
at its own expense, in the defense of such action. The Company also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action. After notice from the Company to such party of the
Company's election to assume the defense thereof, the Indemnified Party shall
bear the fees and expenses of any additional counsel retained by it, and the
Company will not be liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
8.1(d). The Indemnified Parties will promptly notify the Company of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Fund shares or the Contracts or the operation of the
Fund.
8.2 Indemnification by Advisers
8.2(a). Each Adviser agrees, with respect to each Portfolio that it
manages, to indemnify and hold harmless the Company and each of its directors
and officers and each person, if any, who controls the Company within the
meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties"
and individually, "Indemnified Party," for purposes of this Section 8.2) against
any and all losses, claims, damages, liabilities (including amounts paid in
settlement with the written consent of the Adviser) or litigation (including
reasonable legal and other expenses) to which the Indemnified Parties may become
subject under any statute, regulation, at common law or otherwise, insofar as
such losses, claims, damages, liabilities or expenses (or actions in respect
thereof) or settlements are related to the sale or acquisition of shares of the
Portfolio that it manages or the Contracts and:
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
the registration statement or prospectus or sales literature
of the Fund (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission
or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the
statements therein not misleading, provided that this
agreement to indemnify shall not apply as to any Indemnified
Party if such statement or omission or such alleged
statement or omission was made in reliance upon and in
conformity with information furnished to the Fund by or on
behalf of the Company for use in the registration statement
or prospectus for the Fund or in sales literature (or any
amendment or supplement) or otherwise for use in connection
with the sale of the Contracts or Portfolio shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
registration statement, prospectus or sales literature for
the Contracts not supplied by the Fund or persons under its
control and other than statements or representations
authorized by the Company) or unlawful conduct of the Fund,
Adviser(s) or Underwriter or persons under their control,
with respect to the sale or distribution of the Contracts of
Portfolio shares; or
(iii)arise out of or as a result of any untrue statement or
alleged untrue statement of a material fact contained in a
registration statement, prospectus, or sales literature
covering the Contracts, or any amendment thereof or
supplement thereto, or the omission or alleged omission to
state therein a material fact required to be stated therein
or necessary to make the statement or statements therein not
misleading, if such statement or omission was made in
reliance upon information furnished to the Company by or on
behalf of the Fund; or
(iv) arise as a result of any failure by the Adviser to provide
the services and furnish the materials under the terms of
this Agreement; or
(v) arise out of or result form any material breach of any
representation and/or warranty made by the Adviser in this
Agreement or arise out of or result form any other material
breach of this Agreement by the Adviser.
Each of paragraphs (I) through (v) above is limited by and in accordance with
provisions of Sections 8.2(b) and 8.2(c) below.
8.2(b). An Adviser shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement.
8.2(c). An Adviser shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified party unless
such Indemnified Party shall have notified the Adviser in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Adviser of any
such claim shall not relieve the Adviser from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified parties, the Adviser will be entitled to participate, at
its own expense, in the defense thereof. The Adviser also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Adviser to such party of the Adviser's election to
assume the defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the Adviser will not be
liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
8.2(d). The Company agrees promptly to notify the Adviser of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Contracts or the
operation of each Account.
8.3. Indemnification by the Fund
8.3(a). The Fund agrees to indemnify and hold harmless the Company, and
each of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act (hereinafter
collectively, the "Indemnified Parties" and individually, "Indemnified Party,"
for purposes of this Section 8.3) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written consent of
the Fund) or litigation (including reasonable legal and other expenses) to which
the Indemnified Parties may become subject under any statute, regulation, at
common law or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) or settlements result from the gross
negligence, bad faith or willful misconduct of the Board or any member thereof,
are related to the operations of the Fund and:
(i) arise as a result of any failure by the Fund to provide the services
and furnish the materials under the terms of this Agreement; or
(ii) arise out of or result from any material breach of any representation
and/or warranty made by the Fund in this Agreement or arise out of or
result from any other material breach of this Agreement by the Fund.
Each of paragraphs (I) and (ii) above is limited by and in accordance with the
provisions of Section 8.3(b) and 8.3(c) below.
8.3(b). The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement.
8.3(c). The Fund shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified party shall have notified the Fund in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon such Indemnified Party (or after
such Indemnified party shall have received notice of such service on any
designated agent), but failure to notify the Fund of any such claim shall not
relieve the Fund from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action brought against the
Indemnified Parties, the Fund will be entitled to participate, at its own
expense, in the defense thereof. The Fund also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named in the action.
After notice from the Fund to such party of the Fund's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Fund will not be liable to such party
under this Agreement for any legal or other expenses subsequently incurred by
such party independently in connection with the defense thereof other than
reasonable costs of investigation.
8.3(d). The Company agrees promptly to notify the Fund of the
commencement of any litigation or proceedings against it or any of its
respective officers or directors in connection with this Agreement, the issuance
or sale of the Contracts, with respect to the operation of either Account, or
the sale or acquisition of shares of the Fund.
ARTICLE IX. APPLICABLE LAW
9.1 This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of the State of New York.
9,2 This Agreement shall be subject to the provisions of the 1933, 1934
and 1940 Acts, and the rules and regulations and rulings thereunder, including
such exemptions from those statutes, rules and regulations as the Securities and
Exchange Commission may grant (including, but not limited to, the Shared Funding
Exemptive Order) and the terms hereof shall be interpreted and construed in
accordance therewith.
ARTICLE X. TERMINATION
10.1. This Agreement shall continue in full force and effect until the first to
occur of:
(a) termination by any party for any reason by ninety(90) days advance
written notice delivered to the other party; or
(b) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio based upon the Company's
determination that shares of such Portfolio are not reasonably
available to meet the requirements of the Contracts; or
(c) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio in the event any of the
Portfolio's shares are not registered, issued or sold in accordance
with applicable state and/or federal law or such law precludes the use
of such shares as the underlying investment media of the Contracts
issued or to be issued by the Company; or
(d) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio in the event that such Portfolio
ceases to qualify as a Regulated Investment Company under Subchapter M
of the Code or under any successor or similar provision, or if the
Company reasonably believes that the Fund mail fail to so qualify; or
(e) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio in the event that such Portfolio
fails to meet the diversification requirements specified in Article VI
hereof; or
(f) termination by the Fund or an Adviser by written notice to the Company
if the Fund or the Adviser shall determine, in its sole judgment
exercised in good faith, that the Company and/or its affiliated
companies has suffered a material adverse change in its business,
operation, financial condition or prospects since the date of this
Agreement or is the subject of material adverse publicity; or
(g) termination by the Company by written notice to the Fund and the
Adviser, if the Company shall determine, in its sole judgment
exercised in good faith, that either Fund or the Adviser has suffered
a material adverse change in its business, operations, financial
condition or prospects since the date of this Agreement or is the
subject of material adverse publicity; or
(h) termination by the Fund or the Adviser by written notice to the
Company, if the Company gives the Fund and the Adviser the written
notice specified in Section 1.5 hereof and at the time such notice was
given there was no notice of termination outstanding under any other
provision of this Agreement; provided, however, any termination under
this Section 10.2(h) shall be effective forty five (45) days after the
notice specified in Section 1.5 was given; or
(i) termination by the Fund, an Adviser or the Company upon another
party's material breach of any provision of this Agreement.
10.2. Notwithstanding any termination of this Agreement, the Fund shall at the
option of the Company, continue to make available additional shares of the
Portfolios pursuant to the terms and conditions of this Agreement, for all
Contracts in effect on the effective date of termination of this Agreement
(hereinafter referred to as the "Existing Contracts"). Specifically, without
limitation, the owners of the Existing Contracts shall be permitted to direct
reallocation of investments in the Fund, redemption of investments in the Fund
and/or investment in the Fund upon the making of additional purchase payments
under the Existing Contracts. The parties agree that this Section 10.2 shall not
apply to any terminations under Article VII and the effect of such Article VII
terminations shall be governed by Article VII of this Agreement.
10.3 The Company shall not redeem Fund shares attributable to the
Contracts (as distinct from Fund shares attributable to the Company's assets
held in the Account) except (I) as necessary to implement Contract Owner
initiated or approved transactions, or (ii) as required by state and/or federal
laws or regulations or judicial or other legal precedent or general application
(hereinafter referred to as a "Legally Required Redemption") or (iii) as
permitted by an order of the Securities and Exchange Commission pursuant to
Section 26(b) of the 1940 Act. Upon request, the Company will promptly furnish
to the Fund the opinion of counsel for the Company (which counsel shall be
reasonably satisfactory to the Fund) to the effect that any redemption pursuant
to clause (ii) above is a Legally Required Redemption. Furthermore, except in
cases where permitted under the terms of the Contracts, the Company shall not
prevent Contract Owners from allocating payments to a Portfolio that was
otherwise available under the Contracts without first giving the Fund 90 days
prior written notice of its intention to do so.
ARTICLE XI. NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund:
Morgan Stanley Dean Witter Universal Funds, Inc.
c/o Morgan Stanley Dean Witter
Investment Management Inc.
1221 Avenue of the Americas
New York, New York 10020
Attention: Harold J. Schaaff, Jr., Esq.
If to the Advisers:
Morgan Stanley Dean Witter Investment Management, Inc.
1221 Avenue of the Americas
New York, New York 10020
Attention: Harold J. Schaaff, Jr., Esq.
and
Miller Anderson & Sherrerd, LLP
One Tower Bridge
West Conshohocken, Pennsylvania 19428
Attention: Lorraine Truten
If to the Company:
Valley Forge Life Insurance Company
333 S. Wabash, 43 South
Chicago, Illinois 60685
Attention: G. Stephen Wastek, Esq.
ARTICLE XII. MISCELLANEOUS
12.1. All persons dealing with the Fund must look solely to the property of
the Fund for the Fund for the enforcement of any claims against the Fund as
neither the Board, officers, agents or Shareholders assume any personal
liability for obligations entered into on behalf of the Fund.
12.2. Subject to the requirements of legal process and regulatory authority,
each party hereto shall treat as confidential the names and addresses of the
owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information until such time as it may come into
the public domain without the express written consent of the affected party.
12.3. The captions in this Agreement are included for convenience of reference
only And in no way define or delineate any of the provisions hereof or otherwise
affect their construction or effect.
12.4. The Agreement may be executed simultaneously in two or more counterparts,
each of which taken together shall constitute one and the same instrument.
12.5. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement shall
not be affected thereby.
12.6. Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the
Securities and Exchange Commission, the National Association of Securities
Dealers and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish State insurance regulators with any information or reports in
connection with services provided under this Agreement which such regulators may
request in order to ascertain whether the insurance operations of the Company
are being conducted in a manner consistent with applicable law or regulations.
12.7. The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any all rights, remedies and obligations at
law or in equity, which the parties hereto are entitled to under state and
federal laws.
12.8. This Agreement or any of the rights and obligations hereunder may not be
assigned by any party without the prior written consent of all parties hereto;
provided, however, that an Adviser may assign the Agreement or any rights or
obligations hereunder to any affiliate of or company under common control with
the Advisor, if such assignee is duly licensed and registered to perform the
obligations of the Adviser under this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date
specified above.
VALLEY FORGE LIFE INSURANCE COMPANY
By: S/David Stone
- -------------------
Name: David L. Stone
Title: Vice President
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
By: S/Stefanie Y. Chang
- -----------------------
Name: Stefanie Y. Chang
Title: Vice President
MARGAN STANLEY DEAN WITTER
INVESTMENT MANAGEMENT INC.
By: Marna C. Whittington
- --------------------------
Name: Marna C. Whittington
Title: Managing Director
MILLER ANDERSON & SHERRERD,LLP
By: Marna C. Whittington
- --------------------------
Name: Marna C. Whittington
Title: Authorized Signatory
SCHEDULE A
SEPARATE ACCOUNTS AND ASSOCIATED CONTRACTS
<TABLE>
<CAPTION>
<S> <C>
NAME OF SEPARATE ACCOUNT AND FORM NUMBER AND NAME OF
DATE ESTABLISHED BY BOARD OF DIRECTORS CONTRACT FUNDED BY SEPARATE ACCOUNT
Valley Forge Life Insurance Company - CNA Capital Select Variable Annuity
Variable Annuity Separate Account - CNA Capital Select Plus Variable
(Established October 15, 1995) Annuity
Valley Forge Life Insurance Company - CNA Capital Select Variable Universal
Variable Life Separate Account Life
(Established October 15,1995)
</TABLE>
A-1
SCHEDULE B
PORTFOLIOS OF MORGAN STANLEY DEAN WITTER
UNIVERSAL FUNDS, INC. AVAILABLE UNDER THIS AGREEMENT
Emerging Markets Equity Portfolio
International Magnum Portfolio
B-1
SCHEDULE C
PROXY VOTING PROCEDURES
The following is a list of procedures and corresponding responsibilities for the
handling of proxies and voting instructions relating to the Fund. The defined
terms herein shall have the meanings assigned in the Participation Agreement
except that the term "Company" shall also include the department or third party
assigned by the Company to perform the steps delineated below.
o The proxy proposals are given to the Company by the Fund as early as
possible before the date set by the Fund for the shareholder meeting to
enable the Company to consider and prepare for the solicitation of
voting instructions from owners of the Contracts and to facilitate the
establishment of tabulation procedures. At this time the Fund will
inform the Company of the Record, Mailing and Meeting dates. This will
be done verbally approximately two months before meeting.
o Promptly after the Record Date, the Company will perform a "tape run",
or other activity, which will generate the names, addresses and number
of units which are attributed to each Contract owner/policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.
Note: The number of proxy statements is determined by the activities
described in this Step #2. The Company will use its best efforts to
call in the number of Customers to the Fund, as soon as possible, but
no later than two weeks after the Record Date.
o The Fund's Annual Report must be sent to each Customer by the Company
either before or together with the Customers' receipt of voting,
instruction solicitation material. The Fund will provide the last
Annual Report to the Company pursuant to the terms of Section 3.3 of
the Agreement to which this Schedule relates.
o The text and format for the Voting Instruction Cards ("Cards" or
"Card") is provided to the Company by the Fund. The Company, at its
expense, shall produce and personalize the Voting Instruction Cards.
The Fund or its affiliate must approve the Card before it is printed.
Allow approximately 2-4 business days for printing information on the
Cards. Information commonly found on the Cards includes:
- - name (legal name as found on account registration)
- - address
- - fund or account number
C-1
- - coding to state number of units
- - individual Card number for use in tracking and verification of votes
(already on Cards as printed by the Fund).
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
o During this time, the Fund will develop, produce and pay for the Notice of
Proxy and the Proxy Statement (one document). Printed and folded notices
and statements will be sent to Company for insertion into envelopes
(envelopes and return envelopes are provided and paid for by the Company).
Contents of envelope sent to Customers by the Company will include:
- - Voting Instruction Card(s)
- - One proxy notice and statement (one document)
- - return envelope (postage pre-paid by Company) addressed to the Company or
its tabulation agent
- - "urge buckslip" - optional, but recommended. (This is a small, single sheet
of paper that requests Customers to vote as quickly as possible and that
their vote is important. One copy will be supplied by the Fund.)
- - cover letter - optional, supplied by Company and reviewed and approved in
advance by the Fund.
o The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews and
approves the contents of the mailing package to ensure correctness and
completeness. Copy of this approval sent to the Fund.
o Package mailed by the Company.
* The Fund must allow at least a 15-day solicitation time to the Company
as the shareowner. (A 5-week period is recommended.) Solicitation time
is calculated as calendar days from (but not including,) the meeting,
counting backwards.
o Collection and tabulation of Cards begins. Tabulation usually takes place
in another department or another vendor depending on process used. An often
used procedure is to sort Cards on arrival by proposal into vote categories
of all yes, no, or mixed replies, and to begin data entry.
Note: Postmarks are not generally needed. A need for postmark information
would be due to an insurance company's internal procedure and has not been
required by the Fund
C-2
in the past.
o Signatures on Card checked against legal name on account registration which
was printed on the Card.
Note: For Example, if the account registration is under "John A. Smith,
Trustee," then that is the exact legal name to be printed on the Card and
is the signature needed on the Card.
o If Cards are mutilated, or for any reason are illegible or are not signed
properly, they are sent back to Customer with an explanatory letter and a
new Card and return envelope. The mutilated or illegible Card is
disregarded and considered to be not received for purposes of vote
tabulation. Any Cards that have been "kicked out" (e.g. mutilated,
illegible) of the procedure are "hand verified," i.e., examined as to why
they did not complete the system. Any questions on those Cards are usually
remedied individually.
o There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort the
Cards as they first arrive into categories depending upon their vote; an
estimate of how the vote is progressing may then be calculated. If the
initial estimates and the actual vote do not coincide, then an internal
audit of that vote should occur. This may entail a recount.
o The actual tabulation of votes is done in units which is then converted to
shares. (It is very important that the Fund receives the tabulations stated
in terms of a percentage and the number of shares.) The Fund must review
and approve tabulation format.
o Final tabulation in shares is verbally given by the Company to the Fund on
the morning of the meeting not later that 10:00 a.m. Eastern time. The Fund
may request an earlier deadline if reasonable and if required to calculate
the vote in time for the meeting.
o A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
The Fund will provide a standard form for each Certification.
o The Company will be required to box and archive the Cards received from the
Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, the Fund will be
permitted reasonable access to such Cards.
o All approvals and "signing-off" may be done orally, but must always be
followed up in writing.
C-3
CONSENT OF COUNSEL
We consent to the reference to our Firm under the caption "Legal Opinions"
in the Statement of Additional Information which forms a part of the
Registration Statement.
/S/ BLAZZARD, GRODD & HASENAUER, P.C.
Blazzard, Grodd & Hasenauer, P.C.
February 11, 2000
Exhibit 10
INDEPENDENT AUDITORS' CONSENT
We consent to the use in the Post-Effective Amendment No. 1 to Registration
Statement No. 333-8551 and in the Post-Effective Amendment No. 9 to
Registration Statement No. 811-7547, both filed on Form N-4 of Valley Forge
Life Insurance Company Variable Annuity Separate Account of our report on the
financial statements of Valley Forge Life Insurance Company, dated
February 10, 1999 and our report on the financial statements of the Valley
Forge Life Insurance Company Variable Annuity Separate Account, dated
February 23, 1999, appearing in the Registration Statement and to the
reference to us under the heading "Independent Auditors" in the Registration
Statement.
Deloitte & Touche LLP
Chicago, Illinois
February 11, 2000
