<PAGE> 1
FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY CONTRACT
ISSUED BY
VALLEY FORGE LIFE INSURANCE COMPANY AND
VALLEY FORGE LIFE INSURANCE COMPANY VARIABLE ANNUITY
SEPARATE ACCOUNT
This prospectus describes a flexible premium deferred variable annuity
contract (the "Contract") that Valley Forge Life Insurance Company ("VFL")
issues. The Contract may be sold to or used in connection with retirement plans,
including plans that qualify for special federal income tax treatment under the
Internal Revenue Code.
You (the Owner) may allocate Net Purchase Payments and Contract values to
one or more of the Subaccounts of Valley Forge Life Insurance Company Variable
Annuity Separate Account (the "Variable Account"), or to the Interest Adjustment
Account for one or more guarantee periods, or to both. Prior to May 1, 2000, the
Interest Adjustment Account was known as the Guaranteed Interest Option. The 35
Subaccounts of the Variable Account invest their assets in a corresponding
investment portfolio (each, a "Fund") of Federated Insurance Series, Variable
Insurance Products Fund, Variable Insurance Products Fund II, The Alger American
Fund, MFS Variable Insurance Trust, First Eagle SoGen Variable Funds, Inc.
(formerly, SoGen Variable Funds, Inc.), Van Eck Worldwide Insurance Trust, Janus
Aspen Series, Alliance Variable Products Series Fund, American Century Variable
Portfolios, Inc., Franklin Templeton Variable Insurance Products Trust, Lazard
Retirement Series and The Universal Institutional Funds, Inc. (formerly, Morgan
Stanley Dean Witter Universal Funds, Inc.) (you may review a complete list of
the Funds on the next page).
The Contract Value will vary daily as a function of the Subaccounts'
investment performance and any interest VFL credits under the Interest
Adjustment Account. VFL does not guarantee any minimum Variable Contract value
for amounts you allocate to the Variable Account.
This prospectus sets forth information regarding the Contract, and the
Variable Account that you should know before purchasing a Contract. You should
read the prospectuses for the Funds, which provide information regarding each
Fund's investment objectives and policies, in conjunction with this prospectus.
A Statement of Additional Information having the same date as this prospectus
and providing additional information about the Contract and the Variable Account
has been filed with the Securities and Exchange Commission (the "SEC"). It is
incorporated herein by reference. To obtain a free copy of this document, call
or write the Service Center.
The SEC maintains a website that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC, including VFL. The website address is http://www.sec.gov.
Please read this prospectus carefully and keep it for future reference. The
current prospectuses for the Funds must accompany this prospectus.
An investment in a Contract is not:
- - a bank deposit or obligation
- - guaranteed or endorsed by any bank
- - insured by the Federal Deposit Insurance Corporation or any other government
agency
An investment in the Contract involves certain risks. You may lose your
purchase payments (principal).
THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
May 1, 2000
<PAGE> 2
You may choose to invest in the following funds:
- - Federated High Income Bond Fund II
- - Federated Prime Money Fund II
- - Federated Utility Fund II
- - Fidelity VIP II Asset Manager Portfolio
- - Fidelity VIP II Contrafund Portfolio
- - Fidelity VIP II Index 500 Portfolio
- - Fidelity VIP Equity-Income Portfolio
- - Alger American Growth Portfolio
- - Alger American MidCap Growth Portfolio
- - Alger American Small Capitalization Portfolio
- - Alger American Leveraged AllCap Portfolio
- - MFS Emerging Growth Series
- - MFS Growth With Income Series
- - MFS Research Series
- - MFS Total Return Series
- - MFS Limited Maturity Series (shares are not available)
- - First Eagle SoGen Overseas Variable Fund (formerly, SoGen Overseas Variable
Fund)
- - Van Eck Worldwide Emerging Markets Fund
- - Van Eck Worldwide Hard Assets Funds
- - Janus Aspen Series Capital Appreciation Portfolio
- - Janus Aspen Series Growth Portfolio
- - Janus Aspen Series Balanced Portfolio
- - Janus Aspen Series Flexible Income Portfolio
- - Janus Aspen Series International Growth Portfolio
- - Janus Aspen Series Worldwide Growth Portfolio
- - Alliance Premier Growth Portfolio
- - Alliance Growth and Income Portfolio
- - American Century VP Income & Growth Fund
- - American Century VP Value Fund
- - Templeton Asset Strategy Fund (formerly, Templeton Asset Allocation Fund)
- - Templeton Developing Markets Securities Fund (formerly, Templeton Developing
Markets Fund)
- - Lazard Retirement Equity Portfolio
- - Lazard Retirement Small Cap Portfolio
- - Morgan Stanley International Magnum Portfolio
- - Morgan Stanley Emerging Markets Equity Portfolio
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C>
FEE TABLE................................................... 1
SUMMARY..................................................... 9
General Description of the Contract....................... 9
Purchasing a Contract..................................... 9
Canceling the Contract.................................... 10
Charges and Fees.......................................... 10
Transfers................................................. 11
Withdrawals............................................... 12
Surrenders................................................ 12
VFL, THE VARIABLE ACCOUNT AND THE FUNDS..................... 13
VFL....................................................... 13
The Variable Account...................................... 13
The Funds................................................. 14
DESCRIPTION OF THE CONTRACT................................. 20
Purchasing a Contract..................................... 20
Canceling the Contract.................................... 20
Crediting and Allocating Purchase Payments................ 21
Variable Contract Value................................... 21
Transfers................................................. 23
Withdrawals............................................... 25
Surrenders................................................ 26
Death of Owner or Annuitant............................... 26
Payments by VFL........................................... 28
Telephone Transaction Privileges.......................... 28
Supplemental Riders....................................... 29
CONTRACT CHARGES AND FEES................................... 29
Surrender Charge (Contingent Deferred Sales Charge)....... 29
Annual Administration Fee................................. 31
Transfer Processing Fee................................... 31
Taxes on Purchase Payments................................ 31
Mortality and Expense Risk Charge......................... 31
Administration Charge..................................... 32
Fund Expenses............................................. 32
Possible Charge for VFL's Taxes........................... 32
SELECTING AN ANNUITY PAYMENT OPTION......................... 32
Annuity Date.............................................. 32
Annuity Payment Dates..................................... 33
Election and Changes of Annuity Payment Options........... 33
Annuity Payments.......................................... 34
Annuity Payment Options................................... 35
ADDITIONAL CONTRACT INFORMATION............................. 36
Ownership................................................. 36
Changing the Owner or Beneficiary......................... 37
Misstatement of Age or Sex................................ 37
Change of Contract Terms.................................. 37
Reports to Owners......................................... 38
Miscellaneous............................................. 38
YIELDS AND TOTAL RETURNS.................................... 38
</TABLE>
i
<PAGE> 4
<TABLE>
<S> <C>
FEDERAL TAX STATUS.......................................... 41
Introduction.............................................. 41
Tax Status of the Contracts............................... 41
The Treatment of Annuities................................ 42
Taxation of Non-Qualified Contracts....................... 42
Taxation of Qualified Contracts........................... 44
Withholding............................................... 45
Possible Changes in Taxation.............................. 45
Other Tax Consequences.................................... 46
OTHER INFORMATION........................................... 46
Distribution of the Contracts............................. 46
Voting Privileges......................................... 46
Legal Proceedings......................................... 47
Company Holidays.......................................... 47
GLOSSARY.................................................... 48
APPENDIX A.................................................. A-1
APPENDIX B.................................................. B-1
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE
ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS.
ii
<PAGE> 5
FEE TABLE
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CONTRACT OWNER TRANSACTION EXPENSES
Sales load imposed on purchase payments..................... 0%
Maximum Surrender Charge (as a percentage of purchase
payments surrendered or withdrawn)........................ 7%
Transfer Processing Fee (each, after first 12 in a Contract
Year)..................................................... $25
Annual Administration Fee (waived if Contract Value exceeds
$50,000).................................................. $30
VARIABLE ACCOUNT ANNUAL EXPENSES (AS A PERCENTAGE OF NET
ASSETS)
Mortality and Expense Risk Charge........................... 1.25%
Administration Charge....................................... 0.15%
- -------------------------------------------------------------------
Total Variable Account Annual Expenses...................... 1.40%
===================================================================
</TABLE>
1
<PAGE> 6
ANNUAL FUND EXPENSES
(AS A PERCENTAGE OF FUND AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
OTHER TOTAL ANNUAL
EXPENSES (AFTER EXPENSES (AFTER
WAIVERS AND/OR WAIVERS AND/OR
REIMBURSEMENTS REIMBURSEMENTS
MANAGEMENT WITH RESPECT WITH RESPECT
(ADVISORY 12B-1 TO CERTAIN TO CERTAIN
FEES) FEES FUNDS) FUNDS)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FEDERATED INSURANCE SERIES
(See Note 1)
Federated High Income Bond
Fund II.................... 0.60% 0.19% 0.79%
Federated Prime Money Fund
II......................... 0.50% 0.23% 0.73%
Federated Utility Fund II..... 0.75% 0.19% 0.94%
THE ALGER AMERICAN FUND
Alger American Growth
Portfolio.................. 0.75% 0.04% 0.79%
Alger American Mid-Cap Growth
Portfolio.................. 0.80% 0.05% 0.85%
Alger American Small
Capitalization Portfolio... 0.85% 0.05% 0.90%
Alger American Leveraged
AllCap Portfolio (See Note
2)......................... 0.85% 0.08% 0.93%
FIRST EAGLE SOGEN VARIABLE
FUNDS, INC. (See Note 3)
First Eagle SoGen Overseas
Variable Fund.............. 0.75% 0.75% 1.50%
VAN ECK WORLDWIDE INSURANCE
TRUST
Van Eck Worldwide Emerging
Markets Fund (See Note
4)......................... 1.00% 0.34% 1.34%
Van Eck Worldwide Hard Assets
Fund....................... 1.00% 0.26% 1.26%
VARIABLE INSURANCE PRODUCTS FUND
(VIP) AND VARIABLE INSURANCE
PRODUCTS FUND II (VIP II),
INITIAL CLASS (See Note 5)
Fidelity VIP II Asset Manager
Portfolio.................. 0.53% 0.09% 0.62%
Fidelity VIP II Contrafund
Portfolio.................. 0.58% 0.07% 0.65%
Fidelity VIP Equity-Income
Portfolio.................. 0.48% 0.08% 0.56%
Fidelity VIP II Index 500
Portfolio.................. 0.24% 0.04% 0.28%
MFS VARIABLE INSURANCE TRUST
(See Note 6)
MFS Emerging Growth Series.... 0.75% 0.09% 0.84%
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% 0.15% 0.90%
MFS Limited Maturity Series
(See Note 7)............... 0.55% 0.45% 1.00%
</TABLE>
2
<PAGE> 7
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
OTHER TOTAL ANNUAL
EXPENSES (AFTER EXPENSES (AFTER
WAIVERS AND/OR WAIVERS AND/OR
REIMBURSEMENTS REIMBURSEMENTS
MANAGEMENT WITH RESPECT WITH RESPECT
(ADVISORY 12B-1 TO CERTAIN TO CERTAIN
FEES) FEES FUNDS) FUNDS)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
JANUS ASPEN SERIES,
INSTITUTIONAL SHARES (SEE NOTE
8)
Janus Aspen Series Capital
Appreciation Portfolio..... 0.65% 0.04% 0.69%
Janus Aspen Series Growth
Portfolio.................. 0.65% 0.02% 0.67%
Janus Aspen Series Balanced
Portfolio.................. 0.65% 0.02% 0.67%
Janus Aspen Series Flexible
Income Portfolio........... 0.65% 0.07% 0.72%
Janus Aspen Series
International Growth
Portfolio.................. 0.65% 0.11% 0.76%
Janus Aspen Series Worldwide
Growth Portfolio........... 0.65% 0.05% 0.70%
ALLIANCE VARIABLE PRODUCTS
SERIES FUND, CLASS B SHARES
Alliance Premier Growth
Portfolio.................. 1.00% 0.25% 0.04% 1.29%
Alliance Growth and Income
Portfolio.................. 0.63% 0.25% 0.09% 0.97%
AMERICAN CENTURY VARIABLE
PORTFOLIOS, INC. (SEE NOTE 9)
American Century VP Income &
Growth Fund................ 0.70% -- 0.00% 0.70%
American Century VP Value
Fund....................... 1.00% -- 0.00% 1.00%
FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST,
CLASS 2 SHARES (SEE NOTE 10)
Templeton Developing Markets
Securities Fund (see Note
11)........................ 1.25% 0.25% 0.31% 1.81%
Templeton Asset Strategy Fund
(see Note 11).............. 0.60% 0.25% 0.18% 1.03%
LAZARD RETIREMENT SERIES (SEE
NOTE 12)
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%
THE UNIVERSAL INSTITUTIONAL
FUNDS, INC. (SEE NOTE 13)
Morgan Stanley International
Magnum Portfolio........... 0.29% -- 0.87% 1.16%
Morgan Stanley Emerging
Markets Equity Portfolio... 0.42% -- 1.37% 1.79%
- ------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 8
[1] The Fund did not pay or accrue the shareholder services fee during the
fiscal year ended December 31, 1999. The Fund has no present intention of
paying or Accruing the shareholder services fee during the fiscal year
ending December 31, 2000. The maximum shareholder services fee is 0.25%.
[2] Included in other expenses of the Alger American Leveraged AllCap Portfolio
is .01% of interest expense.
[3] The annualized ratios of operating expenses to average net assets for the
period ended December 31, 1999 would have been 3.32% without the effect of
the investment advisory fee waiver and expense reimbursement provided by
the advisor.
[4] For the year ended December 31, 1999, Van Eck Associates Corporation
(Adviser) 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 for the period January
1, 1999 to May 12, 1999. For the period May 13, 1999 to December 31, 1999,
the Adviser agreed to waive its management fees and assume all expenses of
the Fund except interest, taxes, brokerage commissions and extraordinary
expenses exceeding 1.30% of average daily net assets. Without such waivers
and assumption of expenses, for the year ended December 31, 1999, other
expenses were .54% and total annual expenses were 1.54%
[5] A portion of the brokerage commissions that certain funds pay was used to
reduce fund expenses. In addition, through arrangements with certain
funds', or FMR on behalf of certain funds', custodian credits realized as a
result of uninvested cash balances were used to reduce a portion of each
applicable fund's expenses. Without these reductions, the total operating
expenses presented in the table would have been .57% for Equity-Income
Portfolio, .63% for Asset Manager Portfolio, and .71% for Contrafund
Portfolio. FMR agreed to reimburse a portion of the Index 500 Portfolio's
expenses during the period. Without this reimbursement, the Portfolio's
management fee, other expenses and total expenses would have been .24%,
.10% and .34%, respectively.
[6] 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 above
under "Other Expenses" and therefore are higher than the actual expenses of
the series.
[7] MFS has contractually agreed, subject to reimbursement, to bear expenses
for the Series such the series other expenses do not exceed 0.45% (after
taking into account the expense offset arrangement described above under
footnote 6) of the average daily net assets of the series during the
current fiscal year. Absent such reimbursement, for the year ended December
31, 1999, other expenses were 1.93% and total annual expenses were 2.48%.
[8] Expenses are based upon expenses for the fiscal year ended December 31,
1999, restated to reflect a reduction in the management fee for the Growth,
Capital Appreciation, International Growth, Worldwide Growth, and Balanced
Portfolios. All expenses are shown without the effect of expense offset
arrangements.
4
<PAGE> 9
[9] The funds of American Century Variable Portfolios, Inc. have a stepped fee
schedule. As a result, the funds' management fees generally decrease as the
funds' assets increase.
[10] The fund's class 2 distribution plan or "rule 12b-1 plan" is described in
the fund's prospectus. While the maximum amount payable under the fund's
class 2 rule 12b-1 plan is 0.35% per year of the fund's average daily net
assets, the Board of Trustees of Franklin Templeton Variable Insurance
Products Trust has set the current rate at 0.25% per year.
[11] On 2/8/00, shareholders approved a merger and reorganization that combined
the fund with a similar fund of the Franklin Templeton Variable Insurance
Products Trust ("VIP"). VIP shareholders approved new management fees,
which apply to the combined fund effective 5/1/00. The table shows restated
total expenses based on the new fees and the assets of the fund as of
12/31/99, and not the assets of the combined fund. However, if the table
reflected both the new fees and the combined assets, the fund's expenses
after 5/1/00 would be estimated as: Templeton Developing Markets Securities
Fund -- Management Fees 1.25%, 12b-1 fees 0.25%, Other Expenses 0.29%, and
Total Annual Expenses 1.79%; Templeton Asset Strategy Fund -- Management
Fees 0.60%, 12b-1 fees 0.25%, Other Expenses 0.14% and Total Annual
Expenses 0.99%. The fund's class 2 distribution plan or "rule 12b-1 plan"
is described in the fund's prospectus.
[12] Effective May 1, 1999, Lazard Asset Management, the Fund's investment
adviser, has agreed to waive its fee and/or reimburse the Portfolios
through December 31, 2000 to the extent total annual portfolio expenses
exceed 1.25% of the Portfolio's average daily net assets. Absent such an
agreement, the other expenses and total annual portfolio expenses for the
year ended December 31, 1999 would have been 4.63% and 5.63% for the Lazard
Retirement Equity Portfolio and 6.31% and 7.31% for the Lazard Retirement
Small Cap Portfolio.
[13] With respect to the Universal Institutional Funds, Inc. portfolios, the
investment adviser has voluntarily waived a portion or all of the
management fees and reimbursed other expenses of the portfolios to the
extent total 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" and "Other
Expenses" would have been as follows: 1.25% and 1.37%, respectively for the
Emerging Markets Equity Portfolio; and 0.80% and 0.87%, respectively for
the International Magnum Portfolio.
Taxes on purchase payments, generally ranging from 0% to 3.5% of purchase
payments, may be applicable, depending upon the laws of various jurisdictions.
The above tables are intended to assist the Owner in understanding the
costs and expenses that he or she will bear directly or indirectly. The table
reflects the anticipated expenses of the Variable Account and reflect the actual
expenses for each Fund for the year ended December 31, 1999. For a more complete
description of the various costs and expenses, see "CONTRACT CHARGES AND FEES"
and the prospectuses for each Fund.
5
<PAGE> 10
EXAMPLES
The expenses assume that the current fee waivers and/or expense
reimbursement arrangements for the Funds continue for the periods shown in the
examples below.
If you surrender your Contract at the end of the applicable time period,
you would pay the following expenses on a $1,000 purchase payment, assuming a 5%
annual rate of return on assets:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federated High Income Bond Fund II
Subaccount............................... $ 96 $140 $176 $290
Federated Prime Money Fund II Subaccount... $ 95 $138 $173 $284
Federated Utility Fund II Subaccount....... $ 98 $145 $184 $306
Fidelity VIP Equity-Income Subaccount...... $ 94 $133 $164 $265
Fidelity VIP II Asset Manager Subaccount... $ 94 $134 $167 $272
Fidelity VIP II Contrafund Subaccount...... $ 95 $135 $169 $275
Fidelity VIP II Index 500 Subaccount....... $ 91 $124 $149 $234
Alger American Growth Subaccount........... $ 96 $140 $176 $290
Alger American MidCap Growth Subaccount.... $ 97 $142 $180 $296
Alger American Small Capitalization
Subaccount............................... $ 97 $143 $182 $302
Alger American Leveraged AllCap
Subaccount............................... $ 97 $144 $184 $305
MFS Emerging Growth Subaccount............. $ 97 $141 $179 $295
MFS Growth With Income Subaccount.......... $ 97 $143 $181 $300
MFS Research Subaccount.................... $ 97 $142 $180 $297
MFS Total Return Subaccount................ $ 97 $143 $182 $302
MFS Limited Maturity Subaccount............ $ 98 $146 $187 $312
First Eagle SoGen Overseas Variable
Subaccount............................... $103 $162 $213 $363
Van Eck Worldwide Emerging Markets
Subaccount............................... $102 $157 $205 $347
Van Eck Worldwide Hard Assets Subaccount... $101 $155 $201 $339
Janus Aspen Series Capital Appreciation
Subaccount............................... $ 95 $137 $171 $279
Janus Aspen Series Growth Subaccount....... $ 95 $136 $170 $277
Janus Aspen Series Balanced Subaccount..... $ 95 $136 $170 $277
Janus Aspen Series Flexible Income
Subaccount............................... $ 95 $138 $173 $283
Janus Aspen Series International Growth
Subaccount............................... $ 96 $139 $175 $287
Janus Aspen Series Worldwide Growth
Subaccount............................... $ 95 $137 $172 $280
Alliance Premier Growth Subaccount......... $101 $156 $203 $342
Alliance Growth and Income Subaccount...... $ 98 $146 $186 $309
American Century VP Income & Growth
Subaccount............................... $ 95 $137 $172 $280
American Century VP Value Subaccount....... $ 98 $146 $187 $312
Templeton Developing Markets Securities
Subaccount............................... $107 $172 $229 $393
Templeton Asset Strategy Subaccount........ $ 99 $147 $189 $315
Lazard Retirement Equity Subaccount........ $101 $154 $200 $338
Lazard Retirement Small Cap Subaccount..... $101 $154 $200 $338
Morgan Stanley International Magnum
Subaccount............................... $100 $152 $196 $329
Morgan Stanley Emerging Markets Equity
Subaccount............................... $106 $171 $228 $391
- --------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE> 11
If you do not surrender your Contract or if you annuitize, you would pay
the following expenses on a $1,000 purchase payment, assuming a 5% annual rate
of return on assets:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federated High Income Bond Fund II
Subaccount............................... $ 26 $ 80 $136 $290
Federated Prime Money Fund II Subaccount... $ 25 $ 78 $133 $284
Federated Utility Fund II Subaccount....... $ 28 $ 85 $144 $306
Fidelity VIP Equity-Income Subaccount...... $ 24 $ 73 $124 $265
Fidelity VIP II Asset Manager Subaccount... $ 24 $ 74 $127 $272
Fidelity VIP II Contrafund Subaccount...... $ 25 $ 75 $129 $275
Fidelity VIP II Index 500 Subaccount....... $ 21 $ 64 $109 $234
Alger American Growth Subaccount........... $ 26 $ 80 $136 $290
Alger American MidCap Growth Subaccount.... $ 27 $ 82 $140 $296
Alger American Small Capitalization
Subaccount............................... $ 27 $ 83 $142 $302
Alger American Leveraged AllCap
Subaccount............................... $ 27 $ 84 $144 $305
MFS Emerging Growth Subaccount............. $ 27 $ 81 $139 $295
MFS Growth With Income Subaccount.......... $ 27 $ 83 $141 $300
MFS Research Subaccount.................... $ 27 $ 82 $140 $297
MFS Total Return Subaccount................ $ 27 $ 83 $142 $302
MFS Limited Maturity Subaccount............ $ 28 $ 86 $147 $312
First Eagle SoGen Overseas Variable
Subaccount............................... $ 33 $102 $173 $363
Van Eck Worldwide Emerging Markets
Subaccount............................... $ 32 $ 97 $165 $347
Van Eck Worldwide Hard Assets Subaccount... $ 31 $ 95 $171 $339
Janus Aspen Series Capital Appreciation
Subaccount............................... $ 25 $ 77 $131 $279
Janus Aspen Series Growth Subaccount....... $ 25 $ 76 $130 $277
Janus Aspen Series Balanced Subaccount..... $ 25 $ 76 $130 $277
Janus Aspen Series Flexible Income
Subaccount . $ 25 $ 78 $133 $283
Janus Aspen Series International Growth
Subaccount............................... $ 26 $ 79 $135 $287
Janus Aspen Series Worldwide Growth
Subaccount............................... $ 25 $ 77 $132 $280
Alliance Premier Growth Subaccount......... $ 31 $ 96 $163 $342
Alliance Growth and Income Subaccount...... $ 28 $ 86 $146 $309
American Century VP Income & Growth
Subaccount............................... $ 25 $ 77 $132 $280
American Century VP Value Subaccount....... $ 28 $ 86 $147 $312
Templeton Developing Markets Securities
Subaccount............................... $ 37 $112 $189 $393
Templeton Asset Strategy Subaccount........ $ 29 $ 87 $149 $315
Lazard Retirement Equity Subaccount........ $ 31 $ 94 $160 $338
Lazard Retirement Small Cap Subaccount..... $ 31 $ 94 $160 $338
Morgan Stanley International Magnum
Subaccount............................... $ 30 $ 92 $156 $329
Morgan Stanley Emerging Markets Equity
Subaccount............................... $ 36 $111 $188 $391
- --------------------------------------------------------------------------------------------
</TABLE>
The examples provided above assume that no transfer processing fees or
purchase payment taxes have been assessed. The examples also assume that the
annual administration fee is $30 and that the Contract Value per Contract is
$10,000, which
7
<PAGE> 12
translates the annual administration fee into an assumed .30% charge (for
purposes of the examples) based on a $1,000 investment. Under some fixed annuity
options, the surrender charges would not apply.
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THE 5% ANNUAL
RETURN ASSUMED IS HYPOTHETICAL AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE ANNUAL RETURNS, WHICH MAY BE GREATER OR LESS THAN THE ASSUMED
RATE.
8
<PAGE> 13
SUMMARY
GENERAL DESCRIPTION OF THE CONTRACT
The summary section of this prospectus contains a brief description of the
most important parts of the contract. You may find further detail in other
sections of this prospectus, the related Statement of Additional Information,
the contract, and the prospectuses of the underlying mutual funds. If you need
more information, please contact our Variable Support Center at (800) 262-1755.
In many jurisdictions, we issue the contract directly to individuals. In
some jurisdictions, however, we may issue only group contracts. We issue group
contracts to or on behalf of groups. For example, we may issue a group contract
to an employer on behalf of its employees. Individuals who are part of groups
for which a contract is issued receive a certificate containing the same
provisions as the group contract. Throughout this prospectus, the term
"contract" refers to individual contracts, group contracts and certificates for
group contracts.
Under this contract you may:
- allocate all or a portion of your net purchase payments among
several subaccounts of our Valley Forge Life Insurance Company
Variable Annuity Separate Account;
- transfer amounts you have already invested under the contract
among the subaccounts;
- allocate all (or a portion of) your net purchase payments to
our Interest Adjustment Account; and
- transfer amounts you have already invested under the contract
to our Interest Adjustment Account.
The Interest Adjustment Account offers various interest rates and time
periods ("guarantee periods") from which to select. Prior to May 1, 2000, the
Interest Adjustment Account was known as the Guaranteed Interest Option. VFL has
segregated its assets in the Interest Adjustment Account from its general
account. The interest rates offered by the Interest Adjustment Account will
depend on the time period selected. In certain circumstances, if you withdraw
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.
However, you will never get back less than the purchase payment, plus 3% (less
any surrender charge).
We do not promise that the amount that you invest under this contract will
increase in value. You bear the investment risk for all amounts invested under
this contract, except for the amounts that you allocate to the Interest
Adjustment Account.
You have a choice of annuity payment options. The beneficiary that you
select also may apply any death benefit to certain annuity payment options. You
may change your annuity date, within certain limits.
PURCHASING A CONTRACT
Your initial purchase payment for a contract must be at least $2,000. You
may make additional purchase payments of at least $100. We may refuse to accept
additional purchase payments at any time for any reason.
9
<PAGE> 14
In your application to purchase a contract, you specify the accounts to
which you want to allocate your initial purchase payment. Your initial purchase
payment may be allocated in any combination among the subaccounts, and the
guarantee periods within the Interest Adjustment Account.
Once you have selected the subaccounts or guarantee periods within the
Interest Adjustment Account to which you want to allocate your initial purchase
payment, you must then decide the percentage of the purchase payment to be
allocated to each selected account. All percentage allocations must be in whole
numbers. You must allocate at least:
- 1% of a purchase payment to any subaccount or to any guarantee
period within the Interest Adjustment Account; and
- $500.00 to any selected guarantee period within the Interest
Adjustment Account.
We will allocate any subsequent purchase payments among the subaccounts and
the guarantee periods within the Interest Adjustment Account in accordance with
the percentages that you provided to us in your application. If you want to
change these percentage allocations, you must let us know, in writing, of such
changes.
You may also change these percentage allocations by telephone, provided you
have authorized us to accept such changes in your application, or in another
writing.
CANCELING THE CONTRACT
You may cancel this contract by returning it to us within 10 days after you
first receive it or longer where required by law. Once you cancel the contract,
we will give you a refund. Your refund will be equal to the sum of the
investment values in the Subaccounts and Interest Adjustment Account less
certain fees or charges. We will not deduct any mortality risk charge, expense
risk charge, or administration charge from your refund.
Please note, you may live in a state that (1) requires a cancellation
period longer than 10 days; and/or (2) requires that we return to you the amount
of purchase payments that you made to us (rather than the investment values in
the subaccounts and Interest Adjustment Account). If you do live in such a
state, we will comply with such state's laws regarding cancellations and
refunds. For this purpose, we will allocate your initial purchase payment to a
money market account, then at the expiration of the cancellation period, we will
add (or subtract) the income earned (or lost) on this investment to your initial
purchase payment. We will then allocate the initial purchase payment as you
direct in your application.
CHARGES AND FEES
Once you purchase a contract, your contract value may be decreased by the
following charges and fees:
(1) SURRENDER CHARGE. We will deduct a surrender charge for certain
withdrawals if:
- you withdraw or surrender an amount equal to your purchase
payment (as described in the next two paragraphs) before the
passage of five full
10
<PAGE> 15
calendar years from the date that we received your purchase
payment; or
- you decide to receive annuity payments during the first full
five calendar years from the date we received your purchase
payment.
The surrender charge is 7% of the purchase payment if you surrender or
withdraw the purchase payment within two full years after we received it. The
surrender charge reduces by 1% each year thereafter for the next three years and
is 0% in year six and beyond following receipt of the purchase payment.
In determining whether you have withdrawn your purchase payment, we assume
that when you withdraw amounts under your contract, that:
- you first withdraw the portion of your contract value that is
greater than the sum of your purchase payments; and
- you withdraw earlier purchases payments before later purchase
payments.
We will not deduct a surrender charge for withdrawals of any amount of your
contract value that exceeds the sum of your purchase payments. We will not
deduct a surrender charge under certain fixed annuitization options.
(2) ADMINISTRATION CHARGE. We will deduct a daily charge equal to 0.000411%
of the Valley Forge Life Insurance Company Variable Annuity Separate Account's
net assets. This daily charge covers a portion of our administration costs. This
daily charge is approximately equal to an annual charge of 0.15%.
(3) MORTALITY AND EXPENSE RISK CHARGE. We will deduct a daily charge equal
to 0.003446% of the Valley Forge Life Insurance Company Variable Annuity
Separate Account's net assets. This charge compensates us for assuming certain
mortality and expense risks. This daily charge is approximately equal to an
annual charge of 1.25%.
(4) ANNUAL ADMINISTRATION FEE. If your contract value is less than $50,000,
we will deduct an annual administration fee of $30.
(5) TRANSFER PROCESSING FEE. Your first 12 transfers among the subaccounts
and/or Interest Adjustment Account are free. We will then deduct $25 for each
transfer in excess of the 12 free transfers during a Contract Year.
(6) TAXES ON PURCHASE PAYMENTS. Generally, you are taxed for income tax
purposes on purchase payments, if at all, at the time you begin to receive
annuity payments. Any charges for taxes on purchase payments are deducted from
your contract value at that time. These taxes range generally between 0% and
3.5% of purchase payments.
(7) MUTUAL FUND EXPENSES. The mutual funds in which your purchase payments
are invested may deduct certain operating fees. Please read the prospectus for
each of the mutual funds for details on these expenses and operating fees.
TRANSFERS
At any time prior to the date you begin to receive annuity payments, you
may transfer all or part of a contract value among subaccount(s) or guarantee
periods of the Interest Adjustment Account. You may transfer the lesser of $500
or the entire value of the
11
<PAGE> 16
account. On transfers among Subaccounts, the first 12 transfers during each
Contract Year are free. VFL assesses a transfer processing fee of $25 for each
transfer in excess of 12 during the Contract Year. With the Interest Adjustment
Account, you may make up to 4 transfers per Contract Year of all or part of any
Guarantee Amount to a Subaccount or a new guarantee period.
WITHDRAWALS
At any time prior to the date you begin to receive annuity payments, you
may (subject to certain restrictions) withdraw part of the contract value. We
may deduct certain amounts from your withdrawal, which may include a surrender
charge and purchase payment tax charges. Your withdrawals may result in adverse
federal income tax consequences, including a 10% penalty tax for distributions
taken prior to age 59 1/2, in addition to any income tax that you may owe.
SURRENDERS
At any time prior to date you begin to receive annuity payments, you may
surrender the contract and receive its surrender value. The surrender value is
equal to the contract value, less certain charges (including a surrender charge,
purchase payment tax charges and administration charges. You may elect to have
the surrender value paid in a single sum or under an annuity payment option.
Your surrender may result in adverse federal income tax consequences, including
a penalty tax, in addition to any income tax that you may owe. The surrender
value will be determined as of the date we receive your Written Notice for
surrender of this contract at our Service Center.
OTHER INFORMATION
CONDENSED FINANCIAL INFORMATION. You will find the Variable Account's
condensed financial information in Appendix A of this prospectus.
12
<PAGE> 17
THE COMPANY, THE VARIABLE ACCOUNT AND THE FUNDS
VFL
VFL is a life insurance company organized under the laws of the
Commonwealth of Pennsylvania in 1956 and is authorized to transact business in
the District of Columbia, Puerto Rico, Guam and all states except New York.
VFL's home office is located at 401 Penn St., Reading, Pennsylvania 19601, and
its executive office is located at CNA Plaza, Chicago, Illinois 60685. VFL is a
wholly-owned subsidiary of Continental Assurance Company ("Assurance"), a life
insurance company which, as of December 31, 1999, had consolidated assets of
approximately $14 billion. Subject to a reinsurance pooling agreement with
Assurance, VFL assumes all insurance risks under the Contracts, and VFL's
assets, which as of December 31, 1999 were approximately $3.5 billion, support
the benefits under the Contracts.
THE VARIABLE ACCOUNT
The Variable Account is a separate investment account of VFL established
under Pennsylvania law on October 18, 1995. VFL owns the assets of the Variable
Account. These assets are held separately from VFL's General Account and its
other separate accounts. That portion of the Variable Account's assets that is
equal to the reserves and other Contract liabilities of the Variable Account is
not chargeable with liabilities arising out of any other business VFL may
conduct. If the assets exceed the required reserves and other contract
liabilities, VFL may transfer the excess to VFL's General Account. The Variable
Account's assets will at all times, equal or exceed the sum of the Subaccount
Values of all Contracts funded by the Variable Account.
The Variable Account is registered with the SEC under the Investment
Company Act of 1940 (the "1940 Act") as a unit investment trust and meets the
definition of a "separate account" under the federal securities laws. Such
registration does not involve any supervision by the SEC of the management of
the Variable Account or VFL. The Variable Account also is governed by the laws
of Pennsylvania, VFL's state of domicile, and may also be governed by laws of
other states in which VFL does business.
The Variable Account has 35 Subaccounts, each of which invests in shares of
a corresponding Fund. Income, gains and losses, realized or unrealized, from
assets allocated to a Subaccount are credited to or charged against that
Subaccount without regard to other income, gains or losses of VFL.
CHANGES TO THE VARIABLE ACCOUNT. Where permitted by applicable law, VFL may
make the following changes to the Variable Account:
1. any changes required by the 1940 Act or other applicable law or
regulation;
2. combine separate accounts, including the Variable Account;
3. add new Subaccounts to or remove existing Subaccounts from the
Variable Account or combine Subaccounts;
4. make Subaccounts (including new Subaccounts) available to such
classes of Contracts as VFL may determine;
5. add new Funds or remove existing Funds;
13
<PAGE> 18
6. substitute new Fund(s) for any existing Fund if shares of the Fund
are no longer available for investment or if VFL determines that investment
in a Fund is no longer appropriate in light of the purposes of the Variable
Account;
7. deregister the Variable Account under the 1940 Act if such
registration is no longer required; and
8. operate the Variable Account as a management investment company
under the 1940 Act or as any other form permitted by law.
No such changes will be made without any necessary approval of the SEC and
applicable state insurance departments. Owners will be notified of any changes.
THE FUNDS
Each Subaccount invests in a corresponding Fund. Each of the Funds is
either an open-end diversified management investment company or a separate
investment portfolio of such a company and is managed by a registered investment
adviser. The Funds as well as a brief description of their investment objectives
are provided below.
Certain Funds may have investment objectives and policies similar to other
funds that are managed by the same investment advisor or manager. The investment
results of the Funds, however, may be higher or lower than those of such other
funds. We do not guarantee or make any representation that the investment
results of the Funds will be comparable to any other fund, even those with the
same investment advisor or manager.
A Fund's performance may be affected by risks specific to certain types of
investments, such as foreign securities, derivative investments, non-investment
grade debt securities, initial public offerings (IPOs) or companies with
relatively small market capitalizations. IPOs and other investment techniques
may have a magnified performance impact on a fund with a small asset base. A
Fund may not experience similar performance as its assets grow.
FEDERATED INSURANCE SERIES
The Federated High Income Bond Fund II, Federated Prime Money Fund II and
Federated Utility Fund II Subaccounts each invest in shares of corresponding
Funds (i.e., investment portfolios) of Federated Insurance Series ("IS"). IS
issues 12 "series" or classes of shares, each of which represents an interest in
a Fund of IS. Three of these series of shares are available as investment
options under the Contract. The investment objectives of these Funds are set
forth below.
FEDERATED HIGH INCOME BOND FUND II. This Fund invests primarily in
lower-rated fixed-income securities that seek to achieve high current
income.
FEDERATED PRIME MONEY FUND II. This Fund invests in money market
instruments maturing in thirteen months or less to achieve current income
consistent with stability of principal and liquidity.
FEDERATED UTILITY FUND II. This Fund invests in equity and debt
securities of utility companies to achieve high current income and moderate
capital appreciation.
IS is advised by Federated Investment Management Company.
14
<PAGE> 19
VARIABLE INSURANCE PRODUCTS FUND AND VARIABLE INSURANCE PRODUCTS FUND II
The Equity-Income Subaccount invests in shares of a corresponding Fund of
Variable Insurance Products Fund ("VIP Fund"). VIP Fund issues five "series" or
classes of shares, each of which represents an interest in a Fund of VIP Fund.
One of these series of shares is available as an investment option under the
Contracts. Asset Manager, Contrafund, and Index 500 Subaccounts each invest in
shares of corresponding Funds of Variable Insurance Products Fund II ("VIP Fund
II"). VIP Fund II issues five "series" or classes of shares, each of which
represents an interest in a Fund of VIP Fund II. Three of these series of shares
are available as investment options under the Contract. The investment
objectives of these Funds are set forth below.
FIDELITY VIP II ASSET MANAGER PORTFOLIO. This Fund seeks high total
return with reduced risk over the long-term by allocating its assets among
domestic and foreign stocks, bonds and short-term fixed-income instruments.
FIDELITY VIP II CONTRAFUND PORTFOLIO. This Fund seeks capital
appreciation over the long-term by investing in companies that are
undervalued or out-of-favor.
FIDELITY VIP EQUITY-INCOME PORTFOLIO. This Fund seeks current income
by investing primarily in income producing equity securities. In choosing
these securities, the Fund also considers the potential for capital
appreciation.
FIDELITY VIP II INDEX 500 PORTFOLIO. This Fund seeks investment
results that correspond to the total return of common stocks publicly
traded in the United States, as represented by the Standard & Poor's 500
Composite Index of 500 Common Stocks.
VIP Fund and VIP Fund II are each advised by Fidelity Management & Research
Company.
THE ALGER AMERICAN FUND
Alger American Growth, Alger American MidCap Growth, Alger American Small
Capitalization and Alger American Leveraged AllCap Subaccounts each invest in
shares of corresponding Funds of The Alger American Fund ("AAF"). AAF issues six
"series" or classes of shares, each of which represents an interest in a Fund of
AAF. Four of these series of shares are available as investment options under
the Contract. The investment objectives of these Funds are set forth below.
ALGER AMERICAN GROWTH PORTFOLIO. This Fund seeks long-term capital
appreciation by investing in a diversified, actively managed portfolio of
equity securities, primarily of companies with total market capitalization
of $1 billion or greater.
ALGER AMERICAN MID-CAP GROWTH PORTFOLIO. This Fund seeks long-term
capital appreciation. Under normal circumstances, the Portfolio invests
primarily in equity securities of companies having a market capitalization
within the range of companies in the S&P(R) MidCap 400 Index.
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO. This Fund seeks
long-term capital appreciation by investing primarily in the equity
securities of small capitalization companies. A small capitalization
company is one that has a market capitalization within the range of the
Russell(R) 2000 Growth Index or the S&P(R) Small Cap 600 Index.
15
<PAGE> 20
ALGER AMERICAN LEVERAGED ALLCAP PORTFOLIO. This Fund seeks long-term
capital appreciation. Under normal circumstances, the portfolio invests in
the equity securities of companies of any size which demonstrate promising
growth potential. The portfolio can leverage, that is, borrow money, up to
one-third of its total assets to buy additional securities. By borrowing
money, the portfolio has the potential to increase its returns if the
increase in the value of the securities purchased exceeds the cost of
borrowing, including interest paid on the money borrowed.
AAF is advised by Fred Alger Management, Inc.
MFS VARIABLE INSURANCE TRUST
The MFS Emerging Growth, MFS Growth with Income, MFS Research and MFS Total
Return Subaccounts each invest in shares of corresponding Funds of MFS Variable
Insurance Trust ("MFSVIT"). MFSVIT issues 16 "series" or classes of shares, each
of which represents an interest in a Fund of MFSVIT. Five of these series of
shares are available as investment options under the Contract. The investment
objectives of these Funds are set forth below.
MFS EMERGING GROWTH SERIES. This Fund seeks to obtain long-term growth
of capital by investing primarily in common stocks of companies that are
early in their life cycle but which have the potential to become major
enterprises.
MFS GROWTH WITH INCOME SERIES. This Fund seeks to provide reasonable
current income and long-term growth of capital and income.
MFS RESEARCH SERIES. This Fund seeks to provide long-term growth of
capital and future income.
MFS TOTAL RETURN SERIES. This Fund seeks primarily to provide
above-average income consistent with prudent employment of capital and
secondarily to provide a reasonable opportunity for growth of capital and
income.
MFS LIMITED MATURITY SERIES. This Fund seeks as high a level of
current income as is believed to be consistent with prudent investment
risk. Its secondary objective is to protect shareholders' capital. Shares
of this Fund are no longer available.
MFSVIT is advised by Massachusetts Financial Services Company.
FIRST EAGLE SOGEN VARIABLE FUNDS, INC. (formerly, SoGen Variable Fund,
Inc.)
The First Eagle SoGen Overseas Variable Subaccount invests in shares of a
corresponding Fund of First Eagle SoGen Variable Funds, Inc. ("FESG"). FESG
issues one "series" or class of shares which represents an interest in a Fund of
FESG. This series of shares is available as an investment option under the
Contract. The investment objective of this Fund is set forth below.
FIRST EAGLE SOGEN OVERSEAS VARIABLE FUND (formerly, SoGen Overseas
Variable Fund). This Fund seeks long-term growth of capital by investing
primarily in securities of small and medium size non-U.S. companies.
FESG is advised by Arnhold and S. Bleichroeder Advisers, Inc. (prior to
December 31, 1999, Societe Generale Asset Management Corp. was the adviser)
16
<PAGE> 21
VAN ECK WORLDWIDE INSURANCE TRUST
The Worldwide Emerging Markets and Worldwide Hard Assets Subaccounts each
invest in shares of corresponding Funds of Van Eck Worldwide Insurance Trust
("VEWIT"). VEWIT issues five "series" or classes of shares, each of which
represents an interest in a Fund of VEWIT. Two of these series of shares are
available as investment options under the Contract. The investment objectives of
these Funds are set forth below.
VAN ECK WORLDWIDE EMERGING MARKETS FUND. This Fund seeks capital
appreciation by investing primarily in equity securities in emerging
markets around the world.
VAN ECK WORLDWIDE HARD ASSETS FUND. This Fund seeks long-term capital
appreciation by investing globally, primarily in securities of companies
engaged directly or indirectly in the exploration, development, production
and distribution of one or more of the following sectors: precious metals,
ferrous and non-ferrous metals, oil and gas, forest products, real estate
and other basic non-agricultural commodities.
VEWIT is advised by Van Eck Associates Corporation.
JANUS ASPEN SERIES, INSTITUTIONAL SHARES
The Janus Aspen Capital Appreciation, Janus Aspen Growth, Janus Aspen
Balanced, Janus Aspen Flexible Income, Janus Aspen International Growth and
Janus Aspen Worldwide Growth Subaccounts each invest in shares of corresponding
Funds (i.e., "investment portfolios") of Janus Aspen Series ("JAS"). JAS issues
multiple portfolios, each of which offers two or more classes of shares. Six of
these portfolios are available as investment options under the Contract. The
investment objectives of these Funds are set forth below.
JANUS ASPEN SERIES CAPITAL APPRECIATION PORTFOLIO. This Fund seeks
long-term growth of capital by investing primarily in common stocks
selected for their growth potential.
JANUS ASPEN SERIES GROWTH PORTFOLIO. This Fund seeks long-term growth
of capital in a manner consistent with the preservation of capital by
investing primarily in common stocks selected for their growth potential.
JANUS ASPEN SERIES BALANCED PORTFOLIO. This Fund seeks long-term
capital growth, consistent with preservation of capital and balanced by
current income by normally investing 40-60% of its assets in securities
selected primarily for their growth potential and 40-60% of its assets in
securities selected primarily for their income potential.
JANUS ASPEN SERIES FLEXIBLE INCOME PORTFOLIO. This Fund seeks to
obtain maximum total return, consistent with preservation of capital by
investing primarily in a wide variety of income-producing securities such
as corporate bonds and notes, government securities and preferred stock.
JANUS ASPEN SERIES INTERNATIONAL GROWTH PORTFOLIO. This Fund seeks
long-term growth of capital by normally investing at least 65% of its total
assets in securities of issuers from at least five different countries,
excluding the United States.
17
<PAGE> 22
JANUS ASPEN SERIES WORLDWIDE GROWTH PORTFOLIO. This Fund seeks
long-term growth of capital in a manner consistent with the preservation of
capital by investing primarily in common stocks of companies of any size
throughout the world.
JAS is advised by Janus Capital Corporation
ALLIANCE VARIABLE PRODUCTS SERIES FUND, CLASS B SHARES
The Alliance Premier Growth and Alliance Growth and Income Subaccounts each
invest in shares of a corresponding Fund of Alliance Variable Products Series
Fund ("AVP"). AVP has multiple Funds. Two of these Funds are available as
investment options under the Contract. The investment objectives of these Funds
are set forth below.
ALLIANCE PREMIER GROWTH PORTFOLIO. This Fund seeks long term growth of
capital by pursuing aggressive investment policies.
ALLIANCE GROWTH AND INCOME PORTFOLIO. This Fund seeks appreciation
through investments primarily in dividend paying common stocks.
AVP is advised by Alliance Capital Management L.P.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
The American Century VP Income & Growth and American Century VP Value
Subaccounts each invest in shares of Funds of American Century Variable
Portfolios, Inc. ("ACVP"). ACVP consists of multiple Funds. Two of the Funds are
available as investment options under the Contract. The investment objectives of
these Funds are set forth below.
AMERICAN CENTURY VP INCOME & GROWTH FUND. This Fund seeks dividend
growth, current income and capital appreciation by investing in common
stocks.
AMERICAN CENTURY VP VALUE FUND. This Fund seeks long-term capital
growth by investing primarily in common stocks. Income is a secondary
objective.
ACVP is advised by American Century Investment Management, Inc.
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST, CLASS 2 SHARES
The Templeton Developing Markets Securities and the Templeton Asset
Strategy Subaccounts each invest in Class 2 shares of Funds of Franklin
Templeton Variable Insurance Products Trust ("FTVIPT"). Effective May 1, 2000,
the funds of Templeton Variable Products Series Fund were merged into similar
funds of Franklin Templeton Variable Insurance Products Trust. FTVIPT consists
of multiple Funds. Two of the Funds are available as investment options under
the Contract. The investment objectives of the Funds are set forth below.
TEMPLETON DEVELOPING MARKETS SECURITIES FUND (formerly, Templeton
Developing Markets Fund). This Fund seeks long-term capital appreciation.
The Fund invests, under normal market conditions, at least 65% of its total
assets in emerging markets equity securities.
TEMPLETON ASSET STRATEGY FUND (formerly, Templeton Asset Allocation
Fund). This Fund seeks high total return. The Fund invests in equity
securities of companies
18
<PAGE> 23
in any nation, debt securities of companies and governments of any nation,
and in money market instruments.
The Templeton Developing Markets Securities Fund is advised by Templeton
Asset Management Inc. and the Templeton Asset Strategy Fund is advised by
Templeton Investment Counsel, Inc.
LAZARD RETIREMENT SERIES
The Lazard Retirement Equity and Lazard Retirement Small Cap Subaccounts
each invest in shares of a corresponding Fund of Lazard Retirement Series
("LRS"). LRS is comprised of multiple Funds, two of which are available as
investment options under the Contract. The investment objectives of the Funds
are set forth below.
LAZARD RETIREMENT EQUITY PORTFOLIO. This Fund seeks long-term capital
appreciation.
LAZARD RETIREMENT SMALL CAP PORTFOLIO. This Fund seeks long-term
capital appreciation.
LRS is advised by Lazard Asset Management
THE UNIVERSAL INSTITUTIONAL FUNDS, INC. (formerly, Morgan Stanley Dean
Witter Universal Funds, Inc.)
The Morgan Stanley International Magnum and the Morgan Stanley Emerging
Markets Equity Subaccounts each invest in a corresponding Fund of The Universal
Institutional Funds, Inc. ("Universal Funds"). Universal Funds consists of
multiple Funds, two of which are available as investment options under the
Contract. The investment objectives of the Funds are set forth below.
MORGAN STANLEY INTERNATIONAL MAGNUM PORTFOLIO. This Fund seeks long
term capital appreciation by investing primarily in equity securities of
non-U.S. issuers domiciled in EAFE countries.
MORGAN STANLEY EMERGING MARKETS EQUITY PORTFOLIO. This Fund seeks long
term capital appreciation by investing primarily in equity securities of
issuers in emerging market countries.
Universal Funds is advised by Morgan Stanley Asset Management Inc.
No one can assure that any fund will achieve its stated Objectives and
Policies.
More detailed information concerning the investment objectives, policies
and restrictions of the Funds, the expenses of the Funds, the risks attendant to
investing in the Funds and other aspects of their operations can be found in the
current prospectus for each Fund which accompanies this prospectus and the
current statement of additional information for the Funds. The Fund's
prospectuses should be read carefully before any decision is made concerning the
allocation of Purchase Payments or transfers among the Subaccounts.
Please note that not all of the Funds described in the prospectuses for the
Funds are available with the Contract. Moreover, VFL cannot guarantee that each
Fund will always be available for its variable annuity contracts, but in the
event that a Fund is not available,
19
<PAGE> 24
VFL will take reasonable steps to secure the availability of a comparable fund.
Shares of each Fund are purchased and redeemed at net asset value, without a
sales charge.
VFL has entered into agreements with the investment advisers of several of
the Funds pursuant to which each such investment adviser pays VFL a servicing
fee based upon an annual percentage of the average aggregate net assets invested
by VFL on behalf of the Variable Account. These agreements reflect
administrative services provided to the Funds by VFL. Payments of such amounts
by an adviser do not increase the fees paid by the Funds or their shareholders.
Shares of the Funds are sold to separate accounts of insurance companies
that are not affiliated with VFL or each other, a practice known as "shared
funding." They are also sold to separate accounts to serve as the underlying
investment for both variable annuity contracts and variable life insurance
contracts, a practice known as "mixed funding." As a result, there is a
possibility that a material conflict may arise between the interests of Owners,
whose Contract Values are allocated to the Variable Account, and of owners of
other contracts whose contract values are allocated to one or more other
separate accounts investing in any one of the Funds. Shares of some of the Funds
may also be sold directly to certain qualified pension and retirement plans
qualifying under Section 401 of the Code. As a result, there is a possibility
that a material conflict may arise between the interests of Owners or owners of
other contracts (including contracts issued by other companies), and such
retirement plans or participants in such retirement plans. In the event of any
such material conflicts, VFL will consider what action may be appropriate,
including removing the Fund from the Variable Account or replacing the Fund with
another Fund. There are certain risks associated with mixed and shared funding
and with the sale of shares to qualified pension and retirement plans, as
disclosed in each Fund's prospectus.
DESCRIPTION OF THE CONTRACT
PURCHASING A CONTRACT
A prospective Owner may purchase a Contract by submitting an application
through a licensed agent of VFL who is also a representative of a broker-dealer
having a selling agreement with CNA Investor Services, Inc. ("CNA/ISI") or
appointed directly with CNA/ISI, the principal underwriter for the Contracts.
The maximum Age on the Contract Effective Date for Annuitants is 85. An initial
purchase payment must be delivered to the Service Center along with the Owner's
application. The minimum initial purchase payment is $2,000. The minimum
additional purchase payment VFL will accept is $100. Unless VFL gives its prior
approval, it will not accept an initial purchase payment in excess of $500,000
and reserves the right not to accept any purchase payment for any reason. VFL
will send Owners a confirmation notice upon receipt and acceptance of the
Owner's purchase payment.
CANCELING THE CONTRACT
Owners may cancel the Contract during the Cancellation Period, which is the
10-day period after an Owner receives the Contract. Some states may require a
longer Cancellation Period. To cancel the Contract, the Owner must mail or
deliver the Contract to the Service Center or to the agent who sold it. VFL will
refund the Contract Value plus any fees or charges deducted except for the
mortality and expense risk charge and the administration charge. If the Owner
purchased a Contract in a state that requires the
20
<PAGE> 25
return of purchase payments during the Cancellation Period and the Owner chooses
to exercise the cancellation right, then VFL will return the purchase payments.
CREDITING AND ALLOCATING PURCHASE PAYMENTS
If the application for a Contract is properly completed and is accompanied
by all the information necessary to process it (including payment of the initial
purchase payment) VFL will allocate the initial Purchase Payment then as
designated by the Owner to one or more of the Subaccounts or the Interest
Adjustment Account within two business days of receipt of such Purchase Payment
by VFL at its Service Center. If the application is not properly completed, VFL
reserves the right to retain the Purchase Payment for up to five business days
while it attempts to complete the application. If the application cannot be made
complete within five business days, the applicant will be informed of the
reasons for the delay and the initial Purchase Payment will be returned
immediately unless the applicant specifically consents to VFL retaining the
initial Purchase Payment until the application is made complete. The initial
Purchase Payment will then be credited within two business days after receipt of
a properly completed application. VFL will credit additional Purchase Payments
that are accepted by VFL as of the end of the Valuation Period during which the
Payment was received at the Service Center.
The initial Purchase Payment is allocated among the Subaccounts and the
Interest Adjustment Account as specified on the application, unless the Contract
is issued in a state that requires the return of purchase payments during the
Cancellation Period. In those states, any portion of the initial Purchase
Payment allocated to the Interest Adjustment Account will be allocated to that
option upon receipt; and any portion of the initial Purchase Payment allocated
to the Subaccounts will be allocated to the Money Market Subaccount for a period
equal to the number of days in the Cancellation Period. At the expiration of
this period, such portion of the Purchase Payment, as adjusted to reflect the
investment performance of the Money Market Subaccount during this period, is
then allocated to the Subaccounts as described above.
Owners may allocate Purchase Payments among any or all Subaccounts or
guarantee periods available. If an Owner elects to invest in a particular
Subaccount or guarantee period, at least 1% of the Purchase Payment must be
allocated to that Subaccount or guarantee period. All percentage allocations
must be in whole numbers. The minimum amount that may be allocated to any
guarantee period is $500. VFL allocates any additional Purchase Payments among
the Subaccounts and the Interest Adjustment Account in accordance with the
allocation schedule in effect when such Purchase Payment is received at the
Service Center unless it is accompanied by Written Notice directing a different
allocation.
VARIABLE CONTRACT VALUE
SUBACCOUNT VALUE. The Variable Contract Value is the sum of all Subaccount
Values and therefore reflects the investment experience of the Subaccounts to
which it is allocated. The Subaccount Value for any Subaccount as of the
Contract Effective Date is equal to the amount of the initial Purchase Payment
allocated to that Subaccount. On subsequent Valuation Days prior to the Annuity
Date, the Subaccount Value is equal to that part of any Purchase Payment
allocated to the Subaccount and any amount transferred to that Subaccount,
adjusted by interest income, dividends, net capital gains or losses, realized or
unrealized, and decreased by withdrawals (including any applicable
21
<PAGE> 26
surrender charges and any applicable purchase payment tax charge) and any
amounts transferred out of that Subaccount.
ACCUMULATION UNITS. Net Purchase Payments allocated to a Subaccount or
amounts of Contract Value transferred to a Subaccount are converted into
Accumulation Units. For any Contract, the number of Accumulation Units credited
to a Subaccount is determined by dividing the dollar amount directed to the
Subaccount by the value of the Accumulation Unit for that Subaccount for the
Valuation Day on which the Purchase Payment or transferred amount is invested in
the Subaccount. Therefore, Purchase Payments allocated to or amounts transferred
to a Subaccount under a Contract increase the number of Accumulation Units of
that Subaccount credited to the Contract.
The Accumulation Unit value for each Subaccount was arbitrarily set
initially at $10 when the Subaccount began operations. Thereafter, the
Accumulation Unit value at the end of every Valuation Day is the Accumulation
Unit value at the end of the previous Valuation Day multiplied by the net
investment factor, as described below. The Subaccount Value for a Contract is
determined on any day by multiplying the number of Accumulation Units
attributable to the Contract in that Subaccount by the Accumulation Unit value
for that Subaccount.
Decreases in Subaccount Value under a Contract are effected by the
cancellation of Accumulation Units of a Subaccount. Therefore, surrenders,
withdrawals, transfers out of a Subaccount, payment of a death benefit, the
application of Variable Contract Value to an Annuity Payment Option on the
Annuity Date, and the deduction of the annual administration fee all result in
the cancellation of an appropriate number of Accumulation Units of one or more
Subaccounts. Accumulation Units are canceled as of the end of the Valuation
Period in which VFL received Written Notice regarding the event.
The Accumulation Unit value for each Subaccount was arbitrarily set
initially at $10 when the Subaccount began operations. Thereafter, the
Accumulation Unit value at the end of every Valuation Day equals the
Accumulation Unit value at the end of the preceding Valuation Day multiplied by
the Net Investment Factor (described below). The Subaccount Value for a Contract
is determined on any day by multiplying the number of Accumulation Units
attributable to the Contract in that Subaccount by the Accumulation Unit value
for that Subaccount.
THE NET INVESTMENT FACTOR. The Net Investment Factor is an index applied to
measure the investment performance of a Subaccount from one Valuation Period to
the next. For each Subaccount, the Net Investment Factor reflects the investment
experience of the Fund in which that Subaccount invests and the charges assessed
against that Subaccount for a Valuation Period. The Net Investment Factor is
calculated by dividing (1) by (2) and subtracting (3) from the result, where:
(1) is the result of:
a. the Net Asset Value Per Share of the Fund held in the
Subaccount, determined at the end of the current Valuation
Period; plus
b. the per share amount of any dividend or capital gain
distributions made by the Fund held in the Subaccount, if the
"ex-dividend" date occurs during the current Valuation Period;
plus or minus
22
<PAGE> 27
c. a per share charge or credit for any taxes reserved for, which
is determined by VFL to have resulted from the operations of
the Subaccount.
(2) is the Net Asset Value Per Share of the Fund held in the
Subaccount, determined at the end of the last prior Valuation Period.
(3) is a daily factor representing the mortality and expense risk
charge and the administration charge deducted from the Subaccount, adjusted
for the number of days in the Valuation Period.
TRANSFERS
GENERAL. Prior to the Annuity Date and after the Cancellation Period, an
Owner may transfer (by Written Notice) all or part of any Subaccount Value to
another Subaccount(s) (subject to its availability) or to one or more available
guarantee periods, or transfer all or part of any Guarantee Amount to any
Subaccount(s) (subject to its availability) or to one or more available
guarantee periods, subject to the following restrictions. The minimum transfer
amount is $500 or the entire Subaccount Value or Guarantee Amount, if less. The
minimum Subaccount Value or Guarantee Amount that may remain following a
transfer is $500. A transfer request that would reduce any Subaccount Value or
Guarantee Amount below $500 is treated as a transfer request for the entire
Subaccount Value or Guarantee Amount. Only four transfers may be made each
Contract Year from all or part of any Guarantee Amount. The first 12 transfers
during each Contract Year are free. VFL assesses a transfer processing fee of
$25 for each transfer in excess of 12 during a Contract Year. The transfer
processing fee is deducted from the amount being transferred. Each Written
Notice of transfer is considered one transfer regardless of how many Subaccounts
or guarantee periods are affected by the transfer.
DOLLAR-COST AVERAGING FACILITY. If elected in the application or at any
time thereafter prior to the Annuity Date by Written Notice, an Owner may
systematically transfer (on a monthly, quarterly, semi-annual or annual basis)
specified dollar amounts from the Money Market Subaccount to other Subaccounts.
Dollar cost averaging begins on the first available transfer date after our
Service Center receives your request. This is known as the "dollar-cost
averaging" method of investment. The fixed-dollar amount purchases more
Accumulation Units of a Subaccount when their value is lower and fewer units
when their value is higher. Over time, the cost per unit averages out to be less
than if all purchases of Units had been made at the highest value and greater
than if all purchases had been made at the lowest value. The dollar-cost
averaging method of investment reduces the risk of making purchases only when
the price of Accumulation Units is high. It does not assure a profit or protect
against a loss in declining markets.
Owners may only elect to use the dollar-cost averaging facility if their
Money Market Subaccount Value is at least $1,000 at the time of the election.
The minimum transfer amount under the facility is $100 per month (or the
equivalent). If dollar-cost averaging transfers are to be made to more than one
Subaccount, then the Owner must indicate the dollar amount of the transfer to be
made to each. At least $50 must be designated to each Subaccount.
Transfers under the dollar-cost averaging facility are made as of the same
calendar day each month. If this calendar day is not a Valuation Day, transfers
are made as of the
23
<PAGE> 28
next Valuation Day. Once elected, transfers under the dollar-cost averaging
facility continue until the Money Market Subaccount Value is depleted, the
Annuity Date occurs or until the Owner cancels the election by Written Notice at
least seven days in advance of the next transfer date. Alternatively, Owners may
specify in advance a date for transfers under the facility to cease. There is no
additional charge for using the dollar-cost averaging facility. Transfers under
the facility do not count towards the 12 transfers permitted without a transfer
processing fee in any Contract Year. VFL reserves the right to discontinue
offering the dollar-cost averaging facility at any time and for any reason or to
change its features.
GUARANTEED DOLLAR-COST AVERAGING FACILITY. If elected in the application,
an Owner may use the dollar-cost averaging facility to systematically transfer
specified dollar amounts (on a monthly or quarterly basis) from a Guarantee
Amount under the Interest Adjustment Account. For this purpose, VFL may, from
time to time, offer a special one-year or six-month guarantee period designed
for use with the dollar-cost averaging facility. When available, an Owner may
allocate all or part of the initial purchase payment to a special guarantee
period. These special guarantee periods are not available for subsequent
purchase payments or transfers of Contract Value. The minimum dollar amount that
may be transferred from a Guarantee Amount using the dollar-cost averaging
facility is that amount which results in the entire Guarantee Amount being
transferred to one or more Subaccounts by the end of the special guarantee
period and in no case shall be less than $5,000. Once elected, transfers from a
Guarantee Amount under the facility do not cease until the Guarantee Amount is
depleted. No interest adjustment applies to transfers described in this
paragraph. All other requirements applicable to dollar-cost averaging transfers
from the Money Market Subaccount apply to transfers described in this paragraph.
AUTOMATIC SUBACCOUNT VALUE REBALANCING. If elected in the application or
requested by Written Notice at any time thereafter prior to the Annuity Date, an
Owner may instruct VFL to automatically transfer (on a quarterly, semi-annual or
annual basis) Variable Contract Value between and among specified Subaccounts in
order to achieve a particular percentage allocation of Variable Contract Value
among such Subaccounts ("automatic Subaccount Value rebalancing"). Such
percentage allocations must be in whole numbers. Once elected, automatic
Subaccount Value rebalancing begins on the first Valuation Day of the next
calendar quarter or other period (or, if later, the next calendar quarter or
other period after the expiration of the Cancellation Period).
Owners may stop automatic Subaccount Value rebalancing at any time by
Written Notice at least seven calendar days before the first Valuation Day in a
new period. Owners may specify allocations between and among as many Subaccounts
as are available at the time automatic Subaccount Value rebalancing is elected.
Once automatic Subaccount Value rebalancing has been elected, any subsequent
allocation instructions that differ from the then-current rebalancing allocation
instructions are treated as a request to change the automatic Subaccount Value
rebalancing allocation. Owners may change automatic Subaccount Value rebalancing
allocations at any time. Allocation changes will take effect as of the Valuation
Day that instructions are received at the Service Center. Once automatic
Subaccount Value rebalancing is in effect, an Owner may only transfer Subaccount
Value among or between Subaccounts by changing the automatic Subaccount Value
rebalancing allocation instructions. Changes to automatic Subaccount Value
rebalancing must be made by Written Notice.
24
<PAGE> 29
There is no additional charge for automatic Subaccount Value rebalancing
and rebalancing transfers do not count as one the 12 transfers available without
a transfer processing fee during any Contract Year. If automatic Subaccount
Value rebalancing is elected at the same time as the dollar-cost averaging
facility or when the dollar-cost averaging facility is being utilized, automatic
Subaccount Value rebalancing will be postponed until the first Valuation Day in
the calendar quarter or other period following the termination of dollar-cost
averaging facility. VFL reserves the right to discontinue offering automatic
Subaccount Value rebalancing at any time for any reason or to change its
features.
WITHDRAWALS
GENERAL. Prior to the Annuity Date and after the Cancellation Period, an
Owner may withdraw part of the Surrender Value, subject to certain limitations.
Each withdrawal must be requested by Written Notice. The minimum withdrawal
amount is $500. The maximum withdrawal is the amount that would leave a minimum
Surrender Value of $1,000. A withdrawal request that would reduce any Subaccount
Value or Guarantee Amount below $500 will be treated as a request for a
withdrawal of all of that Subaccount Value or Guarantee Amount.
VFL withdraws the amount requested from the Contract Value as of the day
that VFL receives an Owner's Written Notice, and sends the Owner that amount.
VFL will then deduct any applicable surrender charge and any applicable purchase
payment tax charge from the remaining Contract Value.
A Written Notice of withdrawal must specify the amount to be withdrawn from
each Subaccount or Guarantee Amount. If the Written Notice does not specify this
information, or if any Subaccount Value or Guarantee Amount is inadequate to
comply with the request, VFL will make the withdrawal based on the proportion
that each Subaccount Value and each Guarantee Amount bears to the Contract Value
as of the day of the withdrawal.
SYSTEMATIC WITHDRAWALS. If elected in the application or requested at any
time thereafter prior to the Annuity Date by Written Notice, an Owner may elect
to receive periodic withdrawals under VFL's systematic withdrawal plan, free of
any surrender charges. Under the systematic withdrawal plan, VFL will make
withdrawals (on a monthly, quarterly, semi-annual or annual basis) from
Subaccounts specified by the Owner. Withdrawals will begin one frequency period
after the request is received at our Service Center. Systematic withdrawals must
be at least $100 each and may only be made from Variable Contract Value.
Withdrawals under the systematic withdrawal plan may only be made from
Subaccounts having $1,000 or more of Subaccount Value at the time of election.
The systematic withdrawal plan is not available to Owners using the dollar-cost
averaging facility or automatic Subaccount Value rebalancing.
VFL makes systematic withdrawals on the following basis: (1) as a specified
dollar amount, or (2) as a specified whole percent of Subaccount Value.
Participation in the systematic withdrawal plan terminates on the earliest
of the following events: (1) the Subaccount Value from which withdrawals are
being made becomes zero, (2) a termination date specified by the Owner is
reached, or (3) the Owner requests that his or her participation in the plan
cease. Systematic withdrawals being made in order to meet the required minimum
distribution under the Code or to make
25
<PAGE> 30
substantially equal payments as required under the Code will continue even
though a surrender charge is deducted.
TAX CONSEQUENCES OF WITHDRAWALS. Consult your tax adviser regarding the tax
consequences associated with making withdrawals. A withdrawal made before the
taxpayer reaches Age 59 1/2, including systematic withdrawals, may result in
imposition of a penalty tax of 10% of the taxable portion withdrawn. See
"FEDERAL TAX STATUS" for more details.
SURRENDERS
An Owner may surrender the Contract for its Surrender Value at any time
prior to the Annuity Date. A Contract's Surrender Value fluctuates daily as a
function of the investment experience of the Subaccounts in which an Owner is
invested. VFL does not guarantee any minimum Surrender Value for amounts
invested in the Subaccounts.
An Owner may elect to have the Surrender Value paid in a single sum or
under an Annuity Payment Option. The Surrender Value will be determined as of
the date VFL receives the Written Notice for surrender and the Contract at the
Service Center.
Consult your tax adviser regarding the tax consequences of a Surrender. A
Surrender made before age 59 1/2 may result in the imposition of a penalty tax
of 10% of the taxable portion of the Surrender Value. See "FEDERAL TAX STATUS"
for more details.
DEATH OF OWNER OR ANNUITANT
DEATH BENEFITS ON OR AFTER THE ANNUITY DATE. If an Owner dies on or after
the Annuity Date, any surviving joint Owner becomes the sole Owner. If there is
no surviving Owner, any successor Owner becomes the new Owner. If there is no
surviving or successor Owner, the Payee becomes the new Owner. If an Annuitant
or an Owner dies on or after the Annuity Date, the remaining undistributed
portion, if any, of the Contract Value will be distributed at least as rapidly
as under the method of distribution being used as of the date of such death.
Under some Annuity Payment Options, there will be no death benefit.
DEATH BENEFITS WHEN THE OWNER DIES BEFORE THE ANNUITY DATE. If any Owner
dies prior to the Annuity Date, any surviving joint Owner becomes the new sole
Owner. If there is no surviving joint Owner, any successor Owner becomes the new
Owner and if there is no successor Owner the Annuitant becomes the new Owner
unless the deceased Owner was also the Annuitant. If the sole deceased Owner was
also the Annuitant, then the provisions relating to the death of the Annuitant
(described below) will govern unless the deceased Owner was one of two joint
Annuitants, in which event the surviving Annuitant becomes the new Owner.
The following options are available to new Owners:
1. to receive the Adjusted Contract Value in a single lump sum within
five years of the deceased Owner's death; or
2. elect to receive the Adjusted Contract Value paid out under an
Annuity Payment Option provided that: (a) Annuity Payments begin within one
year of the deceased Owner's death, and (b) Annuity Payments are made in
substantially equal installments over the life of the new Owner or over a
period not greater than the life expectancy of the new Owner; or
26
<PAGE> 31
3. if the new Owner is the spouse of the deceased Owner, he or she may
by Written Notice within one year of the Owner's death, elect to continue
the Contract as the new Owner. If the spouse so elects, all of his or her
rights as a Beneficiary cease and if the deceased Owner was also the sole
Annuitant and appointed no Contingent Annuitant, he or she will become the
Annuitant. The spouse will be deemed to have made the election to continue
the Contract if he or she makes no election before the expiration of the
one year period or if he or she makes any purchase payments under the
Contract.
With regard to new Owners who are not the spouse of the deceased Owner: (a)
1 and 2 apply even if the Annuitant or Contingent Annuitant is alive at the time
of the deceased Owner's death, (b) if the new Owner is not a natural person,
only option 1 is available, (c) if no election is made within one year of the
deceased Owner's death, option 1 is deemed to have been elected.
Adjusted Contract Value is computed as of the date that VFL receives Due
Proof of Death of the Owner. Payments under this provision are in full
settlement of all of VFL's liability under the Contract.
DEATH BENEFITS WHEN THE ANNUITANT DIES BEFORE THE ANNUITY DATE. If the
Annuitant dies before the Annuity Date while the Owner is still living, any
Contingent Annuitant will become the Annuitant. If the Annuitant dies before the
Annuity Date and no Contingent Annuitant has been named, VFL will pay the death
benefit described below to the Beneficiary. If there is no surviving
Beneficiary, VFL will pay the death benefit to any Contingent Beneficiary. If
there is no surviving Contingent Beneficiary, VFL will immediately pay the death
benefit to the Owner's estate in a lump sum.
If the Annuitant who is also an Owner dies or if the Annuitant dies and the
Owner is not a natural person, a Beneficiary (or a Contingent Beneficiary):
1. will receive the death benefit in a single lump sum within 5 years
of the deceased Annuitant's death; or
2. may elect to receive the death benefit paid out under an Annuity
Payment Option provided that: (a) Annuity Payments begin within 1 year of
the deceased Annuitant's death, and (b) Annuity Payments are made in
substantially equal installments over the life of the Beneficiary or over a
period not greater than the life expectancy of the Beneficiary; or
3. if the Beneficiary is the spouse of the deceased Annuitant, he or
she may by Written Notice within one year of the Annuitant's death, elect
to continue the Contract as the new Owner. If the spouse so elects, all his
or her rights as a Beneficiary cease and if the deceased Annuitant was also
the sole Annuitant and appointed no Contingent Annuitant, he or she will
become the Annuitant. The spouse will be deemed to have made the election
to continue the Contract if he or she makes no election before the
expiration of the one year period or if he or she makes any purchase
payments under the Contract.
THE DEATH BENEFIT. The death benefit is an amount equal to the greatest of:
1. aggregate purchase payments made less any withdrawals as of the
date that VFL receives Due Proof of Death of the Annuitant; or
27
<PAGE> 32
2. the Contract Value as of the date that VFL receives Due Proof of
Death of the Annuitant; or
3. the minimum death benefit described below;
less any applicable purchase payment tax charge on the date that the death
benefit is paid.
The minimum death benefit is the death benefit floor amount as of the date
of the Annuitant's death (a) adjusted, for each withdrawal made since the most
recent reset of the death benefit floor amount, multiplying that amount by the
product of all ratios of the Contract Value immediately after a withdrawal to
the Contract Value immediately before such withdrawal (b) plus any purchase
payments made since the most recent reset of the death benefit floor amount.
The death benefit floor amount is the largest Contract Value attained on
any prior Contract Anniversary prior to the Annuitant's Age 81. Therefore, the
death benefit floor amount is reset when, on a Contract Anniversary, Contract
Value exceeds the current death benefit floor amount.
Examples of the computation of the death benefit are shown in Appendix B.
PAYMENTS BY VFL
VFL generally makes payments of withdrawals, surrenders, death benefits, or
any Annuity Payments within seven days of receipt of all applicable Written
Notices and/or Due Proofs of Death. However, VFL may postpone such payments for
any of the following reasons:
1. when the New York Stock Exchange ("NYSE") is closed for
trading other than customary holiday or weekend closing, or trading on
the NYSE is restricted, as determined by the SEC; or
2. when the SEC by order permits a postponement for the
protection of Owners; or
3. when the SEC determines that an emergency exists that would
make the disposal of securities held in the Variable Account or the
determination of their value not reasonably practicable.
If a recent check or draft has been submitted, VFL has the right to defer
payment of surrenders, withdrawals, death benefits or Annuity Payments until the
check or draft has been honored.
VFL may defer payment of any withdrawal, surrender or transfer of the
Interest Adjustment Account up to six months after it receives an Owner's
Written Notice. VFL pays interest on the amount of any payment that is deferred.
The interest will accrue from the date that payment becomes payable to the date
of payment, but not for more than one year, at an annual rate of 3%, or the rate
and time required by law.
TELEPHONE TRANSACTION PRIVILEGES
An Owner may make transfers or change allocation instructions by
telephoning the Service Center. An Owner may authorize his agent or
representative to make such transfer
28
<PAGE> 33
by completing a form provided by VFL. A telephone authorization form received by
VFL at the Service Center is valid until it is rescinded or revoked by Written
Notice or until a subsequently dated form signed by the Owner is received at the
Service Center. VFL will send Owners a written confirmation of all transfers and
allocation changes made pursuant to telephone instructions.
The Service Center requires a form of personal identification prior to
acting on instructions received by telephone and also may tape record
instructions received by phone. If VFL follows these procedures, it is not
liable for any losses due to unauthorized or fraudulent transactions. VFL
reserves the right to suspend telephone transaction privileges at any time for
any reason.
SUPPLEMENTAL RIDERS
The following rider is available and may be added to a Contract.
INTEREST ADJUSTMENT ACCOUNT FOR SYSTEMATIC TRANSFERS RIDER. This rider
allows you to systematically transfer specified dollar amounts of your initial
purchase payment (on a monthly or quarterly basis) from a guarantee period of
the Interest Adjustment Account. You may allocate all or part of the initial
purchase payment to a special guarantee period. This special guarantee period is
not available for subsequent purchase payments or Contract Value. There is no
cost associated with this rider.
CONTRACT CHARGES AND FEES
SURRENDER CHARGE (CONTINGENT DEFERRED SALES CHARGE)
GENERAL. No sales charge is deducted from purchase payments at the time
that such payments are made. However, within certain time limits described
below, a surrender charge is deducted upon any withdrawal, surrender or
annuitization. A surrender charge is assessed on Cash Value applied to an
Annuity Payment Option during the first five Contract Years. The surrender
charge is waived if annuitization occurs during Contract Years 2 to 5 and you
select annuitization Option 4, 5, or 6. No surrender charge is assessed on
Contract Value applied to an Annuity Payment Option after the fifth Contract
Year. If on the Annuity Date, however, the Payee elects (or the Owner previously
elected) to receive a lump sum, this sum will equal the Surrender Value on such
date.
In the event that surrender charges are not sufficient to cover sales
expenses, such expenses will be borne by VFL. Conversely, if the revenue from
such charges exceeds such expenses, the excess of revenues from such charges
over expenses will be retained by VFL. VFL does not currently believe that the
surrender charges deducted will cover the expected costs of distributing the
Contracts. Any shortfall will be made up from VFL's general assets, which may
include amounts derived from the mortality and expense risk charge.
CHARGE FOR SURRENDER OR WITHDRAWALS. The surrender charge is equal to the
percentage of each purchase payment surrendered or withdrawn (or applied to an
Annuity Payment Option during the first five Contract Years) as shown in the
table below. The surrender charge is separately calculated and applied to each
purchase payment at the time that the purchase payment is surrendered or
withdrawn. No surrender charge applies to the Contract Value in excess of
aggregate purchase payments (less prior withdrawals of the
29
<PAGE> 34
payments). The surrender charge is calculated using the assumption that purchase
payments are surrendered Contract Value in excess of aggregate purchase payments
(less prior withdrawals of purchase payments) is surrendered or withdrawn before
any purchase payments and that purchase payments are withdrawn on a
first-in-first-out basis. Notwithstanding the foregoing, in each Contract Year
after the first Contract Year (or the first Contract Year if systematic
withdrawals are in effect), you may withdraw an amount equal to the Free Partial
Withdrawal percentage times the Free Partial Withdrawal Basis, without incurring
surrender charges.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
NUMBER OF FULL YEARS SURRENDER CHARGE
ELAPSED BETWEEN DATE OF AS A PERCENTAGE
RECEIPT OF PURCHASE PAYMENT OF PURCHASE
AND DATE OF SURRENDER PAYMENT WITHDRAWN
OF WITHDRAWAL OR SURRENDERED
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 7%
2 7%
3 6%
4 5%
5 4%
6+ 0%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
WITHDRAWALS. With regard to all withdrawals, VFL withdraws the amount
requested from the Contract Value as of the day that it receives the Written
Notice regarding the withdrawal and sends the Owner that amount. VFL then
deducts any surrender charge and any applicable purchase payment tax charge from
the remaining Contract Value. The Written Notice must specify the amount to be
withdrawn from each Subaccount or Guarantee Amount. If the Written Notice does
not specify this information, or any Subaccount Value or Guarantee Amount is
inadequate to comply with your request, VFL will make the withdrawal based on
the proportion that each Subaccount Value and each Guarantee Amount bears to the
Contract Value as of the day of the withdrawal.
AMOUNTS NOT SUBJECT TO A SURRENDER CHARGE. Each Contract Year after the
first Contract Year (or the first Contract Year if systematic withdrawals are in
effect), an Owner may withdraw an amount equal to 15% of the greater of: (1)
aggregate purchase payments (less prior withdrawals of purchase payments) as of
the first Valuation Day of that Contract Year, or (2) Contract Value as of the
day Written Request for the withdrawal is received, without incurring surrender
charge. VFL reserves the right to limit the number of such "free" withdrawals in
any Contract Year. Owners may carry over to subsequent Contract Years, any
unused "free" withdrawal percentages. For example, if 10% of either aggregate
purchase payments (less prior withdrawals of purchase payments) or Contract
Value is withdrawn in a Contract Year, then in the next Contract Year, the Owner
may withdraw an amount equal to 20% (5% unused from the previous Contract Year
plus 15% withdrawal percentage for the current Contract Year) of the greater of:
(1) aggregate purchase payments (less prior withdrawals of purchase payments) as
of the first Valuation Day of that Contract Year, or (2) Contract Value as of
the day Written Request for the withdrawal is received, without incurring
surrender charge. However, the maximum amount of "free" withdrawals in any
Contract Year is 30% of the greater of (1) or (2) as defined above.
WAIVER OF SURRENDER CHARGE. VFL will waive the surrender charge in the
event that the Owner: (1) enters an "eligible nursing home," as defined in the
Contract, for a period of at least 90 days, (2) is diagnosed as having a
"terminal medical condition," as defined in the Contract, or (3) is less than
age 65 and sustains a "permanent and total disability," as defined in the
Contract. VFL reserves the right to require written proof of terminal
30
<PAGE> 35
medical condition or permanent and total disability satisfactory to it and to
require an examination by a licensed physician of its choice. The surrender
charge waiver is not available in all states due to applicable insurance laws in
effect in various states.
ANNUAL ADMINISTRATION FEE
An annual administration fee is deducted as of each Contract Anniversary
for the prior Contract Year. VFL also deducts this fee for the current Contract
Year when determining the Surrender Value prior to the end of a Contract Year
and on the Annuity Date. If Contract Value is $50,000 or less at the time of the
fee deduction, then the annual administration fee is $30. The fee is zero for
Contracts where the Contract Value exceeds $50,000 at the time the fee would be
deducted. This fee is to cover a portion of VFL's administrative expenses
related to the Contracts. VFL does not expect to make a profit from this fee.
The annual administration fee is assessed against Subaccount Values and
Guarantee Amounts based on the proportion that each bears to the Contract Value.
Where the fee is deducted from Subaccount Values, VFL will cancel an appropriate
number of Accumulation Units. Where the fee is obtained from a Guarantee Amount,
VFL will reduce the Guarantee Amount by the amount of the fee.
TRANSFER PROCESSING FEE
Prior to the Annuity Date, VFL permits 12 free transfers per Contract Year
among and between the Subaccounts and the guarantee periods. For each additional
transfer, VFL charges $25 at the time each such transfer is processed. The fee
is deducted from the amount being transferred. VFL does not expect to make a
profit from this fee.
TAXES ON PURCHASE PAYMENTS
Certain states and municipalities impose a tax on VFL in connection with
the receipt of annuity considerations. This tax generally can range from 0% to
3.5% of such considerations and generally varies based on the Annuitant's state
of residence. Taxes on annuity considerations are generally incurred by VFL as
of the Annuity Date based on the Contract Value on that date, and VFL deducts
the charge for taxes on annuity considerations from the Contract Value as of the
Annuity Date. Some jurisdictions impose a tax on annuity considerations at the
time such considerations are made. In those jurisdictions, VFL's current
practice is to pay the tax on annuity considerations and then deduct the charge
for these taxes from the Contract Value upon surrender, payment of the death
benefit, or upon the Annuity Date. VFL reserves the right to deduct any state
and local taxes on annuity considerations from the Contract Value at the time
such tax is due.
MORTALITY AND EXPENSE RISK CHARGE
VFL deducts a daily charge from the assets of the Variable Account to
compensate it for mortality and expense risks that it assumes under the
Contract. The daily charge is at the rate of 0.003446% (approximately equivalent
to an effective annual rate of 1.25%) of the net assets of the Variable Account.
Approximately .70% of this annual charge is for the assumption of mortality risk
and .55% is for the assumption of expense risk. If the mortality and expense
risk charge is insufficient to cover the actual cost of the mortality and
expense risks undertaken by VFL, VFL will bear the shortfall. Conversely, if the
31
<PAGE> 36
charge proves more than sufficient, the excess will be profit to VFL and will be
available for any proper purpose including, among other things, payment of
expenses incurred in selling the Contracts.
The mortality risk that VFL assumes is the risk that Annuitants, as a
group, will live for a longer period of time than VFL estimated when it
established the guaranteed Annuity Payment rates in the Contract. Because of
these guarantees, each Payee is assured that his or her longevity will not have
an adverse effect on the Annuity Payments that he or she receives under Annuity
Payment Options based on life contingencies. VFL also assumes a mortality risk
because the Contracts guarantee a death benefit if the Annuitant dies before the
Annuity Date. The expense risk that VFL assumes is the risk that administration
charge, annual administration fee and the transfer processing fee may be
insufficient to cover the actual expenses of administering the Contracts.
ADMINISTRATION CHARGE
VFL deducts a daily administration charge from the assets of the Variable
Account to compensate it for a portion of the expenses it incurs in
administering the Contracts. The daily charge is at a rate of 0.000411%
(approximately equivalent to an effective annual rate of 0.15%) of the net
assets of the Variable Account. VFL does not expect to make a profit from this
charge.
FUND EXPENSES
The investment performance of each Fund reflects the management fee that it
pays to its investment manager or adviser as well as other operating expenses
that it incurs. Investment management fees are generally daily fees computed as
a percent of a Fund's average daily net assets at an annual rate. Please read
the prospectus for each Fund for complete details.
POSSIBLE CHARGE FOR VFL'S TAXES
VFL currently makes no charge to the Variable Account for any federal,
state or local taxes that VFL incurs which may be attributable to the Variable
Account or the Contracts. VFL, however, reserves the right in the future to make
a charge for any such tax or other economic burden resulting from the
application of the tax laws that it determines to be properly attributable to
the Subaccounts or to the Contracts.
SELECTING AN ANNUITY PAYMENT OPTION
ANNUITY DATE
The Owner selects the Annuity Date. For Non-Qualified Contracts, the
Annuity Date must be no later than the later of the Contract Anniversary
following the Annuitant's Age 85 (Age 99 where permitted under state law). For
most Qualified Contracts, the Annuity Date must be no later than April 1 of the
calendar year following the later of the calendar year in which (a) the Owner
attains age 70 1/2, or (b) retires. Section (b) does not apply to traditional
IRAs. There is no required distribution age for Roth IRAs. An
32
<PAGE> 37
Owner may change the Annuity Date by Written Notice, subject to the following
limitations:
1. Written Notice is received at least 30 days before the current
Annuity Date; and
2. the requested new Annuity Date must be at least 30 days after VFL
receives Written Notice.
ANNUITY PAYMENT DATES
VFL computes the first Annuity Payment as of the Annuity Date and makes the
first Annuity Payment as of the initial Annuity Payment Date selected by the
Owner. The initial Annuity Payment Date is the Annuity Date unless the Annuity
Date is the 29th, 30th or 31st day of a calendar month, in which event, the
Owner must select a different date. All subsequent Annuity Payments are computed
and payable as of Annuity Payment Dates. These dates will be the same day of the
month as the initial Annuity Payment Date. Monthly Annuity Payments will be
computed and payable as of the same day each month as the initial Annuity
Payment Date. Quarterly Annuity Payments will be computed and payable as of the
same day in the third, sixth, ninth, and twelfth month following the initial
Annuity Payment Date and on the same days of such months in each successive
Contract Year. Semi-annual Annuity Payment Dates will be computed and payable as
of the same day in the sixth and twelfth month following the initial Annuity
Payment Date and on the same days of such months in each successive Contract
Year. Annual Annuity Payments will be computed and payable as of the same day in
each Contract Year as the initial Annuity Payment Date. The frequency of Annuity
Payments selected is shown in the Contract. In the event that the Owner does not
select a payment frequency, payments will be made monthly.
ELECTION AND CHANGES OF ANNUITY PAYMENT OPTIONS
On the Annuity Date, the Surrender Value or Adjusted Contract Value is
applied under an Annuity Payment Option, unless the Owner elects to receive the
Surrender Value in a lump sum. If the Annuity Date falls during the first five
Contract Years, Surrender Value is applied under an Annuity Payment Option.
However, the surrender charge will be waived if annuitization occurs during
Contract Years 2 to 5 and you select annuitization Option 4, 5, or 6. If the
Annuity Date falls after the fifth Contract Anniversary, Adjusted Contract Value
is applied under an Annuity Payment Option. The Annuity Payment Option specifies
the type of annuity to be paid and determines how long the annuity will be paid,
the frequency, and the amount of each payment. The Owner may elect or change the
Annuity Payment Option by Written Notice at any time prior to the Annuity Date.
(See "Annuity Payment Options.") The Owner may elect to apply any portion of the
Surrender Value or Adjusted Contract Value to provide either Variable Annuity
Payments or Fixed Annuity Payments or a combination of both. If Variable Annuity
Payments are selected, the Owner must also select the Subaccounts to which
Surrender Value or Adjusted Contract Value will be applied. If no selection has
been made by the Annuity Date, Surrender Value or Adjusted Contract Value from
any Guaranteed Interest Option Value will be applied to purchase Fixed Annuity
Payments and Surrender Value or Adjusted Contract Value from each Subaccount
Value will be applied to purchase Variable Annuity Payments from that
Subaccount. If no Annuity Payment Option has been selected by the Annuity Date,
Surrender Value or Adjusted Contract Value will be
33
<PAGE> 38
applied under Annuity Payment Option 5 (Life Annuity with Period Certain) with a
designated period of 10 years. Any death benefit applied to purchase Annuity
Payments is allocated among the Subaccounts and/or the Guaranteed Interest
Option as instructed by the Beneficiary unless the Owner previously made the
foregoing elections.
ANNUITY PAYMENTS
FIXED ANNUITY PAYMENTS. Fixed Annuity Payments are periodic payments from
VFL to the designated Payee, the amount of which is fixed and guaranteed by VFL.
The dollar amount of each Fixed Annuity Payment depends on the form and duration
of the Annuity Payment Option chosen, the Age of the Annuitant, the sex of the
Annuitant (if applicable), the amount of Adjusted Contract Value applied to
purchase the Fixed Annuity Payments and, for Annuity Payment Options 3-6, the
applicable annuity purchase rates. The annuity purchase rates in the Contract
are based on a Guaranteed Interest Rate of not less than 3%. VFL may, in its
sole discretion, make Fixed Annuity Payments in an amount based on a higher
interest rate. If Fixed Annuity Payments are computed based on an interest rate
in excess of the minimum Guaranteed Interest Rate, then, for the period of the
higher rate, the dollar amount of such Fixed Annuity Payments will be greater
than the dollar amount based on a 3% interest rate. VFL guarantees that any
higher rate will be in effect for at least 12 months.
Except for Annuity Payment Options 1 and 2, the dollar amount of the first
Fixed Annuity Payment is determined by dividing the dollar amount of Adjusted
Contract Value being applied to purchase Fixed Annuity Payments by $1,000 and
multiplying the result by the annuity purchase rate in the Contract for the
selected Annuity Payment Option. Subsequent Fixed Annuity Payments are of the
same dollar amount unless VFL makes payments based on an interest rate different
from that used to compute the first payment.
VARIABLE ANNUITY PAYMENTS. Variable Annuity Payments are periodic payments
from VFL to the designated Payee, the amount of which varies from one Annuity
Payment Date to the next as a function of the net investment experience of the
Subaccounts selected by the Owner or Payee to support such payments. The dollar
amount of the first Variable Annuity Payment is determined in the same manner as
that of a Fixed Annuity Payment. Therefore, provided that the interest rate on
which Fixed Annuity Payments are based equals the Benchmark Rate of Return on
which Variable Annuity Payments are based, for any particular amount of Adjusted
Contract Value applied to a particular Annuity Payment Option, the dollar amount
of the first Variable Annuity Payment would be the same as the dollar amount of
each Fixed Annuity Payment. Variable Annuity Payments after the first Payment
are similar to Fixed Annuity Payments except that the amount of each Payment
varies to reflect the net investment experience of the Subaccounts selected by
the Owner or Payee.
The dollar amount of the initial Variable Annuity Payment attributable to
each Subaccount is determined by dividing the dollar amount of the Adjusted
Contract Value to be allocated to that Subaccount on the Annuity Date by $1,000
and multiplying the result by the annuity purchase rate in the Contract for the
selected Annuity Payment Option. The dollar value of the total initial Variable
Annuity Payment is the sum of the initial Variable Annuity Payments attributable
to each Subaccount.
The number of Annuity Units attributable to a Subaccount is derived by
dividing the initial Variable Annuity Payment attributable to that Subaccount by
the Annuity Unit Value for that Subaccount for the Valuation Period ending on
the Annuity Date or during
34
<PAGE> 39
which the Annuity Date falls if the Valuation Period does not end on such date.
The number of Annuity Units attributable to each Subaccount under a Contract
remains fixed unless there is an exchange of Annuity Units.
The dollar amount of each subsequent Variable Annuity Payment attributable
to each Subaccount is determined by multiplying the number of Annuity Units of
that Subaccount credited under the Contract by the Annuity Unit Value (described
below) for that Subaccount for the Valuation Period ending on the Annuity
Payment Date, or during which the Annuity Payment Date falls if the Valuation
Period does not end on such date.
The dollar value of each subsequent Variable Annuity Payment is the sum of
the subsequent Variable Annuity Payments attributable to each Subaccount.
The Annuity Unit Value of each Subaccount for any Valuation Period is equal
to (a) multiplied by (b) divided by (c) where:
(a) is the Net Investment Factor for the Valuation Period for which
the Annuity Unit Value is being calculated;
(b) is the Annuity Unit Value for the preceding Valuation Period; and
(c) is a daily Benchmark Rate of Return factor (for the 3% benchmark
rate of return) adjusted for the number of days in the Valuation Period.
The Benchmark Rate of Return factor is equal to one plus 3%, or 1.03. The
annual factor can be translated into a daily factor of 1.00008098.
If the net investment return of the Subaccount for an Annuity Payment
period is equal to the pro-rated portion of the 3% Benchmark Rate of Return, the
Variable Annuity Payment attributable to that Subaccount for that period will
equal the Payment for the prior period. To the extent that such net investment
return exceeds an annualized rate of return of 3% for a Payment period, the
Payment for that period will be greater than the Payment for the prior period
and to the extent that such return for a period falls short of an annualized
rate of 3%, the Payment for that period will be less than the Payment for the
prior period.
"TRANSFERS" BETWEEN SUBACCOUNTS. By Written Notice at any time after the
Annuity Date, the Payee may change the Subaccount(s) from which Annuity Payments
are being made by exchanging the dollar value of a designated number of Annuity
Units of a particular Subaccount for an equivalent dollar amount of Annuity
Units of another Subaccount. On the date of the exchange, the dollar amount of a
Variable Annuity Payment generated from the Annuity Units of either Subaccount
would be the same. Exchanges of Annuity Units are treated as transfers for the
purpose of computing any transfer processing fee.
ANNUITY PAYMENT OPTIONS
OPTION 1. INTEREST PAYMENTS. VFL holds the Adjusted Contract Value as
principal and pays interest to the Payee. The interest rate is 3% per year
compounded annually. VFL pays interest every 1 year, 6 months, 3 months or 1
month, as specified at the time this option is selected. At the death of the
Payee, the value of the remaining payments are paid in a lump sum to the Payee's
estate. Only Fixed Annuity Payments are available under Annuity Payment Option
1.
35
<PAGE> 40
OPTION 2. PAYMENTS OF A SPECIFIED AMOUNT. VFL pays the Adjusted Contract
Value in equal payments every 1 year, 6 months, 3 months or 1 month. The amount
and frequency of the payments is specified at the time this option is selected.
After each payment, interest is added to the remaining amount applied under this
option that has not yet been paid. The interest rate is 3% per year compounded
annually. Payments are made to the Payee until the amount applied under this
option, including interest, is exhausted. The total of the payments made each
year must be at least 5% of the amount applied under this option. If the Payee
dies before the amount applied is exhausted, VFL pays the value of the remaining
payments in a lump sum to the Payee's estate. Only Fixed Annuity Payments are
available under Annuity Payment Option 2.
ADDITIONAL INTEREST EARNINGS. VFL may pay interest at rates in excess of
the rates guaranteed in Annuity Payment Options 1 and 2.
OPTION 3. PAYMENTS FOR A SPECIFIED PERIOD. VFL pays the lump sum in equal
payments for the number of years specified when the option is selected. Payments
are made every 1 year, 6 months, 3 months or 1 month, as specified when the
option is selected. If the Payee dies before the expiration of the specified
number of years, VFL pays the commuted value of the remaining payments in a lump
sum to the Payee's estate.
OPTION 4. LIFE ANNUITY. VFL makes monthly payments to the Payee for as long
as the Annuitant lives. UNDER THIS OPTION, A PAYEE COULD RECEIVE ONLY ONE
PAYMENT IF THE ANNUITANT DIES AFTER THE FIRST PAYMENT, TWO PAYMENTS IF THE
ANNUITANT DIES AFTER THE SECOND PAYMENT, ETC.
OPTION 5. LIFE ANNUITY WITH PERIOD CERTAIN. VFL makes monthly payments to
the Payee for as long as the Annuitant lives. At the time this option is
selected, a period certain of 5, 10, 15, or 20 years must also be selected. If
the Annuitant dies before the specified period certain ends, the payments to the
Payee will continue until the end of the specified period. The amount of the
monthly payments therefore depends on the period certain selected.
OPTION 6. JOINT LIFE AND SURVIVORSHIP ANNUITY. VFL makes monthly payments
to the Payee while both Annuitants are living. After the death of either
Annuitant, payments continue to the Payee for as long as the other Annuitant
lives. UNDER THIS OPTION, THE PAYEE COULD RECEIVE ONLY ONE PAYMENT IF BOTH
ANNUITANTS DIE AFTER THE FIRST PAYMENT, TWO PAYMENTS IF BOTH ANNUITANTS DIE
AFTER THE SECOND PAYMENT, ETC.
ADDITIONAL CONTRACT INFORMATION
OWNERSHIP
The Contract belongs to the Owner. An Owner may exercise all of the rights
and options described in the Contract.
Subject to more specific provisions elsewhere herein, an Owner's rights
include the right to: (1) select or change a successor Owner, (2) select or
change any Beneficiary or Contingent Beneficiary, (3) select or change the Payee
prior to the Annuity Date, (4) select or change the Annuity Payment Option, (5)
allocate Purchase Payments among and between the Subaccounts and guarantee
periods, (6) transfer Contract Value among
36
<PAGE> 41
and between the Subaccounts and guarantee periods, and (7) select or change the
Subaccounts on which Variable Annuity Payments are based.
The rights of Owners of Qualified Contracts may be restricted by the terms
of a related employee benefit plan. For example, such plans may require an Owner
of a Qualified Contract to obtain the consent of his or her spouse before
exercising certain ownership rights or may restrict withdrawals. See "FEDERAL
TAX STATUS" for more details.
Selection of an Annuitant or Payee who is not the Owner may have tax
consequences. You should consult a tax advisor as to these consequences.
CHANGING THE OWNER OR BENEFICIARY
Prior to the Annuity Date and after the Cancellation Period and if the
Annuitant is still living, an Owner may transfer ownership of the Contract
subject to VFL's published rules at the time of the change.
At any time before a death benefit is paid, the Owner may name a new
Beneficiary by Written Notice unless an irrevocable Beneficiary has previously
been named. When an irrevocable Beneficiary has been designated, the Owner must
provide the irrevocable Beneficiary's written consent to VFL before a new
Beneficiary is designated.
These changes take effect as of the day the Written Notice is received at
the Service Center and VFL is not liable for any payments made under the
Contract prior to the effectiveness of any change. For possible tax consequences
of these changes, see "FEDERAL TAX STATUS."
MISSTATEMENT OF AGE OR SEX
If the Age or sex of the Annuitant given in the application is misstated,
VFL will adjust the benefits it pays under the Contract to the amount that would
have been payable at the correct Age or sex. If VFL made any underpayments
because of any such misstatement, it shall pay the amount of such underpayment
plus interest at an annual effective rate of 3%, immediately to the Payee or
Beneficiary in one sum. If VFL makes any overpayments because of a misstatement
of Age or sex, it shall deduct from current or future payments due under the
Contract, the amount of such overpayment plus interest at an annual effective
rate of 3%.
CHANGE OF CONTRACT TERMS
Upon notice to the Owner, VFL may modify the Contract to:
1. conform the Contract or the operations of VFL or of the Variable
Account to the requirements of any law (or regulation issued by a
government agency) to which the Contract, VFL or the Variable Account is
subject;
2. assure continued qualification of the Contract as an annuity
contract or a Qualified Contract under the Code;
3. reflect a change (as permitted in the Contract) in the operation of
the Variable Account; or
37
<PAGE> 42
4. provide additional Subaccounts and/or guarantee periods.
In the event of any such modification, VFL will make appropriate
endorsements to the Contract.
Only one of VFL's officers may modify the Contract or waive any of VFL's
rights or requirements under the Contract. Any modification or waiver must be in
writing. No agent may bind VFL by making any promise not contained in the
Contract.
REPORTS TO OWNERS
Prior to the Annuity Date, VFL will send each Owner a report at least
annually, or more often as required by law, indicating: the number of
Accumulation or Annuity Units credited to the Contract and the dollar value of
such units; the Contract Value, Adjusted Contract Value and Surrender Value; any
purchase payments, withdrawals, or surrenders made, death benefits paid and
charges deducted since the last report; the current interest rate applicable to
each Guarantee Amount; and any other information required by law.
The reports, which will be mailed to Owners at their last known address,
will include any information that may be required by the SEC or the insurance
supervisory official of the jurisdiction in which the Contract is delivered. VFL
will also send any other reports, notices or documents required by law to be
furnished to Owners.
MISCELLANEOUS
NON-PARTICIPATING. The Contract does not participate in the surplus or
profits of VFL and VFL does not pay dividends on the Contract.
PROTECTION OF PROCEEDS. To the extent permitted by law, no benefits payable
under the Contract to a Beneficiary or Payee are subject to the claims of an
Owner's or a Beneficiary's creditors.
DISCHARGE OF LIABILITY. Any payments made by VFL under any Annuity Payment
Option or in connection with the payment of any withdrawal, surrender or death
benefit, shall discharge VFL's liability to the extent of each such payment.
PROOF OF AGE AND SURVIVAL. VFL reserves the right to require proof of the
Annuitant's Age prior to the Annuity Date. In addition, for life contingent
Annuity Options, VFL reserves the right to require proof of the Annuitant's
survival before any Annuity Payment Date.
CONTRACT APPLICATION. VFL issues the Contract in consideration of the
Owner's application and payment of the initial purchase payment. The entire
Contract is made up of the Contract, any attached endorsements or riders, and
the application. In the absence of fraud, VFL considers statements made in the
application to be representations and not warranties. VFL will not use any
statement in defense of a claim or to void the Contract unless it is contained
in the application. VFL will not contest the Contract.
YIELDS AND TOTAL RETURNS
From time to time, VFL may advertise or include in sales literature certain
performance related information for the Subaccounts, including yields and
average annual
38
<PAGE> 43
total returns. Certain Funds have been in existence prior to the commencement of
the offering of the Contracts. VFL may advertise or include in sales literature
the performance of the Subaccounts that invest in these Funds for these prior
periods. The performance information of any period prior to the commencement of
the offering of the Contracts is calculated as if the Contract had been offered
during those periods, using current charges and expenses.
Performance information discussed herein is based on historic results and
does not indicate or project future performance. For a description of the
methods used to determine yield and total return for the Subaccounts, see the
Statement of Additional Information.
Effective yields and total returns for the Subaccounts are based on the
investment performance of the corresponding Funds. The performance of a Fund in
part reflects its expenses. See the prospectuses for the Funds for Fund expense
information.
The yield of the Money Market Subaccount refers to the annualized income
generated by an investment in the Subaccount over a specified seven-day period.
The yield is calculated by assuming that the income generated for that seven-day
period is generated each seven-day period over a 52-week period and is shown as
a percentage of the investment. The effective yield is calculated similarly but,
when annualized, the income earned by an investment in the Subaccount is assumed
to be reinvested. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
The yield of a Subaccount other than the Money Market Subaccount refers to
the annualized income generated by an investment in the Subaccount over a
specified 30-day or one-month period. The yield is calculated by assuming that
the income generated by the investment during that 30-day or one-month period is
generated each period over a 12-month period and is shown as a percentage of the
investment.
The total return of a Subaccount refers to return quotations assuming an
investment under a Contract has been held in the Subaccount for various periods
of time including, but not limited to, a period measured from the date the
Subaccount commenced operations. Average annual total return refers to total
return quotations that are annualized based on an average return over various
periods of time.
The average annual total return quotations represent the average annual
compounded rates of return that would equate an initial investment of $1,000
under a Contract to the redemption value of that investment as of the last day
of each of the periods for which total return quotations are provided. Average
annual total return information shows the average annual percentage change in
the value of an investment in the Subaccount from the beginning date of the
measuring period to the end of that period. This standardized version of average
annual total return reflects all historical investment results, less all charges
and deductions applied against the Subaccount (including any surrender charge
that would apply if an Owner terminated the Contract at the end of each period
indicated, but excluding any deductions for premium taxes). When a Subaccount,
other than the Money Market Subaccount, has been in operation for one, five and
ten years respectively, the standard version average annual total return for
these periods will be provided.
In addition to the standard version described above, total return
performance information computed on two different non-standard bases may be used
in advertisements or sales literature. Average annual total return information
may be presented, computed on the same basis as described above, except
deductions will not include the surrender charge.
39
<PAGE> 44
In addition, VFL may from time to time disclose cumulative total return for
Contracts funded by Subaccounts.
From time to time, yields, standard average annual total returns, and
non-standard total returns for the Funds may be disclosed, including such
disclosures for periods prior to the date the Variable Account commenced
operations.
Non-standard performance data will only be disclosed if the standard
performance data for the required periods is also disclosed. For additional
information regarding the calculation of other performance data, please refer to
the Statement of Additional Information.
In advertising and sales literature, the performance of each Subaccount may
be compared with the performance of other variable annuity issuers in general or
to the performance of particular types of variable annuities investing in mutual
funds, or investment portfolios of mutual funds with investment objectives
similar to the Subaccount. Lipper Analytical Services, Inc. ("Lipper"), Variable
Annuity Research Data Service ("VARDS") and Morningstar, Inc. ("Morningstar")
are independent services which monitor and rank the performance of variable
annuity issuers in each of the major categories of investment objectives on an
industry-wide basis.
Lipper's and Morningstar's rankings include variable life insurance issuers
as well as variable annuity issuers. VARDS rankings compare only variable
annuity issuers. The performance analyses prepared by Lipper, VARDS and
Morningstar each rank such issuers on the basis of total return, assuming
reinvestment of distributions, but do not take sales charges, redemption fees or
certain expense deductions at the separate account level into consideration. In
addition, VARDS prepares risk rankings, which consider the effects of market
risk on total return performance. This type of ranking provides data as to which
funds provide the highest total return within various categories of funds
defined by the degree of risk inherent in their investment objectives.
Advertising and sales literature may also compare the performance of each
Subaccount to the Standard & Poor's Index of 500 Common Stocks, a widely used
measure of stock performance. This unmanaged index assumes the reinvestment of
dividends but does not reflect any "deduction" for the expense of operating or
managing an investment portfolio. Other independent ranking services and indices
may also be used as a source of performance comparison.
VFL may also report other information including the effect of tax-deferred
compounding on a Subaccount's investment returns, or returns in general, which
may be illustrated by tables, graphs or charts.
40
<PAGE> 45
FEDERAL TAX STATUS
THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED AS TAX ADVICE
INTRODUCTION
The following summary provides a general description of the Federal income
tax considerations associated with the Contract and does not purport to be
complete or to cover all tax situations. This discussion is not intended as tax
advice. Counsel or other competent tax advisers should be consulted for more
complete information. This discussion is based upon VFL's understanding of the
present Federal income tax laws. No representation is made as to the likelihood
of continuation of the present Federal income tax laws or as to how they may be
interpreted by the Internal Revenue Service (the "IRS").
The Contract may be purchased on a tax-qualified basis ("Qualified
Contract") or non-tax-qualified basis ("Non-Qualified Contract"). Qualified
Contracts are designed for use by individuals whose premium payments are
comprised solely of proceeds from and/or contributions under retirement plans
that are intended to qualify as plans entitled to special income tax treatment
under Sections 401(a), 403(b), 408, 408A, or 459 of the Code. The ultimate
effect of Federal income taxes on the amounts held under a Contract, or annuity
payments, depends on the type of retirement plan, on the tax and employment
status of the individual concerned, and on VFL's tax status. In addition,
certain requirements must be satisfied in purchasing a Qualified Contract with
proceeds from a tax-qualified plan and receiving distributions from a Qualified
Contract in order to continue receiving favorable tax treatment. Some retirement
plans are subject to distribution and other requirements that are not
incorporated into our Contract administration procedures. Owners, participants
and Beneficiaries are responsible for determining that contributions,
distributions and other transactions with respect to the Contracts comply with
applicable law. Therefore, purchasers of Qualified Contracts should seek
competent legal and tax advice regarding the suitability of a Contract for their
situation. The following discussion assumes that Qualified Contracts are
purchased with proceeds from and/or contributions under retirement plans that
qualify for the intended special federal income tax treatment.
TAX STATUS OF THE CONTRACTS
DIVERSIFICATION REQUIREMENTS. The Code requires that the investments of the
Variable Account be adequately diversified in order for the Contracts to be
treated as annuity contracts for Federal income tax purposes. It is intended
that the Variable Account, through the Funds, will satisfy these diversification
requirements.
OWNER CONTROL. In certain circumstances, owners of variable annuity
contracts have been considered for Federal income tax purposes to be the owners
of the assets of the variable account supporting their contracts due to their
ability to exercise investment control over those assets. When this is the case,
the contract owners have been currently taxed on income and gains attributable
to the variable account assets. There is little guidance in this area, and some
features of the Contracts, such as the flexibility of an Owner to allocate
premium payments and transfer Contract Value, have not been explicitly addressed
in published rulings. While VFL believes that the Contracts do not give Owners
investment control over Variable Account assets, VFL reserves the right to
modify the
41
<PAGE> 46
Contracts as necessary to prevent an Owner from being treated as the owner of
the Variable Account assets supporting the Contract.
REQUIRED DISTRIBUTIONS. In order to be treated as an annuity contract for
Federal income tax purposes, the Code requires any Non-Qualified Contract to
contain certain provisions specifying how your interest in the Contract will be
distributed in the event of your death. The Non-Qualified Contracts contain
provisions that are intended to comply with these Code requirements, although no
regulations interpreting these requirements have yet been issued. We intend to
review such provisions and modify them if necessary to assure that they comply
with the applicable requirements when such requirements are clarified by
regulation or otherwise.
Other rules may apply to Qualified Contracts.
The following discussion assumes that the Contracts will qualify as annuity
contracts for Federal income tax purposes.
THE TREATMENT OF ANNUITIES
IN GENERAL. VFL believes that if you are a natural person you will not be
taxed on increases in the value of a Contract until a distribution occurs or
until annuity payments begin. (For these purposes, an agreement to assign or
pledge any portion of the Contract Value, and, in the case of a Qualified
Contract, any portion of an interest in the qualified plan, generally is treated
as a distribution.)
TAXATION OF NON-QUALIFIED CONTRACTS
NON-NATURAL PERSON. The Owner of any annuity contract who is not a natural
person generally must include in income any increase in the excess of the
Contract Value over the "investment in the contract" (generally, the premiums or
other consideration paid for the contract) during the taxable year. There are
some exceptions to this rule and a prospective Owner that is not a natural
person may wish to discuss these with a tax adviser. The following discussion
generally applies to Contracts owned by natural persons.
WITHDRAWALS. When a withdrawal from a Non-Qualified Contract occurs, the
amount received will be treated as ordinary income subject to tax up to an
amount equal to the excess (if any) of the Contract Account Value immediately
before the distribution over the Owner's investment in the Contract at that
time. In the case of a surrender under a Non-Qualified Contract, the amount
received generally will be taxable only to the extent it exceeds the Owner's
investment in the Contract.
PENALTY TAX ON CERTAIN WITHDRAWALS. In the case of a distribution from a
Non-Qualified Contract, there may be imposed a federal tax penalty equal to ten
percent of the amount treated as income. In general, however, there is no
penalty on distributions:
- made on or after the taxpayer reaches age 59 1/2
- made on or after the death of an Owner;
- attributable to the taxpayer's becoming disabled; or
- made as part of a series of substantially equal periodic payments
for the life (or life expectancy) of the taxpayer.
42
<PAGE> 47
Other exceptions may be applicable under certain circumstances and special
rules may be applicable in connection with the exceptions enumerated above. A
tax adviser should be consulted with regard to exceptions from the penalty tax.
Other tax penalties may apply to Qualified Contracts.
ANNUITY PAYMENTS. Although tax consequences may vary depending on the
Annuity Payment Option elected under an annuity contract, a portion of each
annuity payment is generally not taxed and the remainder is taxed as ordinary
income. The non-taxable portion of an annuity payment is generally determined in
a manner that is designed to allow an Owner to recover his or her investment in
the Contract ratably on a tax-free basis over the expected stream of annuity
payments, as determined when annuity payments start. Once an investment in the
Contract has been fully recovered, however, the full amount of each annuity
payment is subject to tax as ordinary income.
TAXATION OF DEATH BENEFIT PROCEEDS. Amounts may be distributed from a
Contract because of the Owner's or the Annuitant's death. Generally, such
amounts are includible in the income of the recipient as follows: (a) if
distributed in a lump sum, they are taxed in the same manner as a surrender of
the Contract, or (b) if distributed under a Payment Option, they are taxed in
the same way as annuity payments.
TRANSFERS, ASSIGNMENTS OR EXCHANGES OF A CONTRACT. A transfer or assignment
of ownership of a Contract, the designation of an Annuitant, the selection of
certain Annuity Dates, or the exchange of a Contract may result in certain tax
consequences to Owners that are not discussed herein. An Owner contemplating any
such transfer, assignment or exchange, should consult a tax advisor as to the
tax consequences.
WITHHOLDING. Annuity distributions are generally subject to withholding for
the recipient's federal income tax liability. Recipients can generally elect,
however, not to have tax withheld from distributions.
MULTIPLE CONTRACTS. All annuity contracts that are issued by VFL (or its
affiliates) to the same Owner during any calendar year are treated as one
annuity contract for purposes of determining the amount includible in such
Owner's income when a taxable distribution occurs.
PARTIAL 1035 EXCHANGES. Section 1035 of the Code provides that an annuity
contract may be exchanged in a tax-free transaction for another annuity
contract. Historically, it was presumed that only the exchange of an entire
contract, as opposed to a partial exchange, would be accorded tax-free status.
In 1998 in CONWAY VS. COMMISSIONER, the Tax Court held that the direct transfer
of a portion of an annuity contract into another annuity contract qualified as a
non-taxable exchange. On November 22, 1999, the Internal Revenue Service filed
an Action on Decision which indicated that it acquiesced in the Tax Court
decision in CONWAY. However, in its acquiescence with the decision of the Tax
Court, the Internal Revenue Service stated that it will challenge transactions
where taxpayers enter into a series of partial exchanges and annuitizations as
part of a design to avoid application of the 10% premature distribution penalty
or other limitations imposed on annuity contracts under the Code. In the absence
of further guidance from the Internal Revenue Service it is unclear what
specific types of partial exchange designs and transactions will be challenged
by the Internal Revenue Service. Due to the uncertainty in this area, owners
should consult their own tax advisers prior to entering into a partial exchange
of an annuity contract.
43
<PAGE> 48
TAXATION OF QUALIFIED CONTRACTS
The Contracts are designed for use with several types of qualified plans.
The tax rules applicable to participants in these qualified plans vary according
to the type of plan and the terms and conditions of the plan itself. Special
favorable tax treatment may be available for certain types of contributions and
distributions. Adverse tax consequences may result from contributions in excess
of specified limits; distributions prior to age 59 1/2 (subject to certain
exceptions); distributions that do not conform to specified commencement and
minimum distribution rules; and in other specified circumstances. Therefore, no
attempt is made to provide more than general information about the use of the
Contracts with the various types of qualified retirement plans. Owners,
Annuitants, Beneficiaries and Payees are cautioned that the rights of any person
to any benefits under these qualified retirement plans may be subject to the
terms and conditions of the plans themselves, regardless of the terms and
conditions of the Contract, but VFL is not bound by the terms and conditions of
such plans to the extent such terms contradict the Contract, unless VFL
consents.
DISTRIBUTIONS. Annuity payments are generally taxed in the same manner as
under a Non-Qualified Contract. When a withdrawal from a Qualified Contract
occurs, a pro rata portion of the amount received is taxable, generally based on
the ratio of the Owner's investment in the Contract to the participant's total
accrued benefit balance under the retirement plan. For Qualified Contracts, the
investment in the contract can be zero.
A variable annuity contract will not provide any additional tax deferral if
it is used to fund a qualified plan that is tax deferred. However, the contract
has features and benefits other than tax deferral that may make it an
appropriate investment for a qualified plan. You should consult your tax adviser
regarding these features and benefits prior to purchasing a qualified contract.
Brief descriptions follow of the various types of qualified retirement plans in
connection with a Contract. We will endorse the Contract as necessary to conform
it to the requirements of such plan.
CORPORATE AND SELF-EMPLOYED PENSION AND PROFIT SHARING PLANS. Section
401(a) of the Code permits corporate employers to establish various types of
retirement plans for employees, and permits self-employed individuals to
establish these plans for themselves and their employees. These retirement plans
may permit the purchase of the Contracts to accumulate retirement savings under
the plans. Adverse tax or other legal consequences to the plan, to the
participant, or to both may result if this Contract is assigned or transferred
to any individual as a means to provide benefit payments, unless the plan
complies with all legal requirements applicable to such benefits prior to
transfer of the Contract. Employers intending to use the Contract with such
plans should seek competent advice.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
"Individual Retirement Annuity" or "IRA." These IRAs are subject to limits on
the amount that can be contributed, the deductible amount of the contribution,
the persons who may be eligible, and the time when distributions commence. Also,
distributions from certain other types of qualified retirement plans may be
"rolled over" or transferred on a tax-deferred basis into an IRA. There are
significant restrictions on rollover or transfer contributions from Savings
Incentive Match Plans (SIMPLE), under which certain employers may, provide
contributions to IRAs on behalf of their employees, subject to special
restrictions. Employers may establish Simplified Employee Pension (SEP) Plans to
provide IRA contributions on behalf of their employees. Sales of the Contract
for use with IRAs may be subject to special requirements of the IRS.
44
<PAGE> 49
ROTH IRAS. Effective January 1, 1998, section 408A of the Code permits
certain eligible individuals to contribute to a Roth IRA. Contributions to a
Roth IRA, which are subject to certain limitations, are not deductible, and must
be made in cash or as a rollover or transfer from another Roth IRA or other IRA.
A rollover from or conversion of an IRA to a Roth IRA may be subject to tax, and
other special rules may apply. Distributions from a Roth IRA generally are not
taxed, except that, once aggregate distributions exceed contributions to the
Roth IRA, income tax and a 10% penalty tax may apply to distributions made (1)
before age 59 1/2 (subject to certain exceptions) or (2) during the five taxable
years starting with the year in which the first contribution is made to the Roth
IRA.
TAX SHELTERED ANNUITIES. Section 403(b) of the Code allows employees of
certain Section 501(c)(3) organizations and public schools to exclude from their
gross income the premium payments made, within certain limits, on a Contract
that will provide an annuity for the employee's retirement. These premium
payments may be subject to FICA (social security) tax.
The following amounts may not be distributed from Code section 403(b)
annuity contracts prior to the employee's death, attainment of age 59 1/2,
separation from service, disability, or financial hardship: (1) elective
contributions made in years beginning after December 31, 1988; (2) earnings on
those contributions; and (3) earnings in such years on amounts held as of the
last year beginning before January 1, 1989. In addition, income attributable to
elective contributions may not be distributed in the case of hardship.
DEFERRED COMPENSATION PLANS. Section 457 of the Code provides for certain
deferred compensation plans. These plans may be offered with respect to service
for state governments, local governments, political subdivisions, agencies,
instrumentalities, certain affiliates of such entities and tax exempt
organizations. The plans may permit participants to specify the form of
investment for their deferred compensation account. With respect to
non-governmental plans, all investments are owned by the sponsoring employer and
are subject to the claims of the general creditors of the employer; and
depending on the terms of the particular plan, the employer may be entitled to
draw on the deferred amounts for purposes unrelated to its Section 457 plan
obligations.
WITHHOLDING
Distributions from Contracts generally are subject to withholding for the
Owner's federal income tax liability. The withholding rate varies according to
the type of distribution and the Owner's tax status. The Owner will be provided
the opportunity to elect not have tax withheld from distributions.
"Eligible rollover distributions" from section 401(a) plans and section
403(b) tax-sheltered annuities are subject to a mandatory federal income tax
withholding of 20%. An eligible rollover distribution is the taxable portion of
any distribution from such a plan, except certain distributions such as minimum
distributions required by the Code or distributions in a specified annuity form.
The 20% withholding does not apply, however, if the Owner chooses a "direct
rollover" from the plan to another tax-qualified plan or IRA.
POSSIBLE CHANGES IN TAXATION
Although the likelihood of legislative change is uncertain, there is always
the possibility that the tax treatment of the Contracts could change by
legislation or other
45
<PAGE> 50
means. It is also possible that any change could be retroactive (that is,
effective prior to the date of the change). A tax adviser should be consulted
with respect to legislative developments and their effect on the Contract.
OTHER TAX CONSEQUENCES
As noted above, the foregoing comments about the Federal tax consequences
under the Contracts are not exhaustive, and special rules are provided with
respect to other tax situations not discussed in this prospectus. Further, the
Federal income tax consequences discussed herein reflect our understanding of
current law, and the law may change. Federal estate and state and local estate,
inheritance and other tax consequences of ownership or receipt of distributions
under a Contract depend on the individual circumstances of each Owner of
recipient of the distribution. A competent tax adviser should be consulted for
further information.
OTHER INFORMATION
DISTRIBUTION OF THE CONTRACTS
CNA Investor Services, Inc. ("CNA/ISI"), which is located at CNA Plaza,
Chicago, Illinois 60685, is principal underwriter and distributor of the
Contracts. CNA/ISI is an affiliate of VFL, is registered with the SEC as a
broker-dealer, and is a member of the National Association of Securities
Dealers, Inc. VFL pays CNA/ISI for acting as principal underwriter under a
distribution agreement. The Contracts are offered on a continuous basis and VFL
does not anticipate discontinuing the offer.
Applications for Contracts are solicited by agents who are licensed by
applicable state insurance authorities to sell VFL's insurance contracts and who
are also registered representatives of a broker-dealer having a selling
agreement with CNA/ISI. Such broker-dealers will generally receive commissions
based on a percent of purchase payments made (up to a maximum of 8%). The
writing agent will receive a percentage of these commissions from the respective
broker-dealer, depending on the practice of that broker-dealer. Owners do not
pay these commissions.
VOTING PRIVILEGES
In accordance with current interpretations of applicable law, VFL votes
Fund shares held in the Variable Account at regular and special shareholder
meetings of the Funds in accordance with instructions received from persons
having voting interests in the corresponding Subaccounts. If, however, the 1940
Act or any regulation thereunder should be amended, or if the present
interpretation thereof should change, or VFL otherwise determines that it is
allowed to vote the shares in its own right, it may elect to do so.
The number of votes that an Owner or Annuitant has the right to instruct
are calculated separately for each Subaccount, and may include fractional votes.
Prior to the Annuity Date, the Owner holds a voting interest in each Subaccount
to which Variable Contract Value is allocated. After the Annuity Date, the Payee
has a voting interest in each Subaccount from which Variable Annuity Payments
are made.
For each Owner, the number of votes attributable to a Subaccount will be
determined by dividing the Owner's Subaccount Value by the Net Asset Value Per
Share of the Fund
46
<PAGE> 51
in which that Subaccount invests. For each Payee, the number of votes
attributable to a Subaccount is determined by dividing the liability for future
Variable Annuity Payments to be paid from that Subaccount by the Net Asset Value
Per Share of the Fund in which that Subaccount invests. This liability for
future payments is calculated on the basis of the mortality assumptions, the
selected Benchmark Rate of Return and the Annuity Unit Value of that Subaccount
on the date that the number of votes is determined. As Variable Annuity Payments
are made to the Payee, the liability for future payments decreases as does the
number of votes.
The number of votes available to an Owner or Payee are determined as of the
date coinciding with the date established by the Fund for determining
shareholders eligible to vote at the relevant meeting of the Fund's
shareholders. Voting instructions are solicited by written communication prior
to such meeting in accordance with procedures established for the Fund. Each
Owner or Payee having a voting interest in a Subaccount will receive proxy
materials and reports relating to any meeting of shareholders of the Funds in
which that Subaccount invests.
Fund shares as to which no timely instructions are received and shares held
by VFL in a Subaccount as to which no Owner or Payee has a beneficial interest
are voted in proportion to the voting instructions that are received with
respect to all Contracts participating in that Subaccount. Voting instructions
to abstain on any item to be voted upon are applied to reduce the total number
of votes eligible to be cast on a matter. Under the 1940 Act, certain actions
affecting the Variable Account may require Contract Owner approval. In that
case, an Owner will be entitled to vote in proportion to his Variable Contract
Value.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate Accounts are a party
or to which the assets of the Variable Account are subject. VFL, as an insurance
company, is ordinarily involved in litigation including class action lawsuits.
In some class action and other lawsuits involving insurance companies,
substantial damages have been sought and/or material settlement payments have
been made. Although the outcome of any litigation cannot be predicted with
certainty, VFL believes that at the present time there are no pending or
threatened lawsuits that are reasonably likely to have a material adverse impact
on its ability to meet its obligations under the Contract or to the Variable
Account nor does VFL expect to incur significant losses from such actions.
COMPANY HOLIDAYS
VFL is closed on the following days: New Years Day, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
47
<PAGE> 52
GLOSSARY
ACCUMULATION UNIT: A unit of measure we use to calculate Variable Contract
Value.
ADJUSTED CONTRACT VALUE: The Contract Value less Premium Tax charges not
previously deducted, less the annual administration fee.
AGE: The age of any person on the birthday nearest the date for which we
determine Age.
ANNUITANT: The person or persons whose life (or lives) determines the
Annuity Payments payable under the Contract and whose death determines the death
benefit. With regard to joint and survivorship Annuity Payment Options, the
maximum number of joint Annuitants is two and provisions referring to the death
of an Annuitant mean the death of the last surviving Annuitant. Provisions
relating to an action by the Annuitant mean, in the case of joint Annuitants,
both Annuitants acting jointly.
ANNUITY DATE: The date on which we apply Surrender Value or Adjusted
Contract Value to purchase Annuity Units or a fixed annuity.
ANNUITY PAYMENT: One of several periodic payments we make to the Payee
under an Annuity Payment Option.
ANNUITY PAYMENT DATE: The date each month, quarter, semi-annual period, or
year as of which VFL computes Annuity Payments. The Annuity Payment Date(s) is
shown on the Contract.
ANNUITY PAYMENT OPTION: The form of Annuity Payments selected by the Owner
under the Contract. The Annuity Payment Option is shown on the Contract.
ANNUITY UNIT: A unit of measure we use to calculate Variable Annuity
Payments.
BENCHMARK RATE OF RETURN: An annual rate of return shown on the Contract
that we use to determine the degree of fluctuation in the amount of Variable
Annuity Payments in response to fluctuations in the net investment return of
selected Subaccounts. We assume (among other things) that the assets in the
Variable Account supporting the Contract will have a net annual investment
return over the anticipated Annuity Payment period equal to that rate of return.
BENEFICIARY: The person(s) to whom we will pay the death benefit if
Annuitant dies prior to the Annuity Date.
CANCELLATION PERIOD: The period described on the cover page of the Contract
during which the Owner may return the Contract for a refund.
THE CODE: The Internal Revenue Code of 1986, as amended.
CONTINGENT ANNUITANT: The person that the Owner designates in the
application who becomes the Annuitant in the event that the Annuitant dies
before the Annuity Date while the Owner is still alive.
CONTINGENT BENEFICIARY: The person(s) to whom we will pay the death benefit
if the Beneficiary (or Beneficiaries) is not living.
CONTRACT ANNIVERSARY: The same date in each Contract Year as the Contract
Effective Date.
48
<PAGE> 53
CONTRACT EFFECTIVE DATE: The date on which VFL issues the Contract and upon
which the Contract becomes effective. The Contract Effective Date is shown on
the Contract and is used to determine Contract Years and Contract Anniversaries.
CONTRACT YEAR: A twelve-month period beginning on the Contract Effective
Date or on a Contract Anniversary.
CONTRACT VALUE: The total amount invested under the Contract. It is the sum
of Variable Contract Value and the Interest Adjustment Account value.
DUE PROOF OF DEATH: Proof of death satisfactory to VFL. Due Proof of Death
may consist of the following if acceptable to VFL:
(a) a certified copy of the death record;
(b) a certified copy of a court decree reciting a finding of death; or
(c) any other proof satisfactory to VFL.
FIXED ANNUITY PAYMENT: An Annuity Payment that the General Account supports
and which does not vary in amount as a function of the investment return of the
Variable Account from one Annuity Payment Date to the next.
FUND: Any open-end management investment company or investment portfolio
thereof or unit investment trust or series thereof, in which a Subaccount
invests.
GENERAL ACCOUNT: VFL's assets, other than those allocated to the Variable
Account or any other separate account of VFL.
GUARANTEE AMOUNT: Before the Annuity Date the amount equal to that part of
any Net Purchase Payment that you allocate to, or any amount you transfer to the
Interest Adjustment Account for a designated guarantee period with a particular
expiration date plus any interest thereon and less the amount of any withdrawals
(including any applicable surrender charges and any applicable premium payment
tax charge) or transfers therefrom.
INTEREST ADJUSTMENT ACCOUNT: An investment option under the contract where
VFL guarantees a certain minimum interest rate.
NET ASSET VALUE PER SHARE: The value per share of any Fund on any Valuation
Day. The method of computing the Net Asset Value Per Share is described in the
prospectus for the Funds.
NET PURCHASE PAYMENT: A purchase payment less any premium payment tax
charge deducted from the purchase payment.
NON-QUALIFIED CONTRACT: A Contract that is not a "qualified contract."
OWNER: The person or persons who owns (or own) the Contract and who is
(are) entitled to exercise all rights and privileges provided in the Contract.
The maximum number of joint Owners is two. Provisions relating to action by the
Owner mean, in the case of joint Owners, both Owners acting jointly. In the
context of a Contract issued on a group basis, Owners refers to holders of
certificates under a group Contract.
PAYEE: The person entitled to receive Annuity Payments under the Contract.
The Annuitant is the Payee unless the Owner designates a different person as
Payee.
49
<PAGE> 54
PREMIUM TAX: A charge specified in the Contract that is deducted either
from purchase payments or from Contract Value prior to surrender, annuitization
or the death of the Owner or Annuitant.
QUALIFIED CONTRACT: A Contract that is issued in connection with a
retirement plan that qualifies for special federal income tax treatment under
Sections 401, 403(b), 408, 408A or 457 of the Code.
SEC: The U.S. Securities and Exchange Commission.
SERVICE CENTER: The offices of VFL's administrative department at P.O. Box
305153, Nashville, Tennessee 37230-5153 (1-800-262-1755). Any overnight
deliveries should be sent to us at:
CNA Insurance Companies
Variable Support Center
100 CNA Drive
Nashville, TN 37214-3439
SUBACCOUNT: A subdivision of the Variable Account, the assets of which are
invested in a corresponding Fund.
SUBACCOUNT VALUE: The amount equal to that part of any Net Purchase Payment
allocated to the Subaccount and any amount transferred to that Subaccount,
adjusted by interest income, dividends, net capital gains or losses (actually
realized or not yet realized) and decreased by withdrawals (including any
applicable surrender charges and any applicable premium payment tax charge) and
any amounts transferred out of that Subaccount.
SUCCESSOR OWNER: Any Owner named in the application to follow the original
Owner should the original Owner die, provided the original Owner is not also the
Annuitant.
SURRENDER VALUE: The Adjusted Contract Value less any applicable surrender
charges.
VALUATION DAY: For each Subaccount, each day on which the New York Stock
Exchange is open for business except for certain holidays listed in the
prospectus and days that a Subaccount's corresponding Fund does not value its
shares.
VALUATION PERIOD: The period that starts at the close of regular trading on
the New York Stock Exchange on any Valuation Day and ends at the close of
regular trading on the next succeeding Valuation Day.
VARIABLE ACCOUNT: Valley Forge Life Insurance Company Variable Annuity
Separate Account.
VARIABLE CONTRACT VALUE: The sum of all Subaccount Values.
VARIABLE ANNUITY PAYMENT: An Annuity Payment that may vary in amount from
one Annuity Payment Date to the next as a function of the investment experience
of one or more Subaccounts selected by the Owner to support such payments.
VFL: Valley Forge Life Insurance Company.
WRITTEN NOTICE: A notice or request submitted in writing in a form
satisfactory to VFL that the Owner signs and VFL receives at the Service Center.
50
<PAGE> 55
APPENDIX A
CONDENSED FINANCIAL INFORMATION
The Variable Account commenced operations in 1997. Following are the number
of Accumulation Units outstanding and their values at inception, at December 31,
1997, December 31, 1998 and December 31, 1999. This information should be read
in conjunction with the financial statements, including related notes, for the
Variable Annuity Separate Account (as well as the independent auditor's report
thereon) which are included in the Statement of Additional Information ("SAI").
The SAI, having the same date as this prospectus and providing additional
information about the Contract and the Variable Account, has been filed with the
SEC and is incorporated herein by reference.
The audited financial statements of VFL (as well as the independent
auditor's report thereon) appear in the SAI.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FEDERATED
FEDERATED HIGH FIDELITY FIDELITY
PRIME FEDERATED INCOME VIP VIP II FIDELITY FIDELITY ALGER ALGER
MONEY UTILITY BOND EQUITY- ASSET VIP II VIP II AMERICAN AMERICAN
FUND II FUND II FUND II INCOME MANAGER INDEX 500 CONTRAFUND SMALL CAP GROWTH
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unit value at
inception............... $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
Unit value at December
31, 1997................ $ 1.00 $ 14.29 $ 10.95 $ 24.28 $ 18.01 $ 114.39 $ 19.94 $ 43.75 $ 42.76
Units outstanding at
December 31, 1997....... 861,083.8 3,546.7 17,395.3 20,427.1 14,845.4 4,920.8 16,502.8 4,473.8 5,832.2
Unit value at December
31, 1998................ $ 1.00 $ 15.27 $ 10.92 $ 25.42 $ 18.16 $ 141.25 $ 24.44 $ 43.97 $ 53.22
Units outstanding at
December 31, 1998....... 5,562,204 110,914 289,997 167,760 124,340 75,681 151,918 36,417 102,309
Unit value at December
31, 1999................ $ 1.00 $ 14.35 $ 10.24 $ 25.71 $ 18.67 $ 167.41 $ 29.15 $ 55.15 $ 64.38
Units outstanding at
December 31, 1999....... 29,668,324 226,331 474,339 309,669 215,317 144,888 405,821 71,289 297,049
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
FIRST EAGLE
ALGER MFS SOGEN VANECK VANECK
AMERICAN MFS GROWTH MFS OVERSEAS WORLDWIDE WORLDWIDE
MID-CAP EMERGING MFS WITH LIMITED MFS VARIABLE HARD EMERGING
GROWTH GROWTH RESEARCH INCOME MATURITY TOTAL RETURN PORTFOLIO ASSETS MARKETS
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unit value at
inception............. $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
Unit value at December
31, 1997.............. $ 24.18 $ 16.14 $ 15.79 $ 16.44 $ 10.01 $ 16.63 $ 9.77 $ 15.72 $ 11.00
Units outstanding at
December 31, 1997..... 1,754.7 8,776.2 9,906.0 13,322.2 8,162.4 15,625.0 77,061.7 574.9 1,535.5
Unit value at December
31, 1998.............. $ 28.87 $ 21.47 $ 19.05 $ 20.11 $ 10.16 $ 18.12 $ 10.07 $ 9.20 $ 7.12
Units outstanding at
December 31, 1998..... 40,631 136,181 88,093 118,618 101,531 104,481 202,429 15,342 56,387
Unit value at December
31, 1999.............. $ 32.23 $ 37.94 $ 23.34 $ 21.31 $ 9.81 $ 17.75 $ 14.18 $ 10.96 $ 14.26
Units outstanding at
December 31, 1999..... 119,877 283,821 199,716 245,559 202,348 273,825 234,356 33,193 75,953
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A-1
<PAGE> 56
There are no accumulation unit values shown for the Alger American
Leveraged AllCap; Alliance Premier Growth; Alliance Growth and Income; American
Century VP Income & Growth; American Century VP Value; Templeton Developing
Markets Securities; Templeton Asset Strategy; Lazard Retirement Equity; Lazard
Retirement Small Cap; Morgan Stanley International Magnum; and Morgan Stanley
Emerging Markets Equity Subaccounts because they were not available under the
Contract until the date of this prospectus.
A-2
<PAGE> 57
APPENDIX B
Assume that an Owner makes purchase payments on the first day of certain
Contract Years as shown in the table below. Assume also that the Owner withdraws
$7,500 during the seventh month of Contract Year five and $5,000 at the
beginning of Contract Years thirteen and fifteen. Assume that the Annuitant is
younger than age 76 for all twenty years. All "beginning of year death benefits"
are computed as of the first day of the Contract Year except for the figure for
Contract Year 5 which is computed as of the seventh month of that year (i.e., as
of the time of the $7,500 withdrawal).
EXPLANATIONS:
The Death Benefit at the beginning of Contract Years 1 through 4 is
determined from the Contract Value at the end of the prior Contract Year plus
the purchase payment made at the beginning of the year for which the computation
is being made.
The Death Benefit at the end of month 7 of Contract Year 5 is determined
from the prior year's Contract Value plus the purchase payment made at the
beginning of that year, minus the $7,500 withdrawn in the seventh month minus a
$318.75 surrender charge assessed in connection with the withdrawal.
The Death Benefit at the beginning of Contract Years 6 through 10 is
determined from the Contract Value at the end of the prior Contract Year plus
the purchase payment made at the beginning of the Year for which the computation
is being made. Since the first day of Contract Year 6 is a minimum death benefit
floor computation anniversary, a new death benefit floor amount is set at
$8,506.
The Death Benefit at the beginning of Contract Year 11 is determined solely
from the prior Year's Contract Value. Since this is a minimum death benefit
floor computation anniversary, a new death benefit floor amount is set at
$42,610.
The Death Benefit at the beginning of Contract Year 12 is determined from
the minimum death benefit which is the most recently reset death benefit floor
amount of $42,610. This is so because the Contract Value declined and no
purchase payments or withdrawals occurred since the prior reset of the death
benefit floor amount.
The Death Benefit at the beginning of Contract Year 13 is determined from
the minimum death benefit which is the most recently reset death benefit floor
amount of $42,610 adjusted for the $5,000 withdrawal. The $36,762 results from
$42,610 being multiplied by $31,432/$36,432.
The Death Benefit at the beginning of Contract Year 14 is the minimum death
benefit which is the most recently reset death benefit floor amount adjusted for
the $5,000 withdrawal made since that floor amount was set, or $36,762.
The Death Benefit at the beginning of Contract Year 15 is the minimum death
benefit which is the most recently reset death benefit floor amount of $42,610
adjusted for both $5,000 withdrawals made since that floor amount was set. The
$28,372 results from $42,610 being multiplied by $31,432/$36,432, and this
result multiplied by $16,908/$21,908.
The Death Benefit at the beginning of Contract Year 16 is the minimum death
benefit which is the most recently reset death benefit floor amount of $42,610
adjusted for both $5,000 withdrawals made since that floor amount was set. The
$28,372 results from
B-1
<PAGE> 58
$42,610 being multiplied by $31,432/$36,432, and this result multiplied by
$16,908/$21,908. Even though this is a death benefit floor computation
anniversary, the death benefit floor amount is not reset since the Contract
Value has not exceeded its previous high of $42,610 occurring in Contract Year
10. No purchase payments or withdrawals were made.
The Death Benefit at the beginning of Contract Year 17 through 20 is the
minimum death benefit which is the most recently reset death benefit floor
amount of $42,610 adjusted for both $5,000 withdrawals made since that floor
amount was set and adjusted further for the $10,000 purchase payment made on the
first day of Contract Year 17.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
ACCUMULATED
BEGINNING NET END OF YEAR BEGINNING YEAR
OF CONTRACT PURCHASE PURCHASE ACCUMULATION END OF YEAR DEATH
YEAR PAYMENTS WITHDRAWALS PAYMENTS UNIT VALUE CONTRACT VALUE BENEFIT
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 $ 2,000 $ 0 $ 2,000 10.50000 $ 2,100 $ 2,000
- ----------------------------------------------------------------------------------------------------
2 $ 2,000 $ 0 $ 4,000 11.23500 $ 4,387 $ 4,100
- ----------------------------------------------------------------------------------------------------
3 $ 2,500 $ 0 $ 6,500 12.13380 $ 7,438 $ 6,887
- ----------------------------------------------------------------------------------------------------
4 $ 3,000 $ 0 $ 9,500 13.34718 $11,482 $10,438
- ----------------------------------------------------------------------------------------------------
5 $ 4,000 $7,500 $ 6,000 14.81537 $ 8,506 $ 7,663
- ----------------------------------------------------------------------------------------------------
6 $ 5,000 $ 0 $11,000 16.59321 $15,127 $13,506
- ----------------------------------------------------------------------------------------------------
7 $ 5,000 $ 0 $16,000 18.25254 $22,139 $20,127
- ----------------------------------------------------------------------------------------------------
8 $ 5,000 $ 0 $21,000 19.71274 $29,310 $27,139
- ----------------------------------------------------------------------------------------------------
9 $ 5,000 $ 0 $26,000 20.89550 $36,369 $34,310
- ----------------------------------------------------------------------------------------------------
10 $ 5,000 $ 0 $31,000 21.52237 $42,610 $41,369
- ----------------------------------------------------------------------------------------------------
11 $ 0 $ 0 $31,000 20.44625 $40,480 $42,610
- ----------------------------------------------------------------------------------------------------
12 $ 0 $ 0 $31,000 18.40162 $36,432 $42,610
- ----------------------------------------------------------------------------------------------------
13 $ 0 $5,000 $26,000 15.64138 $26,717 $36,762
- ----------------------------------------------------------------------------------------------------
14 $ 0 $ 0 $26,000 12.82593 $21,908 $36,762
- ----------------------------------------------------------------------------------------------------
15 $ 0 $5,000 $21,000 13.46723 $17,753 $28,372
- ----------------------------------------------------------------------------------------------------
16 $ 0 $ 0 $21,000 14.14059 $18,641 $28,372
- ----------------------------------------------------------------------------------------------------
17 $10,000 $ 0 $31,000 14.14059 $28,641 $38,372
- ----------------------------------------------------------------------------------------------------
18 $ 0 $ 0 $31,000 13.43356 $27,209 $38,372
- ----------------------------------------------------------------------------------------------------
19 $ 0 $ 0 $31,000 13.43356 $27,209 $38,372
- ----------------------------------------------------------------------------------------------------
20 $ 0 $ 0 $31,000 13.97090 $28,297 $38,372
- ----------------------------------------------------------------------------------------------------
</TABLE>
B-2
