File No. 333-01087
File No. 811-7547
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
-------------- [ ]
Post-Effective Amendment No. 7
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 12 [X]
VALLEY FORGE LIFE INSURANCE COMPANY VARIABLE
ANNUITY SEPARATE ACCOUNT
(Exact Name of Registrant)
VALLEY FORGE LIFE INSURANCE COMPANY
(Name of Depositor)
CNA Plaza, 43 South
Chicago, Illinois 60685
(Address of Depositor's Principal Executive Offices)
Depositor's Telephone Number, including Area Code: (312) 822-6597
Jonathan D. Kantor
Valley Forge Life Insurance Company
CNA Plaza, 43 South
Chicago, IL 60685
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on May 1, 2000 pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of Securities Being Registered:
Deferred Variable Annuity Contracts
================================================================================
CROSS REFERENCE SHEET
Pursuant to Rules 481(a) and 495(a)
Showing location in Part A (prospectus) and Part B (statement of additional
information) of registration statement of information required by Form N-4
PART A
ITEM OF FORM N-4 PROSPECTUS CAPTION
1. Cover Page. . . . . . . . . . . . . . Cover Page
2. Definitions . . . . . . . . . . . . . Glossary
3. Synopsis. . . . . . . . . . . . . . . Fee Table; Summary
4. Condensed Financial
Information . . . . . . . . . . . . . Condensed Financial
Information
5. General Description of Registrant,
Depositor, and Portfolio Companies
(a) Depositor . . . . . . . . . . VFL
(b) Registrant . . . . . . . . . The Variable Account
(c) Portfolio Company . . . . . . The Funds
(d) Portfolio Company Prospectus. The Funds
(e) Voting Rights . . . . . . . . Voting Privileges
(f) Administrator . . . . . . . . Administrative Services
6. Deductions
(a) General . . . . . . . . . . . Contract Charges and Fees;
Summary
(b) Sales Load. . . . . . . . . . Contract Charges and Fees
(c) Special Purchase Plan . . . . Not Applicable
(d) Commission . . . . . . . . . Distribution of the
Contracts
(e) Expenses . . . . . . . . . . Contract Charges and Fees
(f) Organizational Expenses . . . Not Applicable
7. General Description of Variable
Annuity Contracts
(a) Persons With Rights . . . . . . . . . . Cover Page; Summary;
Description of the
Contract; Additional
Contract Information;
Selecting an Annuity
Payment Option
(b)(i) Allocation of Purchase
Payments . . . . . . . . . . . . . . . . Summary; Cancelling the
Contract; Crediting and
Allocating Purchase
Payments
(ii) Transfers . . . . . . . . . . . . . . . Summary; Transfers,
Annuity Payments
(iii) Exchanges . . . . . . . . . . . . . . . Not Applicable
(c) Changes . . . . . . . . . . . . . . . . The Variable Account;
Additional Contract
Information
(d) Inquiries . . . . . . . . . . . . . . . Cover Page; Summary
8. Annuity Period . . . . . . . . . . . . . . . . Summary; Selecting an
Annuity Payment Option
9. Death Benefit . . . . . . . . . . . . . . . . . Death of Owner or
Annuitant
10. Purchases and Contract Value
(a) Purchases . . . . . . . . . . . . . . . Summary; Purchasing a
Contract; Cancelling
the Contract; Crediting
and Allocating Purchase
Payments; Variable
Contract Value;
Transfers; Selecting an
Annuity Payment Option
(b) Valuation . . . . . . . . . . . . . . . Summary; Description of
the Contract; Contract
Charges and Fees;
Selecting an Annuity
Payment Option
(c) Calculations. . . . . . . . . . . . . . Variable Contract
Value; Selecting
an Annuity Payment
Option
(d) Underwriter . . . . . . . . . . . . . . Distribution of the
Contracts
11. Redemptions
(a) By Owners . . . . . . . . . . . . . . . Summary; Withdrawals;
Surrenders; Selecting
an Annuity Payment
Option; Federal Tax
Considerations
By Annuitant. . . . . . . . . . . . . . Not Applicable
(b) Texas ORP . . . . . . . . . . . . . . . Not Applicable
(c) Payment Delay . . . . . . . . . . . . . Payments by VFL
(d) Lapse . . . . . . . . . . . . . . . . . Not Applicable
(e) Free Look . . . . . . . . . . . . . . . Summary; Cancelling the
Contract
12. Taxes . . . . . . . . . . . . . . . . . . Federal Tax Status
13. Legal Proceedings . . . . . . . . . . . . Legal Proceedings
14. Table of Contents for the Statement of
Additional Information . . . . . . . . . Statement of Additional
Information
PART B
ITEM OF FORM N-4 STATEMENT OF ADDITIONAL
INFORMATION CAPTION
15. Cover Page. . . . . . . . . . . . . . . . Cover Page
16. Table of Contents . . . . . . . . . . . . Table of Contents
17. General Information and History . . . . . VFL
(Prospectus)
18. Services
(a) Fees and Expenses of
Registrant . . . . . . . . . . . Contract Charges and Fees
(Prospectus)
(b) Management Contracts. . . . . . . Not Applicable
(c) Custodian . . . . . . . . . . . . Not Applicable
Accountant . . . . . . . . . . . Experts
(d) Assets of Registrant. . . . . . . The Variable Account
(Prospectus)
(e) Affiliated Persons . . . . . . . . Administrative Services
(Prospectus); Distribution
of The Contracts
(Prospectus)
(f) Underwriter . . . . . . . . . . . Distribution of the
Contract (Prospectus)
19. Purchase of Securities Being Offered. . . Summary (Prospectus);
Purchasing a Contract
(Prospectus); Distribution
of the Contracts
(Prospectus)
20. Underwriters . . . . . . . . . . . . . . Distribution of the
Contracts (Prospectus)
21. Calculation of Performance Data . . . . . Performance Information
22. Annuity Payments. . . . . . . . . . . . . Selecting an Annuity
Payment Option
(Prospectus)
23. Financial Statements. . . . . . . . . . . Financial Statements of
Valley Forge Life
Insurance Company
PART C -- OTHER INFORMATION
ITEM OF FORM N-4 PART C CAPTION
24. Financial Statements and Exhibits. . . . . . . Financial Statements of
Valley Forge Life
Insurance Company
25. Directors and Officers of the
Depositor . . . . . . . . . . . . . . . . . . Directors and Officers
26. Persons Controlled By or Under
Common Control with the Depositor
or Registrant. . . . . . . . . . . . . . . . . Persons Controlled By or
Under Common Control
with the Depositor or
Registrant
27. Number of Contractowners. . . . . . . . . . . Number of Contractowners
28. Indemnification . . . . . . . . . . . . . . . Indemnification
29. Principal Underwriters. . . . . . . . . . . . Principal Underwriter
30. Location of Books and Records . . . . . . . . Location of Books and
Records
31. Management Services . . . . . . . . . . . . . Management Services
32. Undertakings. . . . . . . . . . . . . . . . . Undertakings
PART A
PROSPECTUS
FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY CONTRACT
ISSUED BY
VALLEY FORGE LIFE INSURANCE COMPANY AND
VALLEY FORGE LIFE INSURANCE COMPANY VARIABLE ANNUITY
SEPARATE ACCOUNT
This prospectus describes a flexible premium deferred variable annuity
contract (the "Contract") that Valley Forge Life Insurance Company ("VFL")
issues. The Contract may be sold to or used in connection with retirement plans,
including plans that qualify for special federal income tax treatment under the
Internal Revenue Code.
You (the Owner) may allocate Net Purchase Payments and Contract values to
one or more of the Subaccounts of Valley Forge Life Insurance Company Variable
Annuity Separate Account (the "Variable Account"), or to the 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 age).
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
You may choose to invest in the following funds:
- - - Federated High Income Bond Fund II
- - - Federated Prime Money Fund II
- - - Federated Utility Fund II
- - - Asset Manager Portfolio in the Variable Insurance Products Fund II
- - - Contrafund Portfolio in the Variable Insurance Products Fund II
- - - Index 500 Portfolio in the Variable Insurance Products Fund II
- - - Equity-Income Portfolio in the Variable Insurance Products Fund
- - - Alger American Growth Portfolio
- - - Alger American MidCap Growth Portfolio
- - - Alger American Small Capitalization Portfolio
- - - 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 Capital Appreciation Portfolio
- - - Janus Aspen Growth Portfolio
- - - Janus Aspen Balanced Portfolio
- - - Janus Aspen Flexible Income Portfolio
- - - Janus Aspen International Growth Portfolio
- - - Janus Aspen Worldwide Growth Portfolio
- - - Alliance 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
TABLE OF CONTENTS
FEE TABLE...................................................
SUMMARY.....................................................
General Description of the Contract.......................
Purchasing a Contract.....................................
Canceling the Contract....................................
Charges and Fees..........................................
Transfers.................................................
Withdrawals...............................................
Surrenders................................................
VFL, THE VARIABLE ACCOUNT AND THE FUNDS ....................
VFL.......................................................
The Variable Account......................................
The Funds.................................................
DESCRIPTION OF THE CONTRACT.................................
Purchasing a Contract.....................................
Canceling the Contract....................................
Crediting and Allocating Purchase Payments................
Variable Contract Value...................................
Transfers.................................................
Withdrawals...............................................
Surrenders................................................
Death of Owner or Annuitant...............................
Payments by VFL...........................................
Telephone Transaction Privileges..........................
Supplemental Riders.......................................
CONTRACT CHARGES AND FEES...................................
Surrender Charge (Contingent Deferred Sales Charge).......
Annual Administration Fee.................................
Transfer Processing Fee...................................
Taxes on Purchase Payments................................
Mortality and Expense Risk Charge.........................
Administration Charge.....................................
Fund Expenses.............................................
Possible Charge for VFL's Taxes...........................
SELECTING AN ANNUITY PAYMENT OPTION.........................
Annuity Date..............................................
Annuity Payment Dates.....................................
Election and Changes of Annuity Payment Options...........
Annuity Payments..........................................
Annuity Payment Options...................................
ADDITIONAL CONTRACT INFORMATION.............................
Ownership.................................................
Changing the Owner or Beneficiary.........................
Misstatement of Age or Sex................................
Change of Contract Terms..................................
Reports to Owners.........................................
Miscellaneous.............................................
YIELDS AND TOTAL RETURNS....................................
i
FEDERAL TAX STATUS..........................................
Introduction..............................................
Tax Status of the Contracts...............................
The Treatment of Annuities................................
Taxation of Non-Qualified Contracts.......................
Taxation of Qualified Plans...............................
Withholding...............................................
Possible Changes in Taxation..............................
Other Tax Consequences....................................
OTHER INFORMATION...........................................
Distribution of the Contracts.............................
Voting Privileges.........................................
Legal Proceedings.........................................
Company Holidays..........................................
GLOSSARY....................................................
APPENDIX A..................................................
APPENDIX B..................................................
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
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>
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
with respect with respect
to certain to certain
Management 12b-1 Funds) Funds)
(Advisory Fees) Fees
--------------- ---- -------- --------
Federated Insurance Series (See Note 1)
<S> <C> <C> <C>
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 0.58% 0.07% 0.65%
Fidelity VIP Equity-Income 0.48% 0.08% 0.56%
Fidelity VIP 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%
Janus Aspen Series, Institutional Shares (See Note 8)
Janus Aspen Capital Appreciation Portfolio 0.65% 0.04% 0.69%
Janus Aspen Growth Portfolio 0.65% 0.02% 0.67%
Janus Aspen Balanced Portfolio 0.65% 0.02% 0.67%
Janus Aspen Flexible Income Portfolio 0.65% 0.07% 0.72%
Janus Aspen International Growth Portfolio 0.65% 0.11% 0.76%
Janus Aspen 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>
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.
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.
2
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 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 Capital Appreciation Subaccount $ 95 $137 $171 $279
Janus Aspen Growth Subaccount.............. $ 95 $136 $170 $277
Janus Aspen Balanced Subaccount............ $ 95 $136 $170 $277
Janus Aspen Flexible Income Subaccount..... $ 95 $138 $173 $283
Janus Aspen International Growth Subaccount $ 96 $139 $175 $287
Janus Aspen 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>
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 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 Capital Appreciation Subaccount $ 25 $ 77 $131 $ 279
Janus Aspen Growth Subaccount.............. $ 25 $ 76 $130 $ 277
Janus Aspen Balanced Subaccount............ $ 25 $ 76 $130 $ 277
Janus Aspen Flexible Income Subaccount..... $ 25 $ 78 $133 $ 283
Janus Aspen International Growth Subaccount $ 26 $ 79 $135 $ 287
Janus Aspen 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>
3
The examples provided above assume that no transfer processing fees or
purchase payment taxes have been assessed. The examples also assume that the
annual administration fee is $30 and that the Contract Value per Contract is
$10,000, which translates the annual administration fee into an assumed .30%
charge (for purposes of the examples) based on a $1,000 investment. Under some
fixed annuity options, the surrender charges would not apply.
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THE 5% ANNUAL
RETURN ASSUMED IS HYPOTHETICAL AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE ANNUAL RETURNS, WHICH MAY BE GREATER OR LESS THAN THE ASSUMED
RATE.
4
SUMMARY
GENERAL DESCRIPTION OF THE CONTRACT
The summary section of this prospectus contains a brief description of the
most important parts of the contract. You may find further detail in other
sections of this prospectus, the related Statement of Additional Information,
the contract, and the prospectuses of the underlying mutual funds. If you need
more information, please contact our Service Center at (800)808-4537.
In many jurisdictions, we issue the contract directly to individuals. In
some jurisdictions, however, we may issue only group contracts. We issue group
contracts to or on behalf of groups. For example, we may issue a group contract
to an employer on behalf of its employees. Individuals who are part of groups
for which a contract is issued receive a certificate containing the same
provisions as the group contract. Throughout this prospectus, the term
"contract" refers to individual contracts, group contracts and certificates for
group contracts.
Under this contract you may:
- allocate all or a portion of your net purchase payments among
several subaccounts of our Valley Forge Life Insurance Company
Variable Annuity Separate Account;
- transfer amounts you have already invested under the contract
among the subaccounts;
- allocate all (or a portion of) your net purchase payments to
our 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.
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 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 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.
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;
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.
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.
ASSET MANAGER PORTFOLIO. This Fund seeks high total return with reduced
risk over the long-term by allocating its assets among domestic and foreign
stocks, bonds and short-term fixed-income instruments.
CONTRAFUND PORTFOLIO. This Fund seeks capital appreciation over the
long-term by investing in companies that are undervalued or out-of-favor.
EQUITY-INCOME PORTFOLIO. This Fund seeks current income by investing
primarily in income producing equity securities. In choosing these
securities, the Fund also considers the potential for capital appreciation.
INDEX 500 PORTFOLIO. This Fund seeks investment results that
correspond to the total return of common stocks publicly traded in the
United States, as represented by the Standard & Poor's 500 Composite Index
of 500 Common Stocks.
VIP Fund and VIP Fund II are each advised by Fidelity Management &
Research Company.
THE ALGER AMERICAN FUND
Alger American Growth, Alger American MidCap Growth, 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 MIDCAP 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 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 2000 Growth Index or the S&P Small Cap 600 Index.
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)
VAN ECK WORLDWIDE INSURANCE TRUST
The Worldwide Emerging Markets and Worldwide Hard Assets Subaccounts each
invest in shares of corresponding Funds of Van Eck Worldwide Insurance Trust
("VEWIT"). VEWIT issues five "series" or classes of shares, each of which
represents an interest in a Fund of VEWIT. Two of these series of shares are
available as investment options under the Contract. The investment objectives of
these Funds are set forth below.
WORLDWIDE EMERGING MARKETS FUND. This Fund seeks capital appreciation
by investing primarily in equity securities in emerging markets around the
world.
WORLDWIDE HARD ASSETS FUND. This Fund seeks long-term capital
appreciation by investing globally, primarily in securities of companies
engaged directly or indirectly in the exploration, development, production
and distribution of one or more of the following sectors: precious metals,
ferrous and non-ferrous metals, oil and gas, forest products, real estate
and other basic non-agricultural commodities.
VEWIT is advised by Van Eck Associates Corporation.
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 CAPITAL APPRECIATION PORTFOLIO. This Fund seeks long-term
growth of capital by investing primarily in common stocks selected for
their growth potential.
JANUS ASPEN 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 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 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 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.
JANUS ASPEN 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.
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
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 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 Funds'
prospectuses should be read carefully before any decision is made concerning the
allocation of Purchase Payments or transfers among the Subaccounts.
Please note that not all of the Funds described in the prospectuses for the
Funds are available with the Contract. Moreover, VFL cannot guarantee that each
Fund will always be available for its variable annuity contracts, but in the
event that a Fund is not available, VFL will take reasonable steps to secure the
availability of a comparable fund. Shares of each Fund are purchased and
redeemed at net asset value, without a sales charge.
VFL has entered into agreements with the investment advisers of several of
the Funds pursuant to which each such investment adviser pays VFL a servicing
fee based upon an annual percentage of the average aggregate net assets invested
by VFL on behalf of the Variable Account. These agreements reflect
administrative services provided to the Funds by VFL. Payments of such amounts
by an adviser do not increase the fees paid by the Funds or their shareholders.
Shares of the Funds are sold to separate accounts of insurance companies
that are not affiliated with VFL or each other, a practice known as "shared
funding." They are also sold to separate accounts to serve as the underlying
investment for both variable annuity contracts and variable life insurance
contracts, a practice known as "mixed funding." As a result, there is a
possibility that a material conflict may arise between the interests of Owners,
whose Contract Values are allocated to the Variable Account, and of owners of
other contracts whose contract values are allocated to one or more other
separate accounts investing in any one of the Funds. Shares of some of the Funds
may also be sold directly to certain qualified pension and retirement plans
qualifying under Section 401 of the Code. As a result, there is a possibility
that a material conflict may arise between the interests of Owners or owners of
other contracts (including contracts issued by other companies), and such
retirement plans or participants in such retirement plans. In the event of any
such material conflicts, VFL will consider what action may be appropriate,
including removing the Fund from the Variable Account or replacing the Fund with
another Fund. There are certain risks associated with mixed and shared funding
and with the sale of shares to qualified pension and retirement plans, as
disclosed in each Fund's prospectus.
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 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 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
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 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.
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 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
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
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 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 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>
- - -----------------------------------------------------------------------------------------------------------------
SURRENDER CHARGE
NUMBER OF FULL YEARS AS A PERCENTAGE
ELAPSED BETWEEN DATE OF OF PURCHASE
RECEIPT OF PURCHASE PAYMENT PAYMENT WITHDRAWN
AND DATE OF SURRENDER OF WITHDRAWAL OR SURRENDERED
- - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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 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
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 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 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 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.
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 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
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 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. 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.
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 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.
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.
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.
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 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 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.
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.
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.
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
305139, Nashville, Tennessee 37230-5139 (1-800-808-4537). Any overnight
deliveries should be sent to us at: CNA Insurance Company 100 CNA Drive
Attention: Variable POS/Correspondence Team Nashville, TN 37214
SUBACCOUNT: A subdivision of the Variable Account, the assets of which are
invested in a corresponding Fund.
SUBACCOUNT VALUE: The amount equal to that part of any Net Purchase Payment
allocated to the Subaccount and any amount transferred to that Subaccount,
adjusted by interest income, dividends, net capital gains or losses (actually
realized or not yet realized) and decreased by withdrawals (including any
applicable surrender charges and any applicable premium payment tax charge) and
any amounts transferred out of that Subaccount.
SUCCESSOR OWNER: Any Owner named in the application to follow the original
Owner should the original Owner die, provided the original Owner is not also the
Annuitant.
SURRENDER VALUE: The Adjusted Contract Value less any applicable surrender
charges.
VALUATION DAY: For each Subaccount, each day on which the New York Stock
Exchange is open for business except for certain holidays listed in the
prospectus and days that a Subaccount's corresponding Fund does not value its
shares.
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.
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 ALGER ALGER
MONEY UTILITY BOND EQUITY- ASSET VIP II FIDELITY AMERICAN AMERICAN
FUND II FUND II FUND II INCOME MANAGER INDEX 500 CONTRAFUND SMALL CAP GROWTH
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unit value at
inception........... $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
Unit value at
December 31, 1997... $ 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>
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-1
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 $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>
PART B
STATEMENT OF ADDITIONAL INFORMATION
FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY CONTRACT
ISSUED BY
VALLEY FORGE LIFE INSURANCE COMPANY
AND
VALLEY FORGE LIFE INSURANCE COMPANY VARIABLE ANNUITY
SEPARATE ACCOUNT
THIS STATEMENT OF ADDITIONAL INFORMATION, DATED MAY 1, 2000 IS NOT A
PROSPECTUS. THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ IN
CONJUNCTION WITH THE PROSPECTUS DATED MAY 1, 2000 FOR THE VALLEY FORGE LIFE
INSURANCE COMPANY FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY CONTRACT WHICH IS
REFERRED TO HEREIN.
THE PROSPECTUS SETS FORTH INFORMATION THAT A PROSPECTIVE INVESTOR SHOULD
KNOW BEFORE PURCHASING A CONTRACT. FOR A COPY OF THE PROSPECTUS, SEND A WRITTEN
REQUEST TO THE SERVICE CENTER AT P.O. BOX 305139, NASHVILLE, TENNESSEE
37230-5139 OR BY TELEPHONE 1-800-262-1755.
<PAGE> 102
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
COMPANY ....................................................
EXPERTS.....................................................
LEGAL OPINIONS .............................................
PERFORMANCE INFORMATION.....................................
Money Market Subaccount Yields...........................
Other Subaccount Yields..................................
Average Annual Total Returns.............................
Other Total Returns......................................
Effect of the Annual Administration Fee on Performance
Data...................................................
VARIABLE ANNUITY PAYMENTS...................................
Annuity Unit Value.......................................
Illustration of Calculation of Annuity Unit Value........
Illustration of Variable Annuity Payments................
VALUATION DAYS..............................................
OTHER INFORMATION...........................................
FINANCIAL STATEMENTS........................................
</TABLE>
i
COMPANY
Valley Forge Life Insurance Company (the "Company"), is a wholly-owned
subsidiary of Continental Assurance Company ("Assurance"). Assurance is a
wholly-owned subsidiary of Continental Casualty Company ("Casualty"), which is
wholly-owned by CNA Financial Corporation ("CNA"). Loews Corporation owns
approximately 86% of the outstanding common stock of CNA as of December 31,
1999.
The Company is principally engaged in the sale of life insurance and annuities.
It is licensed in the District of Columbia, Guam, Puerto Rico and all states
except New York, where we are only admitted as a reinsurer.
The Company is a Pennsylvania corporation that provides life and health
insurance, retirement plans, and related financial services to individuals and
groups.
EXPERTS
The financial statements for Valley Forge Life Insurance Company as of December
31, 1999 and 1998 and for each of the three years in the period ended December
31, 1999 included in the Statement of Additional Information which is part of
this registration statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and have been
so included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
The financial statements for each of the subaccounts that comprise the Valley
Forge Life Insurance Company Variable Annuity Separate Account as of and for the
year ended December 31, 1999 (for the two years ended December 31, 1999 with
respect to the statements of changes in net assets) included in the Statement of
Additional Information which is part of this registration statement have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing in the registration statement, and have been so included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
LEGAL OPINIONS
All matters relating to Pennsylvania law pertaining to the Contracts, including
the validity of the Contracts and the Company's authority to issue Contracts,
have been passed upon by G. Stephen Wastek, Director and Senior Counsel.
PERFORMANCE INFORMATION
From time to time, Valley Forge Life Insurance Company ("VFL" or "the
Company") may disclose yields, total returns, and other performance data
pertaining to the Contracts for a Subaccount. Such performance data will be
computed, or accompanied by performance data computed, in accordance with the
standards defined by the SEC.
Because of the charges and deductions imposed under a Contract, the yield
for the Subaccounts will be lower than the yield for their respective Funds. The
calculation of yields, total returns and other performance data do not reflect
the effect of any premium tax that may be applicable to a particular Contract.
Premium taxes currently range generally from 0% to 3.5% of the annuity
considerations (purchase payments) based on the jurisdiction is which the
Contract is sold.
MONEY MARKET SUBACCOUNT YIELDS
From time to time, sales literature or advertisements may quote the current
annualized yield of the Money Market Subaccount for a seven-day period in a
manner that does not take into consideration any realized or unrealized gains or
losses on shares of the Money Market Fund or on that Fund's portfolio
securities.
This current annualized yield is computed by determining the net change
(exclusive of realized gains and losses on the sale of securities and unrealized
appreciation and depreciation) at the end of the seven-day period in the value
of a hypothetical account under a Contract having a balance of one unit of the
Money Market Subaccount at the beginning of the period, dividing such net change
in account value by the value of the hypothetical account at the beginning of
the period to determine the base period return, and annualizing this quotient on
a 365-day basis. The net change in account value reflects: 1) net income from
the Subaccount attributable to the hypothetical account; and 2) charges and
deductions imposed under the Contract that are attributable to the hypothetical
account. The charges and deductions include the per unit charges for the
hypothetical account for: 1) the annual administration fee; 2) the mortality and
expense risk charge; and 3) the asset-based administration charge. For purposes
of calculating current yields for a Contract, an average per unit annual
administration fee is used based on the $30 annual administration fee deducted
for the prior Contract Year of the Contract Anniversary. Current Yield is
calculated according to the following formula:
Current Yield = ((NCS - ES)/UV) X (365/7)
Where:
<TABLE>
<S> <C> <C>
NCS = the net change in the value of the Money Market Subaccount
(exclusive of realized gains or losses on the sale of
securities and unrealized appreciation and depreciation) for
the seven-day period attributable to a hypothetical account
having a balance of 1 Subaccount unit.
ES = Per unit expenses attributable to the hypothetical account
for the seven-day period.
UV = The unit value for the first day of the seven-day period.
</TABLE>
Effective Yield = (1 + (NCS - ES)/UV) 365/7 - 1
Where:
<TABLE>
<S> <C> <C>
NCS = the net change in the value of the Money Market Subaccount
(exclusive of realized gains or losses on the sale of
securities and unrealized appreciation and depreciation) for
the seven-day period attributable to a hypothetical account
having a balance of 1 Subaccount unit.
ES = per unit expenses attributable to the hypothetical account
for the seven-day period.
UV = the unit value for the first day of the seven-day period.
</TABLE>
1
Because of the charges and deductions imposed under the Contract, the yield
for the Money Market Subaccount is lower than the yield for the Money Market
Fund.
The current and effective yields on amounts held in the Money Market
Subaccount normally fluctuate on a daily basis. THEREFORE, THE DISCLOSED YIELD
FOR ANY GIVEN PAST PERIOD IS NOT AN INDICATION OR REPRESENTATION OF FUTURE
YIELDS OR RATES OF RETURN. The Money Market Subaccount's actual yield is
affected by changes in interest rates on money market securities, average
portfolio maturity of the Money Market Fund, the types and quality of portfolio
securities held by the Fund and the Fund's operating expenses. Yields on amounts
held in the Money Market Subaccount may also be presented for periods other than
a seven-day period.
Yield calculations do not take into account the surrender charge under the
Contract equal to 4% to 7% of certain purchase payments during the five full
years between the date of receipt of the purchase payment and the date of
surrender or withdrawal.
OTHER SUBACCOUNT YIELDS
From time to time, sales literature or advertisements may quote the current
annualized yield of one or more of the Subaccounts (except the Money Market
Subaccount) for a Contract for 30-day or one-month periods. The annualized yield
of a Subaccount refers to income generated by the Subaccount during a 30-day or
one-month period and is assumed to be generated each period over a 12-month
period.
The yield is computed by 1) dividing the net investment income of the Fund
attributable to the Subaccount units less Subaccount expenses for the period; by
2) the maximum offering price per unit on the last day of the period times the
daily average number of units outstanding for the period; by 3) compounding that
yield for a six-month period; and by 4) multiplying that result by 2. Expenses
attributable to the Subaccount include the annual administration fee, the
asset-based administration charge and the mortality and expense risk charge. The
yield calculation assumes an annual administration fee of $30 per year per
Contract deducted for the prior Contract Year as of the Contract Anniversary.
For purposes of calculating the 30-day or one-month yield, an average
administration fee based on the average Variable Account Value is used to
determine the amount of the charge attributable to the Subaccount for the 30-day
or one-month period. The 30-day or one-month yield is calculated according to
the following formula:
Yield = 2 X (((NI - ES)/(U X UV) + 1) 6 - 1)
Where:
<TABLE>
<S> <C> <C>
NI = net income of the Fund for the 30-day or one-month period
attributable to the Subaccount's units.
ES = expenses of the Subaccount for the 30-day or one-month
period.
U = the average number of units outstanding.
UV = the unit value at the close (highest) of the last day in the
30-day or one-month period.
</TABLE>
Because of the charges and deductions imposed under the Contracts, the
yield for the Subaccount is lower than the yield for the corresponding Fund.
The yield on the amounts held in the Subaccounts normally fluctuates over
time. THEREFORE, THE DISCLOSED YIELD FOR ANY GIVEN PAST PERIOD IS NOT AN
INDICATION OR REPRESENTATION OF FUTURE YIELDS OR RATES OF RETURN. A subaccount's
actual yield is affected by the types and quality of the securities held by the
corresponding Fund and that Fund's operating expenses.
2
Yield calculations do not take into account the surrender charge under the
Contract equal to 4% to 7% of certain purchase payments during the five full
years between the date of receipt of the purchase payment and the date of
surrender or withdrawal.
AVERAGE ANNUAL TOTAL RETURNS
From time to time, sales literature or advertisements may quote standard
average annual total returns for one or more of the Subaccounts for Various
periods of time.
When a Subaccount or Fund has been in operation for 1, 5, and 10 years,
respectively, the standard average annual total return for these periods will be
provided. Average annual total returns for other periods of time may, from time
to time, also be disclosed.
Standard average annual total returns represent the average annual
compounded rates of return that would equate an initial investment of $1,000
under a Contract to the redemption value of that investment as of the last day
of each of the periods. The ending date for each period for which total return
quotations are provided will be for the most recent calendar quarter-end
practicable, considering the type of the communication and the media through
which it is communicated.
Standard average annual total returns are calculated using Subaccount unit
values which the Company calculates on each Valuation Day based on the
performance of the Subaccount's underlying Fund, the deductions for the
mortality and expense risk charge, and the deductions for the asset-based
administration charge and the annual administration fee. The calculation assumes
that the annual administration fee is $30 per year per Contract deducted for the
prior Contract Year as of the Contract Anniversary. For purposes of calculating
standard average annual total return, an average per-dollar per-day annual
administration fee attributable to the hypothetical account for the period is
used. The calculation also assumes surrender of the Contract at the end of the
period for the return quotation. Standard average annual total returns will
therefore reflect a deduction of the surrender charge for any period less than
six years. The standard average annual total return is calculated according to
the following formula:
<TABLE>
<S> <C> <C>
TR = ((ERV/P 1/N) - 1
Where:
TR = the average annual total return net of Subaccount recurring
charges.
ERV = the ending redeemable value (net of any applicable surrender
charge) of the hypothetical account at the end of the
period.
P = a hypothetical initial payment of $1,000.
N = the number of years in the period.
</TABLE>
From time to time, sales literature or advertisements any quote standard
average annual total returns for periods prior to the date the Variable Account
commenced operations. Such performance information for the Subaccounts is
calculated based on the performance of the various Funds and the assumption that
the Subaccounts were in existence for the same periods as those indicated for
the Funds, with the level of Contract charges that were in effect at the
inception of the Subaccounts.
Fund total return information used to calculate the standard average annual
total returns of the Subaccounts for periods prior to the inception of the
Subaccounts has been provided by the Funds. The Funds are not affiliated with
the Company. While the Company has no reason to doubt the accuracy of these
figures provided by the Funds, the Company has not independently verified the
accuracy of these figures.
3
OTHER TOTAL RETURNS
From time to time, sales literature or advertisements may also quote
average annual total returns that do not reflect the surrender charge. These are
calculated in exactly the same way as standard average annual total returns
described above, except that the ending redeemable value of the hypothetical
account for the period is replaced with an ending value for the period that does
not take into account any charges on amounts surrendered or withdrawn.
The company may disclose cumulative total returns in conjunction with the
standard formats described above. The cumulative total returns will be
calculated using the following formula:
<TABLE>
<S> <C> <C>
CTR = (ERV/P) - 1
Where:
CTR = The cumulative total return net of Subaccount recurring
charges for the period.
ERV = The ending redeemable value of the hypothetical investment
at the end of the period.
P = A hypothetical single payment of $1,000.
</TABLE>
EFFECT OF THE ANNUAL ADMINISTRATION FEE ON PERFORMANCE DATA
The Contract provides for a $30 annual administration fee to be deducted
annually for each prior Contract Year as of the Contract Anniversary, from the
Subaccount Values and Guarantee Amounts based on the proportion that each bears
to the Contract Value. For purposes of reflecting the change in yield and total
return quotations, the charge is converted into a per-dollar per-day charge
based on the average Subaccount Value and Guarantee Amount of all Contracts on
the last day of the period for which quotations are provided. The per-dollar
per-day average charge will then be adjusted to reflect the basis upon which the
particular quotation is calculated.
PERFORMANCE INFORMATION
The following charts reflect performance information for the Subaccounts of the
Variable Account for the periods shown. Chart 1 reflects performance information
commencing from the date the Subaccounts of the Variable Account first invested
in the underlying Portfolio. Chart 2 reflects performance information commencing
from the inception date of the underlying Portfolio (which dates may precede the
inception dates of the corresponding Subaccount).
There is no performance shown in Chart 1 below 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.
Chart 1 TOTAL RETURN FOR THE PERIODS ENDED DECEMBER 31, 1999:
<TABLE>
<CAPTION>
Column A (reflects all charges)
Subaccount
Inception Since
Date 1 yr 3 yrs Inception
Federated High Income
<S> <C> <C> <C> <C> <C>
Bond Fund II 11/04/96 -6.24% -1.68% -2.49%
Federated Prime Money
Fund II 11/04/96 -4.60% -3.05% -4.14%
Federated Utility
Fund II 11/04/96 -6.80% 5.26% 4.05%
Fidelity VIP Equity-
Income 11/04/96 -2.55% 7.11% 4.69%
Fidelity VIP II Asset
Manager 11/04/96 1.81% 8.39% 5.95%
Fidelity VIP II
Contrafund 11/04/96 13.88% 16.89% 14.14%
Fidelity VIP II Index
500 11/04/96 10.44% 17.80% 14.45%
Alger American Growth 11/04/96 22.57% 25.56% 21.26%
Alger American MidCap
Growth 11/04/96 20.83% 16.25% 12.91%
Alger American Small
Capitalization 11/04/96 31.44% 13.63% 11.09%
MFS Emerging Growth 11/04/96 61.96% 31.95% 26.49%
MFS Growth With Income 11/04/96 -2.22% 10.42% 7.90%
MFS Research 11/04/96 13.69% 13.53% 10.65%
MFS Total Return 11/04/96 -5.53% 3.72% 1.77%
First Eagle SoGen Overseas
Variable 11/04/96 33.10% 4.83% 3.16%
Van Eck Worldwide
Emerging Markets 11/04/96 83.56% -3.06% -3.94%
Van Eck Worldwide
Hard Assets 11/04/96 NA NA -12.64%
Janus Aspen Capital
Appreciation 08/31/99 NA NA 165.10%
Janus Aspen Growth 08/31/99 NA NA 87.99%
Janus Aspen Balanced 08/31/99 NA NA 45.88%
Janus Aspen Flexible
Income 08/31/99 NA NA -1.79%
Janus Aspen Inter-
national Growth 08/31/99 NA NA 278.10%
Janus Aspen Worldwide
Growth 08/31/99 NA NA 178.83%
</TABLE>
<TABLE>
<CAPTION>
Chart 2 - TOTAL RETURN FOR THE PERIODS ENDED DECEMBER 31, 1999:
Column A (reflects all charges)
Portfolio
Inception Since
Date 1 yr 3 yrs 5 yrs 10 yrs Inception
Federated High Income
<S> <C> <C> <C> <C> <C> <C>
Bond Fund II 03/01/94 -6.24% -1.68% 4.50% NA -0.82%
Federated Prime Money
Fund II 11/21/94 -4.60% -3.05% -0.99% NA -4.10%
Federated Utility
Fund II 02/10/94 -6.80% 5.26% 9.02% NA 3.05%
Fidelity VIP Equity-
Income 10/09/86 -2.55% 7.11% 12.70% 13.14% 4.43%
Fidelity VIP II Asset
Manager 09/06/89 1.81% 8.39% 10.35% 12.09% 3.93%
Fidelity VIP II
Contrafund 01/03/95 13.88% 16.89% NA NA 17.45%
Fidelity VIP II Index
500 08/27/92 10.44% 17.80% 21.33% NA 11.02%
Alger American Growth 01/09/89 22.57% 25.56% 23.90% 21.21% 12.85%
Alger American MidCap
Growth 05/03/93 20.83% 16.25% 19.35% NA 14.32%
Alger American Small
Capitalization 09/21/88 31.44% 13.63% 16.03% 16.50% 10.76%
Alger American
Leveraged AllCap 01/25/95 33.90% 13.37% NA NA 55.50%
MFS Emerging Growth 07/24/95 61.96% 31.95% NA NA 25.02%
MFS Growth With Income 10/09/95 -2.22% 10.42% NA NA 11.29%
MFS Research 07/26/95 13.69% 13.53% NA NA 12.61%
MFS Total Return 01/03/95 -5.53% 3.72% 9.20% NA 5.80%
First Eagle SoGen Overseas
Variable 02/03/97 33.10% 4.83% NA NA 4.08%
Van Eck Worldwide
Emerging Markets 12/27/95 83.56% -3.06% NA NA 0.57%
Van Eck Worldwide
Hard Assets 09/01/89 10.89% -12.24% -3.32% 1.92% -4.53%
Janus Aspen Capital
Appreciation 05/02/97 53.05% NA NA NA 44.13%
Janus Aspen Growth 09/13/93 31.96% 23.99% 22.88% NA 13.89%
Janus Aspen Balanced 09/13/93 16.17% 18.22% 17.96% NA 10.54%
Janus Aspen Flexible
Income 09/13/93 -6.88% -0.51% 4.90% NA -0.56%
Janus Aspen Inter-
national Growth 05/02/94 67.05% 26.27% 26.07% NA 17.47%
Janus Aspen Worldwide
Growth 09/13/93 50.72% 27.22% 26.40% NA 18.86%
Alliance Premier Growth 06/26/92 19.48% 27.00% 19.91% NA 10.38%
Alliance Growth and Income 01/14/91 -8.56% 1.84% 6.85% NA -0.03%
American Century VP Income &
Growth 10/30/97 8.14% NA NA NA 13.51%
American Century VP Value 05/01/96 -18.97% -5.36% NA NA -4.18%
Templeton Developing Markets
Securities* 03/01/96 38.55% -13.26% NA NA -14.29%
Templeton Asset Strategy** 08/24/88 -4.70% -4.26% 2.37% 5.64% -1.27%
Lazard Retirement Equity 03/19/98 -4.37% NA NA NA -1.94%
Lazard Retirement Small Cap 11/04/97 -5.46% NA NA NA -9.54%
Morgan Stanley International
Magnum 01/02/97 13.36% NA NA NA 2.32%
Morgan Stanley Emerging Markets 10/01/96 79.31% 4.18% NA NA 1.45%
</TABLE>
<TABLE>
<CAPTION>
Column B (reflects all charges except Column C
surrender) Annual
Percentage
Change Calendar
Year Return
Since
1 yr 3 yrs 5 yrs 10 yrs Inception 1998 1999
<S> <C> <C> <C> <C> <C>
0.82% 4.60% 8.86% NA 6.64% 1.19% 0.82%
2.59% 3.14% 3.13% NA 3.11% 3.41% 2.59%
0.21% 11.98% 13.56% NA 10.81% 12.26% 0.21%
4.78% 13.94% 17.39% 13.14% 12.29% 10.48% 4.78%
9.48% 15.31% 14.94% 12.09% 11.75% 15.67% 9.48%
22.45% 24.35% NA NA 26.30% 28.23% 22.45%
18.76% 25.32% 26.39% NA 19.37% 26.47% 18.76%
31.80% 33.58% 29.07% 21.21% 21.35% 45.91% 31.80%
29.93% 23.67% 24.32% NA 22.92% 28.40% 29.93%
41.33% 20.88% 20.86% 16.50% 19.09% 13.85% 41.33%
38.04% 20.60% NA NA 67.17% 48.43% 17.94%
74.15% 40.37% NA NA 34.43% 32.21% 74.15%
5.14% 17.47% NA NA 19.67% 20.54% 5.14%
22.24% 20.78% NA NA 21.09% 21.60% 22.24%
1.58% 10.34% 13.75% NA 13.76% 10.62% 1.58%
43.12% 11.52% NA NA 11.92% 0.66% 43.12%
97.37% 3.12% NA NA 8.14% -36.22% 97.37%
19.24% -6.63% 0.71% 1.92% 2.65% -29.71% 19.24%
64.57% NA NA NA 54.98% 55.82% 64.57%
41.89% 31.90% 28.00% NA 22.46% 33.69% 41.89%
24.92% 25.77% 22.88% NA 18.86% 32.34% 24.92%
0.13% 5.85% 9.27% NA 6.92% 7.53% 0.13%
79.63% 34.33% 31.32% NA 26.32% 15.54% 79.63%
62.06% 35.34% 31.66% NA 27.81% 27.05% 62.06%
28.47% 35.10% 24.90% NA 18.69% 45.69% 28.47%
-1.67% 8.34% 11.30% NA 7.49% 8.00% -1.67%
16.28% NA NA NA 22.05% 23.97% 16.28%
-12.87% 0.68% NA NA 3.04% -4.29% -12.87%
48.98% -7.73% NA NA -7.84% -23.78% 48.98%
2.47% 1.85% 6.63% 5.64% 6.16% -1.18% 2.47%
2.83% NA NA NA 5.44% NA 2.83%
1.66% NA NA NA -2.74% -4.65% 1.66%
21.89% NA NA NA 10.02% 6.62% 21.89%
92.81% 10.83% NA NA 9.09% -25.69% 92.81%
</TABLE>
* Previously, Templeton Developing Markets Fund. Effective May 1, 2000, the
Templeton Developing Markets Securities Fund merged into the Templeton
Developing Markets Equity Fund. Performance shown reflects historical
performance and inception date of the Templeton Developing Markets Securities
Fund.
** Previously, Templeton Asset Allocation Fund. Effective May 1, 2000, the
Templeton Asset Strategy Fund merged into the Templeton Global Asset Allocation
Fund. Performance shown reflects historical performance and inception dates of
the Templeton Asset Strategy Fund.
VARIABLE ANNUITY PAYMENTS
ANNUITY UNIT VALUE
The value of an Annuity Unit is calculated at the same time that the value
of an Accumulation Unit is calculated and is based on the same values for Fund
shares and other assets and liabilities. (See "Annuity Payments" in the
Prospectus.) The Annuity Unit Value for each Subaccount's first Valuation Period
was set at $10. The Annuity Unit Value for a Subaccount for each subsequent
Valuation Period is equal to (a) multiplied by (b) divided by (c) where:
(a) is the Net Investment Factor for the Valuation Period for which the
Annuity Unit Value is being calculated;
(b) is the Annuity Unit Value for the preceding Valuation Period; and
(c) is a daily Benchmark Rate of Return factor (for the 3% benchmark rate
of return) adjusted for the number of days in the Valuation Period.
The Benchmark Rate of Return factor is equal to one plus 3%, or 1.03. The
annual factor can be translated into a daily factor of 1.00008098.
4
The following illustrations show, by use of hypothetical examples, the
method of determining the Annuity Unit Value and the amount of several Variable
Annuity Payments based on one Subaccount.
ILLUSTRATION OF CALCULATION OF ANNUITY UNIT VALUE
<TABLE>
<C> <S> <C>
1. Annuity Unit Value for immediately preceding Valuation
Period...................................................... 10.00000000
2. Net Investment factor....................................... 1.00036164
3. Daily factor to compensate for Benchmark Rate of Return of
3%.......................................................... 1.00008099
4. Adjusted Net Investment Factor (2)/(3)...................... 1.00028063
5. Annuity Unit Value for current Valuation Period (4)X(1)..... 10.00280630
</TABLE>
ILLUSTRATION OF VARIABLE ANNUITY PAYMENTS
(ASSUMING NO PREMIUM TAX IS APPLICABLE)
<TABLE>
<C> <S> <C>
1. Number of Accumulation Units at Annuity Date................ 1,000.00
2. Accumulation Unit Value..................................... 12.55548000
3. Adjusted Contract Value (1)X(2)............................. $ 12,555.48
4. First monthly Annuity Payment per $1,000 of adjusted
Contract Value.............................................. 9.63
5. First monthly Annuity Payment (3)X(4)/1,000................. $ 120.91
6. Annuity Unit Value.......................................... 10.00280630
7. Number of Annuity Units (5)/(6)............................. 12.08760785
8. Assume Annuity Unit value for second month equal to......... 10.04000000
9. Second Monthly Annuity Payment (7)X(8)...................... $ 121.36
10. Assume Annuity Unit Value for third month equal to.......... 10.05000000
11. Third Monthly Annuity Payment (7)X(10)...................... $ 121.48
</TABLE>
VALUATION DAYS
As defined in the prospectus, for each Subaccount a Valuation Day is each
day on which the New York Stock Exchange is open for business, except for
certain holidays listed in the prospectus and days that a Subaccount's
corresponding Fund does not value its shares.
OTHER INFORMATION
A registration statement has been filed with the SEC under the Securities
Act of 1933, as amended, with respect to the Contracts discussed in this
Statement of Additional Information. Not all the information set forth in the
registration statement, amendments and exhibits thereto has been included in
this Statement of Additional Information. Statements contained in this Statement
of Additional Information concerning the content of the Contracts and other
legal instruments are summaries. For a complete statement of the terms of these
documents, reference should be made to the instruments filed with the SEC.
FINANCIAL STATEMENTS
The financial statements for Valley Forge Life Insurance Company Variable
Annuity Separate Account and VFL follow.
<PAGE> 1
INDEPENDENT AUDITORS' REPORT
To the Contractholders of Valley Forge Life Insurance Company Variable Annuity
Separate Account and the Board of Directors of Valley Forge Life Insurance
Company:
We have audited the accompanying statement of assets and liabilities of
the subaccounts of Valley Forge Life Insurance Company Variable Annuity Separate
Account (the "Account") as of December 31, 1999, the statements of operations
for the year ended December 31, 1999, and changes in net assets for the two
years ended December 31, 1999. The subaccounts that collectively comprise the
Account are the Federated Prime Money Fund II, Federated Utility Fund II,
Federated High Income Bond Fund II, Fidelity Variable Insurance Products Fund
Equity-Income Portfolio, Fidelity Variable Insurance Products Fund II Asset
Manager Portfolio, Fidelity Variable Insurance Products Fund II Index 500
Portfolio, Fidelity Variable Insurance Products Fund II Contrafund Portfolio,
The Alger American Fund Small Capitalization Portfolio, The Alger American
Growth Portfolio, The Alger American MidCap Growth Portfolio, MFS Emerging
Growth Series, MFS Research Series, MFS Growth with Income Series, MFS Limited
Maturity Series, MFS Total Return Series, SoGen Overseas Variable Fund, Van Eck
Worldwide Hard Assets, Van Eck Emerging Markets Fund, Janus Aspen Capital
Appreciation Portfolio, Janus Aspen Growth Portfolio, Janus Aspen Balanced
Portfolio, Janus Aspen Flexible Income Portfolio, Janus Aspen International
Growth Portfolio and Janus Aspen World Wide Growth Portfolio. These financial
statements are the responsibility of the Account's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned at December 31, 1999. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of each of the subaccounts that
comprise the Account as of December 31, 1999, the results of their operations
for the year ended December 31, 1999, and the changes in their net assets for
the two years ended December 31, 1999, are in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Chicago, Illinois
February 24, 2000
1
<PAGE> 2
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
FEDERATED FEDERATED FIDELITY FIDELITY
PRIME FEDERATED HIGH EQUITY- ASSET FIDELITY FIDELITY
MONEY UTILITY INCOME BOND INCOME MANAGER INDEX 500 CONTRAFUND
DECEMBER 31, 1999 FUND II FUND II FUND II PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- ---------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at
market value (See
Supplemental cost
information below) $29,703,202 $ 3,355,716 $4,861,406 $8,012,656 $ 5,992,679 $ 24,349,701 $11,949,857
----------- ----------- ---------- ---------- ----------- ------------ -----------
TOTAL ASSETS 29,703,202 3,355,716 4,861,406 8,012,656 5,992,679 24,349,701 11,949,857
----------- ----------- ---------- ---------- ----------- ------------ -----------
LIABILITIES:
Payable for fund
withdrawals and
surrenders (34,878) (107,868) (4,173) (51,065) (105,715) (94,018) (120,178)
----------- ----------- ---------- ---------- ----------- ------------ -----------
TOTAL LIABILITIES (34,878) (107,868) (4,173) (51,065) (105,715) (94,018) (120,178)
----------- ----------- ---------- ---------- ----------- ------------ -----------
NET ASSETS $29,668,324 $ 3,247,848 $4,857,233 $7,961,591 $ 5,886,964 $ 24,255,683 $11,829,679
=========== =========== ========== ========== =========== ============ ===========
SUPPLEMENTAL COST INFORMATION:
Investments, at cost:
$29,668,324 $ 3,262,612 $5,061,507 $7,724,362 $ 5,835,260 $ 20,734,923 $ 9,927,803
=========== =========== ========== ========== =========== ============ ===========
<CAPTION>
JANUS JANUS JANUS JANUS
VAN ECK ASPEN JANUS JANUS ASPEN ASPEN ASPEN
EMERGING CAPITAL ASPEN ASPEN FLEXIBLE INTERNATIONAL WORLD WIDE
MARKETS APPRECIATION GROWTH BALANCED INCOME GROWTH GROWTH
DECEMBER 31, 1999 FUND PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------- ---- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments,
at market value
(See Supplemental
cost information
below) $1,085,079 $ 8,222,654 $ 2,866,575 $3,580,814 $ 260,415 $ 724,430 $2,733,573
---------- ------------- ------------ ---------- --------- --------- ----------
TOTAL ASSETS 1,085,079 8,222,654 2,866,575 3,580,814 260,415 724,430 2,733,573
---------- ------------- ------------ ---------- --------- --------- ----------
LIABILITIES:
Payable for fund
withdrawals and
surrenders (1,990) -- (863) -- (54,538) (91) (78)
---------- ------------- ------------ ---------- --------- --------- ----------
TOTAL LIABILITIES (1,990) -- (863) -- (54,538) (91) (78)
---------- ------------- ------------ ---------- --------- --------- ----------
NET ASSETS $1,083,089 $ 8,222,654 $ 2,865,712 $3,580,814 $ 205,877 $ 724,339 $2,733,495
========== ============= ============ ========== ========= ========= ==========
SUPPLEMENTAL COST
INFORMATION:
Investments, at
cost: $ 621,316 $ 6,460,434 $ 2,564,139 $3,357,450 $ 202,939 $ 618,384 $2,394,255
========== ============= ============ ========== ========= ========= ==========
</TABLE>
See accompanying Notes to Financial Statements.
2
<PAGE> 3
<TABLE>
<CAPTION>
THE ALGER
AMERICAN THE ALGER MFS VAN ECK
SMALL THE ALGER AMERICAN MFS GROWTH MFS MFS SOGEN WORLDWIDE
CAPITALI- AMERICAN MIDCAP EMERGING MFS WITH LIMITED TOTAL OVERSEAS HARD
ZATION GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY RETURN VARIABLE ASSETS
PORTFOLIO PORTFOLIO PORTFOLIO SERIES SERIES SERIES SERIES SERIES FUND FUND
- --------- ----------- ----------- ----------- ----------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$3,931,611 $19,149,543 $3,883,853 $10,768,176 $ 4,694,705 $5,275,194 $2,127,072 $5,011,714 $3,323,165 $ 410,436
- ---------- ----------- ---------- ----------- ----------- ---------- ---------- ---------- ---------- ---------
3,931,611 19,149,543 3,883,853 10,768,176 4,694,705 5,275,194 2,127,072 5,011,714 3,323,165 410,436
- ---------- ----------- ---------- ----------- ----------- ---------- ---------- ---------- ---------- ---------
-- (25,509) (20,216) -- (33,341) (42,329) (142,042) (151,324) -- (46,638)
- ---------- ----------- ---------- ----------- ----------- ---------- ---------- ---------- ---------- ---------
-- (25,509) (20,216) -- (33,341) (42,329) (142,042) (151,324) -- (46,638)
- ---------- ----------- ---------- ----------- ----------- ---------- ---------- ---------- ---------- ---------
$3,931,611 $19,124,034 $3,863,637 $10,768,176 $ 4,661,364 $5,232,865 $1,985,030 $4,860,390 $3,323,165 $ 363,798
========== =========== ========== =========== =========== ========== ========== ========== ========== =========
$2,998,780 $16,042,433 $3,187,774 $ 7,168,784 $ 3,838,648 $4,985,879 $2,034,696 $4,927,674 $2,632,373 $ 328,321
========== =========== ========== =========== =========== ========== ========== ========== ========== =========
</TABLE>
See accompanying Notes to Financial Statements.
3
<PAGE> 4
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FIDELITY
FOR THE YEAR FEDERATED FEDERATED FEDERATED FIDELITY ASSET FIDELITY FIDELITY
ENDED PRIME MONEY UTILITY HIGH INCOME EQUITY-INCOME MANAGER INDEX 500 CONTRAFUND
DECEMBER 31, 1999 FUND II FUND II BOND FUND II PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------- ------- ------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividend income $ 706,558 $ 149,669 $ 304,785 $ 216,369 $ 180,618 $ 190,903 $ 161,610
----------- ----------- ---------- ---------- ----------- ------------ -----------
706,558 149,669 304,785 216,369 180,618 190,903 161,610
----------- ----------- ---------- ---------- ----------- ------------ -----------
Expenses:
Mortality and expense
risk and
administration
charges 218,056 36,756 52,594 91,915 47,651 236,504 99,358
----------- ----------- ---------- ---------- ----------- ------------ -----------
218,056 36,756 52,594 91,915 47,651 236,504 99,358
----------- ----------- ---------- ---------- ----------- ------------ -----------
NET INVESTMENT
INCOME (LOSS) 488,502 112,913 252,191 124,454 132,967 (45,601) 62,252
----------- ----------- ---------- ---------- ----------- ------------ -----------
Investment gains and
(losses):
Net realized gains
(losses) - 10,509 (126,349) 27,187 45,050 1,086,783 251,862
Net unrealized gains
(losses) - (89,449) (183,228) 37,873 315,175 2,357,042 1,425,059
----------- ----------- ---------- ---------- ----------- ------------ -----------
NET REALIZED AND
UNREALIZED
INVESTMENT GAINS
(LOSSES) - (78,940) (309,577) 65,060 360,225 3,443,825 1,676,921
----------- ----------- ---------- ---------- ----------- ------------ -----------
NET INCREASE
(DECREASE)
IN NET ASSETS
RESULTING FROM
OPERATIONS $ 488,502 $ 33,973 $ (57,386) $ 189,514 $ 493,192 $ 3,398,224 $ 1,739,173
=========== =========== ========== ========== =========== ============ ===========
JANUS JANUS JANUS JANUS
VAN ECK ASPEN JANUS JANUS ASPEN ASPEN ASPEN
EMERGING CAPITAL ASPEN ASPEN FLEXIBLE INTERNATIONAL WORLD WIDE
FOR THE YEAR ENDED MARKETS APPRECIATION GROWTH BALANCED INCOME GROWTH GROWTH
DECEMBER 31, 1999 FUND PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------- ---- --------- --------- --------- --------- --------- ---------
Investment income:
Dividend income - - - - - - -
---------- ------------- ------------ ---------- --------- --------- ----------
- - - - - - -
---------- ------------- ------------ ---------- --------- --------- ----------
Expenses:
Mortality and expense
risk and
administration
charges $ 8,211 $ 19,876 $ 5,105 $ 4,713 $ 324 $ 664 $ 3,010
---------- ------------- ------------ ---------- --------- --------- ----------
8,211 19,876 5,105 4,713 324 664 3,010
---------- ------------- ------------ ---------- --------- --------- ----------
NET INVESTMENT
INCOME (LOSS) (8,211) (19,876) (5,105) (4,713) (324) (664) (3,010)
---------- ------------- ------------ ---------- --------- --------- ----------
Investment gains and
(losses):
Net realized gains
(losses) (10,144) 17,638 3,441 41 (829) 1,668 157
Net unrealized gains
(losses) 526,239 1,762,220 301,573 223,364 2,938 105,955 339,240
---------- ------------- ------------ ---------- --------- --------- ----------
NET REALIZED
AND UNREALIZED
INVESTMENT
GAINS
(LOSSES) 516,095 1,779,858 305,014 223,405 2,109 107,623 339,397
---------- ------------- ------------ ---------- --------- --------- ----------
NET INCREASE
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS $ 507,884 $ 1,759,982 $ 299,909 $ 218,692 $ 1,785 $ 106,959 $ 336,387
========== ============= ============ ========== ========= ========= ==========
</TABLE>
See accompanying Notes to Financial Statements.
4
<PAGE> 5
<TABLE>
<CAPTION>
THE ALGER
AMERICAN THE ALGER MFS VAN ECK
SMALL THE ALGER AMERICAN MFS GROWTH MFS MFS SOGEN WORLDWIDE
CAPITALI- AMERICAN MIDCAP EMERGING MFS WITH LIMITED TOTAL OVERSEAS HARD
ZATION GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY RETURN VARIABLE ASSETS
PORTFOLIO PORTFOLIO PORTFOLIO SERIES SERIES SERIES SERIES SERIES FUND FUND
- --------- ----------- ----------- ----------- ----------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 240,850 $ 958,176 $220,841 -- $ 32,893 $ 23,662 $112,682 $ 143,153 $ 34,501 $ 2,253
- ---------- ---------- -------- ---------- -------- -------- -------- --------- -------- -------
240,850 958,176 220,841 -- 32,893 23,662 112,682 143,153 34,501 2,253
- ---------- ---------- -------- ---------- -------- -------- -------- --------- -------- -------
31,029 161,061 29,020 $ 70,170 43,888 56,667 $ 23,473 51,054 37,217 2,921
- ---------- ---------- -------- ---------- -------- -------- -------- --------- -------- -------
31,029 161,061 29,020 70,170 43,888 56,667 23,473 51,054 37,217 2,921
- ---------- ---------- -------- ---------- -------- -------- -------- --------- -------- -------
209,821 797,115 191,821 (70,170) (10,995) (33,005) 89,209 92,099 (2,716) (668)
- ---------- ---------- -------- ---------- -------- -------- -------- --------- -------- -------
(27,093) 335,913 21,690 245,537 107,121 122,217 (6,655) 14,997 140,440 (1,568)
904,672 2,287,237 529,227 3,087,888 655,276 47,625 (25,526) (127,595) 796,693 49,925
- ---------- ---------- -------- ---------- -------- -------- -------- --------- -------- -------
877,579 2,623,150 550,917 3,333,425 762,397 169,842 (32,181) (112,598) 937,133 48,357
- ---------- ---------- -------- ---------- -------- -------- -------- --------- -------- -------
$1,087,400 $3,420,265 $742,738 $3,263,255 $751,402 $136,837 $ 57,028 $ (20,499) $934,417 $47,689
========== ========== ======== ========== ======== ======== ======== ========= ======== =======
</TABLE>
See accompanying Notes to Financial Statements.
5
<PAGE> 6
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FIDELITY
FEDERATED FEDERATED FEDERATED FIDELITY ASSET FIDELITY FIDELITY
FOR THE YEAR PRIME MONEY UTILITY HIGH INCOME EQUITY-INCOME MANAGER INDEX 500 CONTRAFUND
ENDED DECEMBER 31, 1999 FUND II FUND II BOND FUND II PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------- ------- ------- ------------ --------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
From operations:
Net investment income
(loss) $ 488,502 $ 112,913 $ 252,191 $ 124,454 $ 132,967 $ (45,601) $ 62,252
Net realized and
unrealized gains
(losses) -- (78,940) (309,577) 65,060 360,225 3,443,825 1,676,921
----------- ------------ ----------- ---------- ----------- ------------ -----------
Change in net assets
resulting from
operations 488,502 33,973 (57,386) 189,514 493,192 3,398,224 1,739,173
----------- ------------ ----------- ---------- ----------- ------------ -----------
From capital
transactions:
Net premiums/deposits 33,173,793 831,090 1,266,165 2,220,476 1,838,108 7,195,871 4,291,826
Death benefits -- (159,614) (191,732) (58,842) (115,043) (114,424) (120,178
Surrenders (1,163,352) (29,199) (116,987) (310,647) (1,668) (621,921) (225,432
Withdrawals (335,752) (50,907) (83,712) (131,986) (50,538) (357,810) (115,676
Transfers into (out of)
subaccounts,
net--Note1
(8,057,071) 928,843 874,120 1,788,608 1,464,890 4,065,763 2,549,528
----------- ------------ ----------- ---------- ----------- ------------ -----------
Change in net
assets resulting
from capital
transactions 23,617,618 1,520,213 1,747,854 3,507,609 3,135,749 10,167,479 6,380,068
----------- ------------ ----------- ---------- ----------- ------------ -----------
Increase in net assets 24,106,120 1,554,186 1,690,468 3,697,123 3,628,941 13,565,703 8,119,241
Net assets at beginning
of period 5,562,204 1,693,662 3,166,765 4,264,468 2,258,023 10,689,980 3,710,438
----------- ------------ ---------- ---------- ----------- ------------ -----------
NET ASSETS AT END
OF PERIOD $29,668,324 $ 3,247,848 $4,857,233 $7,961,591 $ 5,886,964 $ 24,255,683 $11,829,679
----------- ------------ ---------- ---------- ----------- ------------ -----------
NET ASSET VALUE PER
UNIT AT END OF
PERIOD $ 1.00 $ 14.35 $ 10.24 $ 25.71 $ 18.67 $ 167.41 $ 29.15
=========== ============ ========== ========== =========== ============ ===========
UNITS OUTSTANDING
AT END OF PERIOD 29,668,324 226,331 474,339 309,669 315,317 144,888 405,821
=========== ============ ========== ========== =========== ============ ===========
</TABLE>
6
<PAGE> 7
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
FIDELITY
FEDERATED FEDERATED FEDERATED FIDELITY ASSET FIDELITY FIDELITY
FOR THE YEAR PRIME MONEY UTILITY HIGH INCOME EQUITY-INCOME MANAGER INDEX 500 CONTRAFUND
ENDED DECEMBER 31, 1998 FUND II FUND II BOND FUND II PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------- ------------ ----------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
From operations:
Net investment income
(loss) $ 207,113 $ 3,202 $ (9,420) $ 8,287 $ 19,013 $ (22,378) $ 3,442
Net realized and
unrealized gains
(losses) 634 97,354 (26,804) 186,584 141,214 1,288,532 507,452
------------ ----------- ---------- ---------- ----------- ------------ ----------
Change in net assets
resulting from
operations 207,747 100,556 (36,224) 194,871 160,227 1,266,154 510,894
From capital
transactions:
Net premiums/deposits 24,848,283 1,307,253 2,301,701 2,167,250 1,237,984 6,238,184 1,114,162
Death benefits (15,275) (19,978) (13,846) (7,421) -- -- (10,449
Surrenders (198,856) (15,885) (12,264) (37,904) (1,620) (50,773) (23,821
Withdrawals (112,539) (77,318) (93,235) (31,134) (22,890) (110,964) (23,659
Transfers into (out of)
subaccounts, net--
Note 1 (20,028,240) 348,351 830,154 1,482,837 616,956 2,784,494 1,814,245
------------ ----------- ---------- ---------- ----------- ------------ ----------
Change in net assets
resulting from
capital
transactions 4,493,373 1,542,423 3,012,510 3,573,628 1,830,430 8,860,941 2,870,478
------------ ----------- ---------- ---------- ----------- ------------ ----------
Increase in net assets 4,701,120 1,642,979 2,976,286 3,768,499 1,990,657 10,127,095 3,381,372
Net assets at beginning
of period 861,084 50,683 190,479 495,969 267,366 562,885 329,066
------------ ----------- ---------- ---------- ----------- ------------ ----------
NET ASSETS AT END
OF PERIOD $ 5,562,204 $ 1,693,662 $3,166,765 $4,264,468 $ 2,258,023 $ 10,689,980 $3,710,438
------------ ----------- ---------- ---------- ----------- ------------ ----------
NET ASSET VALUE PER
UNIT AT END OF
PERIOD $ 1.00 $ 15.27 $ 10.92 $ 25.42 $ 18.16 $ 141.25 $ 24.44
============ =========== ========== ========== =========== ============ ==========
UNITS OUTSTANDING AT
END OF PERIOD 5,562,204 110,914 289,997 167,760 124,340 75,681 151,818
============ =========== ========== ========== =========== ============ ==========
</TABLE>
See accompanying Notes to Financial Statements.
7
<PAGE> 8
<TABLE>
<CAPTION>
THE ALGER
AMERICAN THE ALGER MFS VAN ECK
SMALL THE ALGER AMERICAN MFS GROWTH MFS MFS SOGEN WORLDWIDE VAN ECK
CAPITALI- AMERICAN MIDCAP EMERGING MFS WITH LIMITED TOTAL OVERSEAS HARD EMERGING
ZATION GROWTH GROWTH GROWTH RESEARCH INCOME MATURITY RETURN VARIABLE ASSETS MARKETS
PORTFOLIO PORTFOLIO PORTFOLIO SERIES SERIES SERIES SERIES SERIES FUND FUND FUND
- --------- ----------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 209,821 $ 797,115 $ 191,821 $ (70,170) $ (10,995) $ (33,005) $ 89,209 $ 92,099 $ (2,716) $ (668) $ (8,211)
877,579 2,623,150 550,917 3,333,425 762,397 169,842 (32,181) (112,598) 937,133 48,357 516,095
- ---------- ----------- ---------- ----------- ---------- ---------- ----------- --------- -------- -------- ----------
1,087,400 3,420,265 742,738 3,263,255 751,402 136,837 57,028 (20,499) 934,417 47,689 507,884
- ---------- ----------- ---------- ----------- ---------- ---------- ----------- --------- -------- -------- ----------
1,066,895 5,221,581 1,384,117 2,740,437 1,024,522 1,191,276 261,437 1,432,338 411,295 150,522 195,914
-- (52,193) (9,196) (5,257) (33,341) -- (11,410) (175,729) -- -- --
(13,535) (246,417) (30,775) (31,310) (36,878) (26,140) (77,142) (82,248) (87,477) (8,640) --
(33,248) (208,410) (38,843) (34,437) (35,053) (59,788) (22,640) (61,388) (73,467) (1,989) (15,623)
222,844 5,544,308 642,592 1,911,677 1,312,541 1,605,262 746,199 1,874,729 99,935 35,073 (6,561)
- ---------- ----------- ---------- ----------- ---------- ---------- ----------- --------- -------- -------- ----------
1,242,956 10,258,869 1,947,895 4,581,110 2,231,791 2,710,610 896,444 2,987,702 350,286 174,966 173,730
- ---------- ----------- ---------- ----------- ---------- ---------- ----------- --------- -------- -------- ----------
2,330,356 13,679,134 2,690,633 7,844,365 2,983,193 2,847,447 953,472 2,967,203 1,284,703 222,655 681,614
1,601,255 5,444,900 1,173,004 2,923,811 1,678,171 2,385,418 1,031,558 1,893,187 2,038,462 141,143 401,475
- ---------- ----------- ---------- ----------- ---------- ---------- ----------- --------- -------- -------- ----------
$3,931,611 19,124,034 $3,863,637 $10,768,176 $4,661,364 $5,232,865 $1,985,030 $4,860,390 $3,323,165 $363,798 $1,083,089
- ---------- ----------- ---------- ----------- ---------- ---------- ----------- --------- -------- -------- ----------
$ 55.15 $ 64.38 $ 32.23 $ 37.94 $ 23.34 $ 21.31 $ 9.81 $ 17.75 $ 14.18 $ 10.96 $ 14.26
========== =========== ========== =========== ========== ========== ========== ========== ========== ======== ==========
71,289 297,049 119,877 283,821 199,716 245,559 202,348 273,825 234,356 33,193 75,953
========== =========== ========== =========== ========== ========== ========== ========== ========== ======== ==========
$ 115,699 $ 307,440 $ 18,386 $ (10,989) $ (1,475) $ (16,356) $ (7,862) $ 12,833 $ (24,005) $ 4,608 $ (2,674)
2,409 766,562 131,442 548,478 172,413 234,577 (11,034) 69,285 (64,492) (40,765) (109,753)
- ---------- ----------- ---------- ----------- ---------- ---------- ----------- --------- -------- -------- ----------
118,108 1,074,002 149,828 537,489 170,938 218,221 (18,896) 82,118 (88,497) (36,157) (112,427)
- ---------- ----------- ---------- ----------- ---------- ---------- ----------- --------- -------- -------- ----------
1,012,659 2,385,652 456,073 845,164 586,011 1,164,678 743,654 968,524 1,098,070 128,466 348,583
(3,193) -- (3,436) -- -- (4,023) (7,699) -- (3,348) -- --
(27,136) (13,467) -- (9,089) (1,253) -- (6,502) (7,865) (16,724) (20,009) (3,769)
(16,711) (33,198) (1,155) (24,319) (11,140) (17,911) (6,087) (11,868) (21,157) (1,198) (4,392)
321,797 1,782,528 529,267 1,432,918 777,200 805,436 245,382 602,434 317,226 61,004 156,590
- ---------- ----------- ---------- ----------- ---------- ---------- ----------- --------- -------- -------- ----------
1,287,416 4,121,515 980,749 2,244,674 1,350,818 1,948,180 968,748 1,551,225 1,374,067 168,263 497,012
- ---------- ----------- ---------- ----------- ---------- ---------- ----------- --------- -------- -------- ----------
1,405,524 5,195,517 1,130,577 2,782,163 1,521,756 2,166,401 949,852 1,633,343 1,285,570 132,106 384,585
195,731 249,383 42,427 141,648 156,415 219,017 81,706 259,844 752,892 9,037 16,890
- ---------- ----------- ---------- ----------- ---------- ---------- ----------- --------- -------- -------- ----------
$1,601,255 $ 5,444,900 $1,173,004 $ 2,923,811 $1,678,171 $2,385,418 $1,031,558 $1,893,187 $2,038,462 $141,143 $ 401,475
- ---------- ----------- ---------- ----------- ---------- ---------- ----------- --------- -------- -------- ----------
$ 43.97 $ 53.22 $ 28.87 $ 21.47 $ 19.05 $ 20.11 $ 10.16 $ 18.12 $ 10.07 $ 9.20 $ 7.12
========== =========== ========== =========== ========== ========== ========== ========== ========== ======== ==========
36,417 102,309 40,631 136,181 88,093 118,618 101,531 104,481 202,429 15,342 56,387
========== =========== ========== =========== ========== ========== ========== ========== ========== ======== ==========
</TABLE>
See accompanying Notes to Financial Statements.
8
<PAGE> 9
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
JANUS JANUS JANUS JANUS
ASPEN JANUS JANUS ASPEN ASPEN ASPEN
CAPITAL ASPEN ASPEN FLEXIBLE INTERNATIONAL WORLD WIDE
APPRECIATION GROWTH BALANCED INCOME GROWTH GROWTH
FOR THE YEAR ENDED DECEMBER 31, 1999 PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------ --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
From operations:
Net investment income (loss) $ (19,876) $ (5,105) $ (4,713) $ (324) $ (664) $ (3,010)
Net realized and unrealized
gains (losses) 1,779,858 305,014 223,405 2,109 107,623 339,397
---------- ----------- --------- ---------- --------- -----------
Change in net assets
resulting from operations 1,759,982 299,909 218,692 1,785 106,959 336,387
---------- ----------- --------- ---------- --------- -----------
From capital transactions:
Net premiums/deposits 6,485,581 2,588,038 3,367,893 204,092 617,608 2,407,678
Death benefits -- -- -- -- -- --
Surrenders (11,563) (9,539) -- -- -- (8,172)
Withdrawals (11,346) (12,696) (5,771) -- (228) (2,401)
Transfers into(out of)
subaccounts,
net--Note 1
-- -- -- -- -- 3
---------- ----------- --------- ---------- --------- -----------
Change in net assets resulting
from capital transactions 6,462,672 2,565,803 3,362,122 204,092 617,380 2,397,108
---------- ----------- --------- ---------- --------- -----------
Increase in net assets 8,222,654 2,865,712 3,580,814 205,877 724,339 2,733,495
Net assets at beginning of period -- -- -- -- -- --
---------- ----------- --------- ---------- --------- -----------
NET ASSETS AT END OF PERIOD $8,222,654 $ 2,865,712 $3,580,814 $ 205,877 $ 724,339 $ 2,733,495
---------- ----------- ---------- ---------- --------- -----------
NET ASSET VALUE PER UNIT AT END
OF PERIOD $ 33.17 $ 33.65 $ 27.92 $ 11.42 $ 38.67 $ 47.75
========== =========== ========= ========== ========= ===========
UNITS OUTSTANDING AT END OF PERIOD 247,894 85,162 128,253 18,028 18,731 57,246
========== =========== ========= ========== ========= ===========
</TABLE>
See accompanying Notes to Financial Statements.
9
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1. ORGANIZATION
Valley Forge Life Insurance Company Variable Annuity Separate Account
("Variable Account"), a unit investment trust registered with the Securities and
Exchange Commission under the Investment Company Act of 1940, is a separate
account of Valley Forge Life Insurance Company ("VFL"). The Variable Account
began operation on February 3, 1997. The assets of the Variable Account are
segregated from VFL's general account and its other separate accounts. VFL is a
wholly-owned subsidiary of Continental Assurance Company ("Assurance").
Assurance is a wholly-owned subsidiary of Continental Casualty Company
("Casualty"), which is wholly-owned by CNA Financial Corporation ("CNA"). Loews
Corporation owns approximately 86% of the outstanding common stock of CNA.
VFL sells a wide range of life insurance products, including the
Flexible Premium Deferred Annuity Contract ("Contract"). Under the terms of the
Contract, contractholders select where the net purchase payments of the Contract
are invested. The contractholder may choose to invest in either the Variable
Account, the Guaranteed Interest Option Separate Account ("GIO Account") or both
the Variable Account and the GIO Account.
The Variable Account currently offers 24 subaccounts each of which
invests in shares of corresponding funds (Funds), in which the contractholders
bear all of the investment risk. Each Fund is either an open-end diversified
management investment company or a separate investment portfolio of such a
company and is managed by an investment advisor ("Investment Advisor") which is
registered with the Securities and Exchange Commission. The Investment Advisors
and subaccounts are identified here.
10
<PAGE> 11
NOTE 1.-(CONTINUED)
<TABLE>
<CAPTION>
INVESTMENT ADVISOR: INVESTMENT ADVISOR:
FUND/SUBACCOUNT FUND/SUBACCOUNT
- ------------------ ---------------
<S> <C>
FEDERATED ADVISERS: MASSACHUSETTS FINANCIAL SERVICES
Federated Prime Money Fund II COMPANY:
Federated Utility Fund II MFS Emerging Growth Series
Federated High Income Bond Fund II MFS Research Series
FIDELITY MANAGEMENT & RESEARCH COMPANY: MFS Growth With Income Series
Fidelity Variable Insurance Products MFS Limited Maturity Series (closed
Fund Equity-Income Portfolio ("Fidelity to new investments)
Equity-Income Portfolio") MFS Total Return Series
Fidelity Variable Insurance Products SOCIETE GENERALE ASSET MANAGEMENT
Fund II Asset Manager Portfolio CORP.:
("Fidelity Asset Manager Portfolio") SoGen Overseas Variable Fund
Fidelity Variable Insurance Products VAN ECK ASSOCIATES CORPORATION:
Fund II Index 500 Portfolio Van Eck Worldwide Hard Assets Fund
("Fidelity Index 500 Portfolio") Van Eck Emerging Markets Fund
Fidelity Variable Insurance Products JANUS CAPITAL CORPORATION-
Fund II Contrafund Portfolio INSTITUTIONAL CLASS
("Fidelity Contrafund Portfolio") Janus Aspen Capital Appreciation Portfolio
FRED ALGER MANAGEMENT, INC.: Janus Aspen Growth Portfolio
The Alger American Small Janus Aspen Balanced Portfolio
Capitalization Portfolio Janus Aspen Flexible Income Portfolio
The Alger American Growth Portfolio Janus Aspen International Growth
The Alger American MidCap Growth Portfolio
Portfolio Janus Aspen World Wide Growth Portfolio
</TABLE>
The MFS Limited Maturity Series subaccount is no longer available for new
allocations as of May 1, 1999.
The GIO Account is also a separate account of VFL. Through the
guaranteed interest option, VFL offers specified effective annual rates of
interest that are credited daily and available for specified periods of time.
Contractholders choosing the guaranteed interest option do not participate in
the investment performance of the GIO Account and this performance does not
determine the GIO Account value or benefits relating thereto.
The assets of the GIO Account and the Variable Account are segregated
from other VFL assets and from the General Account of VFL. The contractholder
(before the maturity date, while the contractholder is still living or the
Contract is in force) may transfer all or part of any subaccount value to
another subaccount(s) or to the GIO Account, or transfer all or part of the GIO
Account value to any subaccounts. The GIO Account, however, unlike the Variable
Account, is not registered as an investment company under the 1940 Act. Separate
financial statements are not prepared for the GIO Account and the accompanying
financial statements do not reflect amounts invested in the GIO Account.
11
<PAGE> 12
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
VALUATION OF INVESTMENTS--Investments in the Variable Account consist
of shares of the Funds and are stated at market value based on quoted market
prices. Changes in the difference between market value and cost are reflected as
net unrealized gains (losses) in the accompanying financial statements.
INVESTMENT INCOME--Investment income consists of dividends declared by
the Funds and are recognized on the date of record.
REALIZED GAINS AND LOSSES--Realized investment gains and losses in the
Variable Account represent the difference between the proceeds from sales of
shares of the Funds held by the subaccount and the cost of such shares, which
are determined using the first-in first-out cost method.
FEDERAL INCOME TAXES--Net investment income and realized gains and
losses on investments of the Variable Account are taxable to contractholders
generally upon distribution. Accordingly, no provision for income taxes has been
recorded in the accompanying financial statements.
USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
In the opinion of Variable Account's management, these statements include all
adjustments, consisting of normal recurring accruals, which are necessary for
the fair presentation of the financial position, results of operations and
changes in net assets in the accompanying financial statements.
12
<PAGE> 13
NOTE 3. CHARGES AND DEDUCTIONS
VFL deducts a daily charge from the assets of the Variable Account to
compensate it for mortality and expense risks that it assumes under the
Contract. The daily charge is equal to an annual rate of 1.25% of the net assets
of the subaccount.
An annual administration fee of $30 is also deducted from the
subaccounts on each Contract if the contract value is below $50,000. This fee is
to cover a portion of VFL's administrative expenses related to the contracts.
VFL deducts a daily administration charge from the assets of the
subaccounts on each Contract to compensate it for a portion of the expenses it
incurs in administering the contracts. The daily charge is equal to an annual
rate of 0.15% of the net assets of the subaccounts.
VFL permits 12 free transfers among and between the subaccounts within
the Variable Account (four of which can be applied to the GIO Account) per
contract year without an assessment of a fee. For each additional transfer, VFL
charges $25 at the time each such transfer is processed. The fee is deducted
from the amount being transferred.
NOTE 4. DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue Code of
1986 (the Code), a variable annuity contract, other than a contract issued in
connection with certain types of employee benefit plans, will not be treated as
an annuity contract for federal tax purposes for any period for which the
investments of the segregated asset account on which the contract is based are
not adequately diversified. The Code provides that the "adequately diversified"
requirement may be met if the underlying investments satisfy either a statutory
safe harbor test or diversification requirements set forth in regulations issued
by the Secretary of the Treasury. VFL believes, based on the funds' prospectuses
of each of the Funds that the Variable Account participates in, that the mutual
Funds satisfy the diversification requirement of the regulations.
13
<PAGE> 1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
Valley Forge Life Insurance Company
We have audited the accompanying balance sheets of Valley Forge Life
Insurance Company (a wholly-owned subsidiary of Continental Assurance Company,
which is a wholly-owned subsidiary of Continental Casualty Company, a wholly
owned subsidiary of CNA Financial Corporation, an affiliate of Loew's
Corporation) as of December 31, 1999 and 1998, and the related statements of
operations, stockholder's equity and cash flows for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of Valley Forge Life Insurance Company
as of December 31, 1999 and 1998, and the results of operations and its cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with generally accepted accounting principles.
As discussed in Note 12 to the financial statements, the Company
changed its method of accounting for liabilities for insurance-related
assessments in 1999.
Deloitte & Touche LLP
Chicago, Illinois
February 23, 2000
<PAGE> 2
VALLEY FORGE LIFE INSURANCE COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 1999 1998
- ----------- ----------- -----------
<S> <C> <C>
(In thousands of dollars)
ASSETS:
Investments:
Fixed maturities available-for-sale (amortized cost: $548,444
and $454,635) $ 530,512 $ 460,516
Equity securities available-for-sale (cost: $0 and $981) 51 2,218
Policy loans 93,575 74,150
Other invested assets 433 485
Short-term investments 24,714 81,418
----------- -----------
TOTAL INVESTMENTS 649,285 618,787
Cash 3,529 3,750
Receivables:
Reinsurance 2,414,553 2,119,897
Premium and other 82,852 76,690
Less allowance for doubtful accounts (12) (26)
Deferred acquisition costs 127,297 111,963
Accrued investment income 11,066 7,721
Receivables for securities sold 2,426 --
Federal income tax recoverable 4,316 --
Other 4,883 902
Separate Account business 209,183 73,745
----------- -----------
TOTAL ASSETS $ 3,509,378 $ 3,013,429
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY:
Liabilities:
Insurance reserves:
Future policy benefits $ 2,751,396 $ 2,438,305
Claims and claim expense 139,653 93,001
Policyholders' funds 43,466 42,746
Payables for securities purchased 2,421 370
Federal income taxes payable -- 6,468
Deferred income taxes 2,694 6,213
Due to affiliates 12,435 1,946
Commissions and other payables 95,976 86,815
Separate Account business 209,183 73,745
----------- -----------
TOTAL LIABILITIES 3,257,224 2,749,609
----------- -----------
Commitments and contingent liabilities
Stockholder's Equity
Common stock ($50 par value; Authorized--200,000 shares;
Issued--50,000 shares) 2,500 2,500
Additional paid-in capital 69,150 69,150
Retained earnings 191,464 187,683
Accumulated other comprehensive income (loss) (10,960) 4,487
----------- -----------
TOTAL STOCKHOLDER'S EQUITY 252,154 263,820
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 3,509,378 $ 3,013,429
=========== ===========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 3
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
- ---------------------- --------- --------- ---------
<S> <C> <C> <C>
(In thousands of dollars)
Revenues:
Premiums $ 310,719 $ 315,599 $ 332,172
Net investment income 39,148 35,539 29,913
Realized investment gains (losses) (19,081) 16,967 4,200
Other 4,545 7,959 6,872
--------- --------- ---------
335,331 376,064 373,157
--------- --------- ---------
Benefits and expenses:
Insurance claims and policyholders' benefits 291,547 301,900 307,207
Amortization of deferred acquisition costs 13,942 11,807 11,818
Other operating expenses 23,740 35,813 33,505
--------- --------- ---------
329,229 349,520 352,530
--------- --------- ---------
Income before income tax expense and
cumulative effect of change
in accounting principle 6,102 26,544 20,627
Income tax expense 2,087 9,091 7,297
--------- --------- ---------
Income before cumulative effect of change
in accounting principle 4,015 17,453 13,330
Cumulative effect of change in accounting
principle, net of tax-Note 12 234 -- --
--------- --------- ---------
NET INCOME $ 3,781 $ 17,453 $ 13,330
========= ========= =========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 4
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Accumulated
Other
Additional Comprehensive Comprehensive Total
Common Paid-in Income Retained Income Stockholder's
Stock Capital (Loss) Earnings (Loss) Equity
--------- ---------- ------------- -------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands of dollars)
Balance, December 31, 1996 $ 2,500 $ 39,150 $ 156,900 $ 990 $ 199,540
Comprehensive income:
Net income -- -- $ 13,330 13,330 -- 13,330
Other comprehensive income -- -- 3,390 -- 3,390 3,390
---------
Total comprehensive income $ 16,720
=========
Balance, December 31, 1997 2,500 39,150 170,230 4,380 216,260
Capital Contribution from Assurance -- 30,000 -- -- 30,000
Comprehensive income:
Net income -- -- $ 17,453 17,453 -- 17,453
Other comprehensive income -- -- 107 -- 107 107
---------
Total comprehensive income $ 17,560
=========
Balance, December 31, 1998 2,500 69,150 187,683 4,487 263,820
Comprehensive income (loss):
Net income -- -- $ 3,781 3,781 -- 3,781
Other comprehensive loss -- -- (15,447) -- (15,447) (15,447)
---------
Total comprehensive loss $ (11,666)
=========
BALANCE, DECEMBER 31, 1999 $ 2,500 $ 69,150 $ 191,464 $ (10,960) $ 252,154
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 5
VALLEY FORGE LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31 1999 1998 1997
- ----------- ----------- ----------- -----------
<S> <C> <C> <C>
(In thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,781 $ 17,453 $ 13,330
Adjustments to reconcile net income to net
cash flows from operating activities:
Deferred income tax provision 4,924 2,058 2,581
Realized investment losses (gains) 19,081 (16,967) (4,200)
Amortization of bond discount (2,999) (4,821) (2,438)
Changes in:
Receivables, net (300,832) (544,920) (269,787)
Deferred acquisition costs (13,866) (16,746) (20,765)
Accrued investment income (3,345) (2,476) (300)
Due to/from affiliates (10,489) 37,945 31,500
Federal income taxes payable and receivable (10,784) 493 2,151
Insurance reserves 380,939 541,560 221,252
Commissions and other payables and other 25,642 (18,804) 47,212
----------- ----------- -----------
Total adjustments 88,271 (22,678) 7,206
----------- ----------- -----------
NET CASH FLOWS FROM OPERATING ACTIVITIES 92,052 (5,225) 20,536
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed maturities (1,512,848) (744,431) (464,361)
Proceeds from fixed maturities:
Sales 1,339,905 741,277 278,459
Maturities, calls and redemptions 58,263 33,635 45,442
Purchases of equity securities -- (5) (1,334)
Proceeds from sale of equity securities 2,647 5 2,447
Change in short-term investments 59,455 (73,233) 39,301
Change in policy loans (19,424) (7,179) (6,704)
Change in other invested assets 205 (82) (580)
Other, net -- -- --
----------- ----------- -----------
NET CASH FLOWS FROM INVESTING ACTIVITIES (71,797) (50,013) (107,330)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Receipts for investment contracts credited
to policyholder accounts 15,901 30,007 111,478
Return of policyholder account balances on investment contracts (36,377) (25,584) (24,878)
Capital contribution from Assurance -- 30,000 --
----------- ----------- -----------
NET CASH FLOWS FROM FINANCING ACTIVITIES (20,476) 34,423 86,600
----------- ----------- -----------
NET CASH FLOWS (221) (20,815) (194)
Cash at beginning of period 3,750 24,565 24,759
----------- ----------- -----------
CASH AT END OF PERIOD $ 3,529 $ 3,750 $ 24,565
=========== =========== ===========
Supplemental disclosures of cash flow information:
Federal income taxes paid $ 8,260 $ 6,651 $ 2,488
=========== =========== ===========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 6
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Valley Forge Life Insurance Company (VFL) is a wholly-owned subsidiary
of Continental Assurance Company (Assurance). Assurance is a wholly-owned
subsidiary of Continental Casualty Company (Casualty) which is wholly-owned by
CNA Financial Corporation (CNAF). Loews Corporation owns approximately 86% of
the outstanding common stock of CNAF.
VFL markets and underwrites insurance products designed to satisfy the
life, health insurance and retirement needs of individuals and groups. Products
available in individual policy form include annuities as well as term and
universal life insurance. Products available in group policy form include life,
pension, accident and health insurance.
The operations, assets and liabilities of VFL and its parent,
Assurance, are managed on a combined basis. Pursuant to a Reinsurance Pooling
Agreement, as amended, VFL cedes all of its business, excluding its separate
account business, to its parent, Assurance. This ceded business is then pooled
with the business of Assurance, which excludes Assurance's participating
contracts and separate account business, and 10% of the combined pool is assumed
by VFL.
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles (GAAP). Certain amounts applicable
to prior years have been reclassified to conform to classifications followed in
1999.
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
INSURANCE
Premium revenue- Revenues on universal life type contracts are
comprised of contract charges and fees which are recognized over the coverage
period. Accident and health insurance premiums are earned ratably over the terms
of the policies after provision for estimated adjustments on retrospectively
rated policies and deductions for ceded insurance. Other life insurance premiums
are recognized as revenue when due, after deductions for ceded insurance.
Future policy benefit reserves- Reserves for traditional life insurance
products (whole and term life products) are computed based upon the net level
premium method using actuarial assumptions as to interest rates, mortality,
morbidity, withdrawals and expenses. Actuarial assumptions include a margin for
adverse deviation and generally vary by plan, age at issue and policy duration.
Interest rates range from 3% to 9%, and mortality, morbidity and withdrawal
assumptions reflect VFL and industry experience prevailing at the time of issue.
Expense assumptions include the estimated effects of inflation and expenses to
be incurred beyond the premium paying period. Reserves for universal life-type
contracts are equal to the account balances that accrue to the benefit of the
policyholders. Interest crediting rates ranged from 4.45% to 7.25% for the three
years ended December 31, 1999.
Claim and claim expense reserves- Claim reserves include provisions for
reported claims in the course of settlement and estimates of unreported losses
based upon past experience and estimates of future expenses to be incurred in
settlement of claims.
<PAGE> 7
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Reinsurance- In addition to the Reinsurance Pooling Agreement with
Assurance, VFL also assumes and cedes insurance with other insurers and
reinsurers and members of various reinsurance pools and associations. VFL
utilizes reinsurance arrangements to limit its maximum loss, provide greater
diversification of risk and minimize exposures on larger risks. The reinsurance
coverages are tailored to the specific risk characteristics of each product line
with VFL's retained amount varying by type of coverage. VFL's reinsurance
includes coinsurance, yearly renewable term and facultative programs. Amounts
recoverable from reinsurers are estimated in a manner consistent with the claim
liability and future policy benefit reserves.
Deferred acquisition costs- Cost of acquiring life insurance business
are capitalized and amortized based on assumptions consistent with those used
for computing future policy benefit reserves. Acquisition costs on traditional
life business are amortized over the assumed premium paying periods. Universal
life and annuity acquisition costs are amortized in proportion to the present
value of the estimated gross profits over the products' assumed durations. To
the extent that unrealized gains or losses on available-for-sale securities
would result in an adjustment of deferred policy acquisition costs had those
gains or losses actually been realized, the related unamortized deferred policy
acquisition costs are recorded as an adjustment to the unrealized gains or
losses included in stockholder's equity.
INVESTMENTS
Valuation of investments- VFL classifies its fixed maturities and its
equity securities as available-for-sale, and as such, they are carried at fair
value. The amortized cost of fixed maturities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization and accretion
are included in net investment income.
Policy loans are carried at unpaid balances. Short-term investments,
which have an original maturity of one year or less, are carried at amortized
cost which approximates market value. VFL has no real estate or mortgage loans.
VFL records its derivative securities at fair value at the reporting
date and changes in fair value are reflected in realized investment gains and
losses. VFL's derivatives are made up of interest rate caps and purchased
options and are classified as other invested assets.
Investment gains and losses- All securities transactions are recorded
on the trade date. Realized investment gains and losses are determined on the
basis of the cost of the specific securities sold. Unrealized investment gains
and losses on fixed maturities and equity securities are reflected as part of
stockholder's equity, net of applicable deferred income taxes and deferred
acquisition costs. Investments are written down to estimated fair values and
losses are charged to income when a decline in value is considered to be other
than temporary.
Securities lending activities- VFL lends securities to unrelated
parties, primarily major brokerage firms. Borrowers of these securities must
deposit collateral with VFL equal to 100% of the fair value of the securities if
the collateral is cash, or 102% if the collateral is securities. Cash deposits
from these transactions are invested in short term investments (primarily
commercial paper) and a liability is recognized for the obligation to return the
collateral. VFL continues to receive the interest on loaned debt securities as
beneficial owner, and accordingly, loaned debt securities are included in fixed
maturity securities. VFL had no securities on loan at December 31, 1999 or 1998.
Separate Account business- VFL writes certain variable annuity
contracts and universal life policies. The supporting assets and liabilities of
these contracts and policies are legally segregated and reflected as assets and
liabilities of Separate Account business. Substantially all assets of the
Separate Account business are carried at fair value. Separate Account
liabilities are principally obligations due to contractholders and are carried
at contract values.
INCOME TAXES
VFL accounts for income taxes under the liability method. Under the
liability method deferred income taxes are recognized for temporary differences
between the financial statement and tax return bases of assets and liabilities.
Temporary differences primarily relate to insurance reserves, deferred
acquisition costs and net unrealized investment gains or losses.
<PAGE> 8
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 2. INVESTMENTS
The significant components of net investment income are presented in
the following table:
NET INVESTMENT INCOME
Year Ended December 31 1999 1998 1997
- ---------------------- ------- ------- -------
(In thousands of dollars)
Fixed maturities--Taxable bonds $30,851 $27,150 $20,669
Equity securities 54 72 72
Policy loans 4,963 4,760 4,264
Short-term investments 2,969 3,803 4,885
Other 778 105 201
------- ------- -------
39,615 35,890 30,091
Investment expense 467 351 178
------- ------- -------
NET INVESTMENT INCOME $39,148 $35,539 $29,913
======= ======= =======
Net realized investment gains (losses) and unrealized appreciation
(depreciation) in investments are set forth in the following table:
ANALYSIS OF INVESTMENT GAINS (LOSSES)
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
- ---------------------- -------- -------- --------
<S> <C> <C> <C>
(In thousands of dollars)
Realized investment gains (losses):
Fixed maturities $(20,981) $ 16,907 $ 3,333
Equity securities 1,667 0 1,021
Other 233 60 (154)
-------- -------- --------
(19,081) 16,967 4,200
Income tax benefit (expense) 6,679 (5,938) (1,470)
-------- -------- --------
Net realized investment gains (losses) (12,402) 11,029 2,730
-------- -------- --------
Change in net unrealized investment gains (losses):
Fixed maturities (23,813) 441 5,806
Equity securities (1,186) (42) (607)
Adjustment to deferred policy acquisition costs
related to unrealized gains (losses) and other 1,235 (235) 20
-------- -------- --------
(23,764) 164 5,219
Deferred income tax (expense) benefit 8,317 (57) (1,829)
-------- -------- --------
Change in net unrealized investment gains (losses) (15,447) 107 3,390
-------- -------- --------
NET REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES) $(27,849) $ 11,136 $ 6,120
======== ======== ========
</TABLE>
<PAGE> 9
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 2. - (CONTINUED)
SUMMARY OF GROSS REALIZED INVESTMENT GAINS (LOSSES)
FOR FIXED MATURITIES AND EQUITY SECURITIES
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
---- ---- ----
(In thousands of dollars) FIXED EQUITY Fixed Equity Fixed Equity
MATURITIES SECURITIES Maturities Securities Maturities Securities
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Proceeds from sales $ 1,339,905 $ 2,647 $ 741,277 $ 5 $ 278,459 $ 2,447
============= ======== ========== ==== ========== ========
Gross realized gains $ 4,399 $ 1,667 $ 17,604 $ -- $ 4,793 $ 1,113
Gross realized losses (25,380) -- (697) -- (1,460) (92)
------------- -------- ---------- ---- ---------- --------
NET REALIZED GAINS (LOSSES)
ON SALES $ (20,981) $ 1,667 $ 16,907 $ -- $ 3,333 $ 1,021
============= ======== ========== ==== ========== ========
</TABLE>
ANALYSIS OF NET UNREALIZED INVESTMENT GAINS (LOSSES)
INCLUDED IN ACCUMULATED OTHER COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
December 31 1999 1998
---- ----
GAINS LOSSES NET Gains Losses Net
<S> <C> <C> <C> <C> <C> <C>
(In thousands of dollars)
Fixed maturities $ 666 $ (18,598) $ (17,932) $ 6,926 $ (1,045) $ 5,881
Equity securities 51 -- 51 1,237 -- 1,237
Adjustment to deferred policy
acquisition costs related to
unrealized gains (losses)
and other 1,468 (448) 1,020 -- (215) (215)
---------- ---------- ---------- --------- --------- --------
$ 2,185 $ (19,046) (16,861) $ 8,163 $ (1,260) 6,903
========== ========== ========= =========
Deferred income tax benefit (expense) 5,901 (2,416)
---------- --------
NET UNREALIZED INVESTMENT
GAINS (LOSSES) $ (10,960) $ 4,487
========== ========
</TABLE>
<PAGE> 10
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
SUMMARY OF INVESTMENTS IN FIXED MATURITIES
AND EQUITY SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
(In thousands of dollars) GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
December 31, 1999 COST GAINS LOSSES VALUE
- ----------------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
U.S. Treasuries and obligations of government agencies $253,041 $ -- $ 6,988 $246,053
Asset-backed securities 107,275 50 4,200 103,125
Corporate securities 164,140 98 6,914 157,324
Other debt securities 23,988 518 496 24,010
-------- -------- -------- --------
Total fixed maturities 548,444 666 18,598 530,512
Equity securities -- 51 -- 51
-------- -------- -------- --------
TOTAL $548,444 $ 717 $ 18,598 $530,563
======== ======== ======== ========
December 31, 1998
U.S. Treasuries and obligations of government
agencies $223,743 $ 1,601 $ 563 $224,781
Asset-backed securities 109,207 1,163 180 110,190
Corporate securities 98,466 2,512 81 100,897
Other debt securities 23,219 1,650 221 24,648
-------- -------- -------- --------
Total fixed maturities 454,635 6,926 1,045 460,516
Equity securities 981 1,237 -- 2,218
-------- -------- -------- --------
Total $455,616 $ 8,163 $ 1,045 $462,734
======== ======== ======== ========
</TABLE>
SUMMARY OF INVESTMENTS IN FIXED MATURITIES BY CONTRACTUAL MATURITY
<TABLE>
1999
AMORTIZED FAIR
December 31 COST VALUE
- ----------- ------------ ------------
<S> <C> <C>
(In thousands of dollars)
Due in one year or less $ 4,130 $ 4,115
Due after one year through five years 180,447 176,798
Due after five years through ten years 194,438 188,778
Due after ten years 62,154 57,697
Asset-backed securities not due at a single maturity date 107,275 103,124
------------ ------------
Total $ 548,444 $ 530,512
============ ============
</TABLE>
Actual maturities may differ from contractual maturities because
securities may be called or prepaid with or without call or prepayment
penalties.
There are no investments, other than equity securities, that have not
produced income for the years ended December 31, 1999 and 1998. Except for
investments in securities of the U.S. Government and its Agencies, there are no
investments in a single issuer that when aggregated exceed 10% of stockholder's
equity at December 31, 1999.
Securities with carrying values of $2.7 million and $2.8 million were
deposited by VFL under requirements of regulatory authorities as of December 31,
1999 and 1998, respectively.
<PAGE> 11
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 3. FINANCIAL INSTRUMENTS
In the normal course of business, VFL invests in various financial
assets, incurs various financial liabilities, and enters into agreements
involving derivative securities, including off-balance sheet financial
instruments.
Fair values are required to be disclosed for all financial instruments,
whether or not recognized in the balance sheets, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values may be based on estimates using present value or other valuation
techniques. These techniques are significantly affected by the assumptions used,
including the discount rates and estimates of future cash flows. Potential taxes
and other transaction costs have not been considered in estimating fair value.
The estimates presented herein are subjective in nature and are not necessarily
indicative of the amounts VFL could realize in a current market exchange.
All non-financial instruments such as deferred acquisition costs,
reinsurance receivables, deferred income taxes and insurance reserves are
excluded from fair value disclosure. Thus, the total fair value amounts cannot
be aggregated to determine the underlying economic value of VFL.
The carrying amounts reported in the balance sheet approximate fair
value for cash, short-term investments, accrued investment income, receivables
for securities sold, payables for securities purchased and certain other assets
and other liabilities because of their short-term nature. Accordingly, these
financial instruments are not listed in the table below. The carrying amounts
and estimated fair values of VFL's other financial instrument assets and
liabilities are listed below:
<TABLE>
<CAPTION>
1999 1998
---- ----
CARRYING ESTIMATED Carrying Estimated
DECEMBER 31 AMOUNT FAIR VALUE Amount Fair Value
- ----------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C>
(In thousands of dollars)
FINANCIAL ASSETS
Investments:
Fixed maturities $ 530,512 $ 530,512 $ 460,516 $ 460,516
Equity securities 51 51 2,218 2,218
Policy loans 93,575 87,156 74,150 72,148
Other 433 433 485 485
Separate Account business:
Fixed maturities 12,999 12,999 247 247
Equity securities (primarily mutual funds) 175,772 175,772 55,577 55,577
Other 119 119 340 340
FINANCIAL LIABILITIES
Premium deposits and annuity contracts 294,777 278,810 332,665 312,979
========== ========== ========== ===========
</TABLE>
The following methods and assumptions were used by VFL in estimating
the fair value amounts for financial instruments:
Fixed maturities and equity securities are based on quoted
market prices, where available. For securities not actively traded,
fair values are estimated using values obtained from independent
pricing services, costs to settle, or quoted market prices of
comparable instruments.
The fair values for policy loans are estimated using discounted
cash flow analyses at interest rates currently offered for similar
loans to borrowers with comparable credit ratings. Loans with similar
characteristics are aggregated for purposes of the calculations.
Valuation techniques to determine fair value of Separate
Account business assets consist of discounted cash flows and quoted
market prices of (a) the investments or (b) comparable instruments.
The fair value of Separate Account business liabilities approximates
their carrying value.
<PAGE> 12
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Premium deposits and annuity contracts are valued based on cash
surrender values and the outstanding fund balances.
VFL invests from time to time in certain derivative financial
instruments primarily to reduce its exposure to market risk. Financial
instruments used for such purposes may include interest rate caps, put and call
options, commitments to purchase securities, futures and forwards. VFL also uses
derivatives to mitigate the risk associated with certain guaranteed annuity
contracts by purchasing certain options in a notional amount equal to the
original customer deposit. VFL generally does not hold or issue these
instruments for trading purposes.
Options are contracts that grant the purchaser, for a premium payment,
the right, but not the obligation, to either purchase or sell a financial
instrument at a specified price within a specified period of time.
An interest rate cap consists of a guarantee given by the issuer to the
purchaser in exchange for the payment of a premium. This guarantee states that
if interest rates rise above a specified rate, the issuer will pay to the
purchaser the difference between the then current market rate and the specified
rate on the notional principal amount. The notional principal amount is not
actually borrowed or repaid.
Derivative financial instruments consist of interest rate caps in the
general account and purchased options in the Separate Accounts at December 31,
1999. The gross notional principal or contractual amounts of derivative
financial instruments in the general account at December 31, 1999 and 1998
totaled $50 million. The gross notional principal or contractual amounts of
derivative financial instruments in the Separate Accounts was $295 thousand at
December 31, 1999 and was $1.5 million at December 31, 1998 as the separate
accounts sold approximately $1.2 million of notional value in 1999. The contract
of notional amounts are used to calculate the exchange of contractual payments
under the agreements and are not representative of the potential for gain or
loss on these agreements.
The fair values associated with derivative financial instruments are
generally affected by interest rates, equity stock prices and foreign exchange
rates. The credit exposure associated with these instruments is generally
limited to the unrealized fair value of the instruments and will vary based on
the credit worthiness of the counterparties. The risk of default depends on the
creditworthiness of the counterparty to the instrument. Although VFL is exposed
to the aforementioned credit risk, it does not expect any counterparty to fail
to perform as contracted based on the creditworthiness of the counterparties.
Due to the nature of the derivative securities, VFL does not require collateral.
The fair value of derivatives generally reflects the estimated amounts
that VFL would receive or pay upon termination of the contracts at the reporting
date. Dealer quotes are available for substantially all of VFL's derivatives.
For securities not actively traded, fair values are estimated using values
obtained from independent pricing services, costs to settle, or quoted market
prices of comparable instruments. The fair value of derivative financial assets
(liabilities) in the general account and Separate Accounts at December 31, 1999
totaled $0.4 million and $0.1 million, respectively, and compares to $0.1
million and $0.5 million, respectively, at December 31, 1998. Net realized gains
(losses) on derivative financial instruments at December 31, 1999 totaled $0.4
million in the general account and ($0.1) million in the Separate Accounts. At
December 31, 1998, net realized losses on derivative financial instruments held
in the general account totaled $0.2 million and net realized gains on
derivatives in the Separate Accounts were $0.1 million.
NOTE 4. STATUTORY CAPITAL AND SURPLUS (UNAUDITED)
Statutory capital and surplus and net income for VFL are determined in
accordance with accounting practices prescribed or permitted by the Pennsylvania
Insurance Department. Prescribed statutory accounting practices are set forth in
a variety of publications of the National Association of Insurance Commissioners
as well as state laws, regulations, and general administrative rules. VFL has no
material permitted accounting practices. VFL had statutory net income of $8.3
million for the year ended December 31, 1999 and statutory net losses of $8.1
million, and $1.0 million for the years ended December 31, 1998, and 1997
respectively. The statutory net losses for 1998 and 1997 were primarily due to
<PAGE> 13
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
the immediate expensing of acquisition costs which were substantial and related
sales of individual life and annuity products. Under GAAP, such costs are
capitalized and amortized to income over the duration of these contracts.
Statutory capital and surplus for VFL was $153.1 million, $147.1 million, and
$125.3 million at December 31, 1999, 1998, and 1997, respectively.
The payment of dividends by VFL to Assurance without prior approval of
the Pennsylvania Insurance Department is limited to formula amounts. As of
December 31, 1999, dividends of approximately $15.7 million were not subject to
prior Insurance Department approval.
NOTE 5. ACCUMULATED OTHER COMPREHENSIVE INCOME
Comprehensive income is comprised of all changes to stockholder's
equity, including net income, except those changes resulting from investments
by, and distributions to, the stockholder. Other comprehensive income (loss) is
comprehensive income exclusive of net income. The change in the components of
accumulated other comprehensive income (loss) are shown in the following tables.
<TABLE>
<CAPTION>
Pre-tax Tax (Expense) Net
Year Ended December 31, 1999 Amount Benefit Amount
- ---------------------------- ------ ------- ------
(In thousands of dollars)
<S> <C> <C> <C>
Net unrealized gains (losses) on investment securities:
Net unrealized holding gains (losses) arising during the period $ (19,684) $ 6,889 $ (12,795)
Adjustment for (gains) losses included in net income (4,080) 1,428 (2,652)
------------- --------- -----------
Total Other Comprehensive Income (Losses) $ (23,764) $ 8,317 $ (15,447)
============= ========= ===========
<CAPTION>
Pre-tax Tax (Expense) Net
Year Ended December 31, 1998 Amount Benefit Amount
- ---------------------------- ------ ------- ------
(In thousands of dollars)
<S> <C> <C> <C>
Net unrealized gains on investment securities:
Net unrealized holding gains (losses) arising during the period $ 3,756 $ (1,314) $ 2,442
Adjustment for (gains) losses included in net income (3,592) 1,257 (2,335)
------------- --------- -----------
Total Other Comprehensive Income $ 164 $ (57) $ 107
============= ========= ===========
<CAPTION>
Pre-tax Tax (Expense) Net
Year Ended December 31, 1997 Amount Benefit Amount
- ---------------------------- ------ ------- ------
(In thousands of dollars)
<S> <C> <C> <C>
Net unrealized gains (losses) on investment securities:
Net unrealized holding gains (losses) arising during the period $ 6,447 $ (2,256) $ 4,191
Adjustment for (gains) losses included in net income (1,228) 427 (801)
------------- --------- -----------
Total Other Comprehensive Income $ 5,219 $ (1,829) $ 3,390
============= ========= ===========
</TABLE>
NOTE 6. BENEFIT PLANS
VFL has no employees as it has contracted with Casualty for services
provided by Casualty employees. As Casualty is a wholly-owned subsidiary of
CNAF, all Casualty employees are covered by CNAF's Benefit Plans. The plans are
discussed below.
<PAGE> 14
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
PENSION PLAN
CNAF has noncontributory pension plans covering all full-time employees
age 21 or over that have completed at least one year of service. While the
benefits for the plans vary, they are generally based on years of credited
service and the employee's highest sixty consecutive months of compensation.
Casualty is included in the CNA Employees' Retirement Plan and VFL is allocated
a share of these expenses. The net pension cost allocated to VFL was $1.0
million, $1.1 million and $4.0 million for the years ended December 31, 1999,
1998 and 1997, respectively.
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
CNAF provides certain health and dental care benefits for eligible
retirees through age 64, and provides life insurance and reimbursement of
Medicare Part B premiums for all eligible retired persons. CNAF funds benefit
costs principally on the basis of current benefit payments. Net postretirement
benefit cost allocated to VFL was $0.3 million, $0.5 million and $2.1 million
for the years ended December 31, 1999, 1998 and 1997, respectively.
SAVINGS PLAN
Casualty is included in the CNA Employees' Savings Plan, which is a
contributory plan that allows employees to make regular contributions of up to
16% of their salary subject to limitations prescribed by the Internal Revenue
Service. VFL is allocated a share of CNA Employees' Savings Plan expenses. CNAF
contributes an amount equal to 70% of the first 6% of salary contributed by the
employee. CNAF contributions allocated to and expensed by VFL for the Savings
Plan were $0.2 million in each year 1999, 1998 and 1997.
NOTE 7. INCOME TAXES
VFL is taxed under the provisions of the Internal Revenue Code, as
applicable to life insurance companies, and is included along with Assurance,
its parent company, which is ultimately included in the consolidated Federal
income tax return of Loews. The Federal income tax provision of VFL generally is
computed on a stand-alone basis, as if VFL was filing its own separate tax
return.
VFL maintains a special tax memorandum account designated as the
"Shareholder's Surplus Account." Dividends from this account may be distributed
to the shareholder without resulting in any additional tax. The amount in the
Shareholder's Surplus Account was $151.6 million and $156.3 million at December
31, 1999 and 1998, respectively. Another tax memorandum account, defined as the
"Policyholders' Surplus Account," totaled $5.4 million at both December 31, 1999
and 1998. No further additions to this account are allowed. Amounts accumulated
in the Policyholders' Surplus Account are subject to income tax if distributed
to the stockholder. VFL has no plans for such a distribution and as a result,
has not provided for such a tax.
Significant components of VFL's net deferred tax liabilities as of
December 31, 1999 and 1998 are shown in the table below:
December 31 1999 1998
- ----------- ---- ----
(In thousands of dollars)
Insurance reserves $ 20,715 $ 26,880
Deferred acquisition costs (45,457) (37,729)
Investment valuation 4,166 3,693
Net unrealized gains 5,901 (2,416)
Annuity deposits and other 9,349 1,009
Other, net 2,632 2,350
---------- -------------
NET DEFERRED TAX LIABILITIES $ (2,694) $ (6,213)
========== =============
<PAGE> 15
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
At December 31, 1999, gross deferred tax assets and liabilities
amounted to $44.3 million and $47.0 million, respectively. Gross deferred tax
assets and liabilities, at December 31, 1998, amounted to $35.5 million and
$41.7 million, respectively.
The components of income tax expense are as follows:
Year Ended December 31 1999 1998 1997
- ---------------------- ---------- --------- ----------
(In thousands of dollars)
Current tax expense (benefit) $ (2,837) $ 7,033 $ 4,716
Deferred tax expense 4,924 2,058 2,581
---------- --------- ----------
TOTAL INCOME TAX EXPENSE $ 2,087 $ 9,091 $ 7,297
========== ========= ==========
<PAGE> 16
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
A reconciliation of the statutory federal income tax rate on income is
as follows:
<TABLE>
<CAPTION>
% OF % OF % OF
PRETAX PRETAX PRETAX
Year Ended December 31 1999 INCOME 1998 INCOME 1997 INCOME
- ---------------------- ---- ------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
(In thousands of dollars)
Income taxes at statutory rates $ 2,136 35.0 $ 9,290 35.0 $ 7,219 35.0
Other (49) (0.8) (199) (0.8) 78 0.4
-------- ------- ---------- -------- ---------- -------
INCOME TAX AT EFFECTIVE RATES $ 2,087 34.2 $ 9,091 34.2 $ 7,297 35.4
======= ======= ========= ======== ========== =======
</TABLE>
NOTE 8. REINSURANCE
The ceding of insurance does not discharge primary liability of VFL.
VFL places reinsurance with other carriers only after careful review of the
nature of the contract and a thorough assessment of the reinsurers' credit
quality and claim settlement performance. For carriers that are not authorized
reinsurers in VFL's state of domicile, VFL receives collateral, primarily in the
form of bank letters of credit.
In the table below, the majority of life premium revenue is from long
duration type contracts, while the majority of accident and health insurance
premiums is from short duration contracts. The effects of reinsurance on premium
revenues are shown in the following table:
<TABLE>
<CAPTION>
PREMIUMS ASSUMED/NET
-------- -----------
YEAR ENDED DECEMBER 31 DIRECT ASSUMED CEDED NET %
- ---------------------- ------ ------- ----- --- -
<S> <C> <C> <C> <C> <C>
(In thousands of dollars)
1999
Life $ 633,764 $ 109,964 $ 666,003 $ 77,725 141%
Accident and Health 6,539 232,994 6,539 232,994 100
------------- ----------- ----------- ---------- --------
Total premiums $ 640,303 $ 342,958 $ 672,542 $ 310,719 110%
============= =========== =========== ========== ========
1998
Life $ 687,644 $ 78,156 $ 690,541 $ 75,259 104%
Accident and Health 4,158 240,340 4,158 240,340 100
------------- ----------- ----------- ---------- --------
Total premiums $ 691,802 $ 318,496 $ 694,699 $ 315,599 101%
============= =========== =========== ========== ========
1997
Life $ 564,891 $ 81,502 $ 567,217 $ 79,176 103%
Accident and Health 2,776 252,996 2,776 252,996 100
------------- ----------- ----------- ---------- --------
Total premiums $ 567,667 $ 334,498 $ 569,993 $ 332,172 101%
============= =========== =========== ========== ========
</TABLE>
Transactions with Assurance, as part of the Pooling Agreement described
in Note 1, are reflected in the above table. Premium revenues ceded to
non-affiliated companies were $395.2 million, $263.4 million and $116.2 million
for the years ended December 31, 1999, 1998 and 1997, respectively.
Additionally, benefits and expenses for insurance claims and policyholder
benefits are net of reinsurance recoveries from non-affiliated companies of
$263.4 million, $203.4 million and $77.8 million for the years ended December
31, 1999, 1998 and 1997, respectively.
Reinsurance receivables reflected on the balance sheets are amounts
recoverable from reinsurers who have assumed a portion of the Company's
insurance reserves. These balances are principally due from Assurance pursuant
the Reinsurance Pooling Agreement.
The impact of reinsurance, including transactions with Assurance, on
life insurance in force is shown in the following schedule:
<TABLE>
<CAPTION>
LIFE INSURANCE IN FORCE ASSUMED/NET
----------------------- -----------
DIRECT ASSUMED CEDED NET %
------ ------- ----- --- ---
<S> <C> <C> <C> <C> <C>
(In millions of dollars)
December 31, 1999 $ 267,102 $ 42,629 $ 281,883 $ 27,848 153.1%
December 31, 1998 $ 224,615 $ 32,253 $ 230,734 $ 26,134 123.4
December 31, 1997 $ 166,308 $ 25,557 $ 168,353 $ 23,512 108.7
</TABLE>
<PAGE> 17
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 9. RELATED PARTIES
As discussed in Note 1, VFL is party to a Reinsurance Pooling Agreement
with its parent, Assurance. In addition, VFL is party to the CNA Intercompany
Expense Agreement whereby expenses incurred by CNAF and each of its subsidiaries
are allocated to the appropriate companies. All acquisition and underwriting
expenses allocated to VFL are further subject to the Reinsurance Pooling
Agreement with Assurance, so that acquisition and underwriting expenses
recognized by VFL are ten percent of the acquisition and underwriting expenses
of the combined pool. Pursuant to the foregoing agreements, VFL recorded
amortization of deferred acquisition costs and other operating expenses totaling
$37.5 million, $47.6 million and $45.3 million for 1999, 1998 and 1997,
respectively. Expenses of VFL exclude $5.6 million, $9.2 million and $9.9
million of general and administrative expenses incurred by VFL and allocated to
CNAF for the years ended December 31, 1999, 1998 and 1997, respectively. At
December 31, 1999 VFL had a payable of $12.4 million to affiliated companies and
a $1.9 million payable at December 31, 1998.
There are no interest charges on intercompany receivables or payables.
In 1998, Assurance made a $30.0 million capital contribution to VFL.
NOTE 10. LEGAL
VFL is party to litigation arising in the ordinary course of business.
The outcome of this litigation will not, in the opinion of management,
materially affect the results of operations or stockholder's equity of VFL.
NOTE 11. BUSINESS SEGMENTS
VFL operates in one reportable segment, the business of which is to
market and underwrite insurance products designed to satisfy the life, health
and retirement needs of individuals and groups. VFL products are distributed
primarily in the United States. Premium revenues earned outside the United
States are not material.
The operations, assets and liabilities of VFL and its parent,
Assurance, are managed on a combined basis. Pursuant to a Reinsurance Pooling
Agreement, as amended, VFL cedes all of its business, excluding its Separate
Account business, to Assurance which is then pooled with the business of
Assurance, excluding Assurance's participating contracts and separate account
business, and 10% of the combined pool is assumed by VFL.
The following presents premiums by product group for each of the years
in the three years ended December 31, 1999:
(In thousands of dollars) 1999 1998 1997
- ------------------------- ---- ---- ----
Life $ 77,725 $ 75,259 $ 79,176
Accident and Health 232,994 240,340 252,996
----------- ---------- -----------
Total $ 310,719 $ 315,599 $ 332,172
----------- ---------- -----------
Assurance provides health insurance benefits to postal and other
federal employees under the Federal Employees Health Benefit Plan (FEHBP).
Premiums under this contract totaled $2.1 billion, $2.0 billion and $2.1 billion
for the years ended December 31, 1999, 1998 and 1997, respectively, and the
portion of these premiums assumed by VFL under the Reinsurance Pooling Agreement
totaled $209 million, $202 million and $212 million for the years ended December
31, 1999, 1998 and 1997, respectively.
<PAGE> 18
VALLEY FORGE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 12. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
In the first quarter of 1999, VFL adopted Statement of Position 97-3
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments" (SOP 97-3). SOP 97-3 requires that insurance companies recognize
liabilities for insurance-related assessments when an assessment is probable and
will be imposed, when it can be reasonably estimated, and when the event
obligating the entity to pay or probable assessment has occurred on or before
the date of the financial statements. Adoption of SOP 97-3 resulted in an after
tax charge of $234 thousand ($360 thousand, pretax) as a cumulative effect of a
change in accounting principle. The pro forma effect of adoption on reported
results for prior periods is not significant.
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
Financial statements for Valley Forge Life Insurance Company (the
"Company") and the financial statements for Valley Forge Life
Insurance Company Variable Annuity Separate Account (the "Variable
Account") are included in Part B hereof.
(b) Exhibits
(1) (a) Certified resolution of the board of directors of the
Company dated October 18, 1995, establishing the Variable
Account.*
(2) Not applicable.
(3) Form of underwriting agreement between the Company and CNA
Investor Services, Inc. ("CNA/ISI").**
(4) (a) Form of Flexible Premium Deferred Variable Annuity
Contract (the "Contract").*
(b) Form of Qualified Plan Endorsement.*
(c) Form of IRA Endorsement.*
(d) Form of Nursing Home Confinement, Terminal Medical
Condition, Total Disability Endorsement.*
(e) Endorsement (Amending MVA Provision).+++
(f) Tax Sheltered Annuity Endorsement.+++
(5) Contract Application.+
(6) (a) Articles of Incorporation of the Company.*
(b) By-Laws of the Company.*
(7) Not applicable.
(8) (a) Form of Participation Agreement between the Company and
Insurance Management Series.**
(b) Form of Participation Agreement between the Company and
Variable Insurance Products Fund.**
(c) Form of Participation Agreement between the Company and
The Alger American Fund.**
(d) Form of Participation Agreement between the Company
and MFS Variable Insurance Trust. **
(e) Form of Participation Agreement between the Company
and SoGen Variable Funds, Inc. **
(f) Form of Participation Agreement between the Company
and Van Eck Worldwide Insurance Trust.**
(g) Form of Participation Agreement between the Company
and Janus Aspen Series.++
(h) Form of Participation Agreement among the Company, CNA
Investor Services, Inc., Lazard Asset Management and
Lazard Retirement Series, Inc.
(i) Form of Participation Agreement among Templeton
Variable Products Series Fund, Franklin Templeton
Distributors, Inc. and the Company.
(j) Form of Participation Agreement among the Company, CNA
Investor Services, Inc., Alliance Capital Management
L.P. and Alliance Fund Distributors, Inc.
(k) Form of Shareholder Services Agreement between the
Company and American Century Investment Management, Inc.
(l) Form of Participation Agreement between the Company and
Morgan Stanley Dean Witter Universal Funds, Inc.
(9) Opinion of Counsel
(10) (a) Independent Auditors' Consent
(10) (b) Consent of G. Stephen Wastek
(11) Not applicable.
(12) Not applicable.
(13) Calculation of Performance Information.
(14) Financial Data Schedule for Electronic Filers. (Not Applicable)
* Incorporated herein by reference to the initial filing of
this Form N-4 Registration on February 20, 1996
** Incorporated herein by reference to filing of Pre-Effective
Amendment Number 1 to this Form N-4 Registration on September
4, 1996
+ Incorporated herein by reference to filing of Post-Effective
Amendment Number 4 to this Form N-4 Registration Statement
on April 26, 1999
++ Incorporated herein by reference to the filing of Post-
Effective Amendment Number 5 to this Form N-4 Registration
Statement on September 2, 1999.
+++ Incorporated by reference to the filing of Post-Effective
Amendment Number 6 to this Form N-4 Registration Statement
On March 2, 2000.
ITEM 25. DIRECTORS AND OFFICERS OF THE COMPANY
The name, age, positions and offices, term as director, and business
experience during the past five years for Valley Forge Life Insurance Company's
("VFL") directors and executive officers are listed in the following table:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
OFFICERS OF VFL
- ----------------------------------------------------------------------------------------------------
POSITION(S) HELD
NAME AND ADDRESS AGE WITH VFL PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- - ----------------------------------------------------------------------------------------------------
Bernard L. Hengesbaugh 53 Chairman of the Chairman of the Board and Chief Executive
CNA Plaza Board, Chief Officer of CNA since February, 1999. Prior
Chicago, IL 60685 Executive thereto, Mr. Hengesbaugh served as Executive
Officer, and Vice President and Chief Operating Officer of
Director CNA since February, 1998. Prior thereto, Mr.
Hengesbaugh was Senior Vice President of CNA
since November, 1990. Mr. Hengesbaugh has
served as Director since February, 1999.
- - ----------------------------------------------------------------------------------------------------
Peter E. Jokiel 52 President and Senior Vice President of CNA since November,
CNA Plaza Chief Operating 1990. Chief Financial Officer of CNA from
Chicago, IL 60685 Officer, November, 1990 through October, 1997. Mr.
CNA Life Jokiel served as a Director of VFL from July,
1992 through October, 1997.
- ------------------------------------------------------------------------------------------------------
Jonathan D. Kantor 43 Senior Vice Senior Vice President, Secretary and General
CNA Plaza President, Counsel of CNA since April, 1997. Group Vice
Chicago, IL 60685 Secretary, President of CNA since April, 1994. Prior
General Counsel thereto, Mr. Kantor was a partner at the law
and Director firm of Shea & Gould.* Mr. Kantor has served
as a Director of VFL since April, 1997.
- - ----------------------------------------------------------------------------------------------------
Robert V. Deutsch 40 Senior Vice Senior Vice President, Chief Financial Officer
CNA Plaza President, Chief and Director since August 16, 1999. Prior
Chicago, IL 60685 Financial thereto, Chief Financial Officer for Executive
Officer, Director Risk, Inc.
- - ----------------------------------------------------------------------------------------------------
Tom Taylor 48 Executive Vice Executive Vice President, Underwriting Policy
President Group since June 1999. Specialty Operations,
1998-1999. President and Chief Operating
Officer, Financial Insurance, 1992-1998.
- ------------------------------------------------------------------------------------------------------
Thomas Pontarelli 51 Senior Vice Senior Vice President, Human Resources since
President, April, 2000. Prior thereto, Group Vice President,
Director Human Resources. From May 1974 to December 1997
series of positions culminating in the position
of Chairman, CEO and President of Washington
National Life Insurance Company.
- ------------------------------------------------------------------------------------------------------
Donald P. Lofe, Jr. 42 Group Vice Group Vice President, Corporate Finance
President, Department since October 1998. Prior thereto,
Director partner of PricewaterhouseCoopers LLP.
- -----------------------------------------------------------------------------------------------------
John M. Squarok 46 Group Vice Group Vice President of CNA since July 1998.
President Prior thereto, Mr. Squarok was Chief Financial
and Director Officer of various businesses of GE Capital from
August 1988 until July 1998. Director since
August 1998.
- ------------------------------------------------------------------------------------------------------
</TABLE>
Each director is elected to serve until the next annual meeting of
stockholders or until his or her successor is elected and shall have qualified.
Some directors hold various executive positions with insurance company
affiliates of VFL. Executive officers serve at the discretion of the Board of
Directors.
* Shea & Gould declared bankruptcy in 1995.
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
The registrant is a segregated asset account of the Company and is therefore
owned and controlled by the Company. The Company is a stock life insurance
company of which all of the voting securities are owned by Continental Assurance
Company. Continental Assurance Company is owned by Continental Casualty Company,
a stock casualty insurance company organized under the Illinois Insurance Code,
the home office of which is located at CNA Plaza, Chicago, Illinois 60685. All
of the voting securities of Continental Casualty Company are owned by CNA
Financial Corporation, a Delaware Corporation, CNA Plaza, Chicago, Illinois
60685. As of September 30, 1999, 86% of the outstanding voting securities of CNA
Financial Corporation are owned by Loews Corporation, a Delaware Corporation,
667 Madison Avenue, New York, New York 10021-8087. Loews Corporation has
interests in insurance, hotels, watches and other timing devices, drilling rigs
and tobacco. Laurence A. Tisch is Co-Chairman of the Board and a director of
Loews Corporation and Chief Executive Officer and a director of CNA Financial
Corporation. Preston R. Tisch is Co-Chairman of the Board and a director of
Loews Corporation and a director of CNA Financial Corporation. James S. Tisch is
President and Chief Executive Officer and director of Loews Corporation and a
director of CNA Financial Corporation. Various companies and other entities
controlled by CNA Financial Corporation may be considered to be under common
control with the registrant or the Company. Such other companies and entities,
together with the identity of their controlling persons (where applicable), are
set forth below:
PRIMARY SUBSIDIARIES OF CNA
<TABLE>
<CAPTION>
PLACE OF
COMPANY INCORPORATION
- - ------- -------------
<S> <C>
AMS Services, Inc. and subsidiaries (10) Delaware
Alexsis, Inc. and subsidiaries (4) Maryland
American Casualty Company of Reading, Pennsylvania (ACCO) Pennsylvania
Boston Old Colony Insurance Company Massachusetts
Claims Administration Corp. Maryland
CNA Casualty of California California
CNA Surety Corporation Delaware
Columbia Casualty Company Illinois
Commercial Insurance Company of Newark, N.J. New Jersey
Continental Assurance Company (CAC) Illinois
Continental Casualty Company (CCC) Illinois
Continental Lloyd's Insurance Company Texas
Continental Reinsurance Corporation California
Firemen's Insurance Company of Newark, New Jersey New Jersey
Kansas City Fire and Marine Insurance Company Missouri
National Fire Insurance Company of Hartford (NFI) Connecticut
National-Ben Franklin Insurance Company of Illinois Illinois
Niagara Fire Insurance Company Delaware
Pacific Insurance Company California
The Buckeye Union Insurance Company Ohio
The Continental Corporation, Inc. (CIC) New York
The Continental Insurance Company New Hampshire
The Continental Insurance Company of New Jersey New Jersey
Convida Holdings, Ltd and subsidiary (1) Bahamas
The Fidelity and Casualty Company of New York New Hampshire
The Glens Falls Insurance Company Delaware
The Mayflower Insurance Company, Ltd. Indiana
Transcontinental Insurance Company New York
Transcontinental Technical Services, Inc. (ServCo) Illinois
Transportation Insurance Company Illinois
Valley Forge Insurance Company Pennsylvania
Valley Forge Life Insurance Company Pennsylvania
Western National Warranty Corporation and subsidiary (1) Arizona
</TABLE>
All other Subsidiaries, when aggregated, are not considered significant.
II-2
ITEM 27. NUMBER OF CONTRACTOWNERS
As of April 12, 2000, the Separate Account had 2,036 qualified
contractowners and 2,643 non-qualified contractowners.
ITEM 28. INDEMNIFICATION
The registrant has no officers, directors or employees. The depositor
and the registrant do not indemnify the officers, directors of
employees of the depositor. CNA Financial Corporation, ("CNAFC") a
parent of the depositor, indemnifies the depositor's officers,
directors and employees in their capacity as such. Most of the
depositor's officers, directors and employees are also officers,
directors and/or employees of CNAFC.
CNAFC indemnifies any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of CNAFC) by
reason of the fact that he is or was a director, officer, employee, or
agent of CNAFC, or was serving at the request of CNAFC as a director,
office, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including
attorney's fees), judgments, fines, and amounts paid in settlement
actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests
of CNAFC, and, with respect to any criminal action or proceeding, had
no reasonable cause to believe his conduct was unlawful.
CNAFC indemnifies any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit
by or in the right of CNAFC to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or
agent of CNAFC, or was serving at the request of CNAFC as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including
attorney's fees) actually and reasonably incurred by him in connection
with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of CNAFC. No indemnification is made,
however, in respect of any claim, issue or matter as to which such
person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to CNAFC unless and only to
the extent that a court determines that, despite the adjudication of
II-3
liability but in view of all of the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the court
deems proper.
To the extent that any person referred to above is successful on the merits or
otherwise in defense of any action, suit or proceeding referred to above, or in
defense of any claim, issue or matter therein, CNAFC will indemnify such person
against expenses (including attorney's fees) actually and reasonably incurred by
him in connection therewith. CNAFC may advance to such a person, expenses
incurred in defending a civil or criminal action, suit or proceeding as
authorized by CNAFC's board of directors upon receipt of an undertaking by (or
on behalf of) such person to repay the amount advanced unless it is ultimately
determined that he is entitled to be indemnified.
Indemnification and advancement of expenses described above (unless pursuant to
a court order) is only made as authorized in the specific case upon a
determination that such indemnification or advancement of expenses is proper in
the circumstances because he has met the applicable standard of conduct. Such
determination must be made by a majority vote of a quorum of CNAFC's board of
directors who are not parties to the action, suit or proceeding or by
independent legal counsel in a written opinion or by CNAFC's stockholders.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
ITEM 29. PRINCIPAL UNDERWRITER
(a) CNA/ISI is the registrant's principal underwriter and also serves
as the principal underwriter of certain variable life insurance
contracts issued by the Company and certain variable annuity
contracts and variable life insurance contracts issued by
affiliates of the Company.
(b) CNA Investor Services Inc.("CNAISI") is the principal underwriter
for the Policies. The following persons are the officers and
directors of CNAISI.
Name and Principal Positions and Offices
Business Address with Underwriter
---------------- ----------------
Kevin Hogan President, Chief Executive Officer,
Treasurer and Director
Ronald Chapon Vice President and Director
Lynne Gugenheim Vice President, Secretary and Director
John J. Sullivan, Jr. Vice President and Director
The principal business address for each officer and director of
CNAISI is CNA Plaza, 34 South Chicago, Illinois 60685.
(c) Not applicable
Item 30. LOCATION BOOKS AND RECORDS
All of the accounts, books, records or other documents required to be kept
by Section 31(a) of the Investment Company Act of 1940 and rules
thereunder, are maintained by the Company at CNA Plaza, Chicago, Illinois
60685, or 100 CNA Drive, Nashville, Tennessee 37214-3439, by Financial
Administration Services, Inc. at 1290 Silas Deane Highway, P.O. Box 290794,
Wethersfield, Connecticut 06129-0794, and by CNA/ISI at CNA Plaza, Chicago,
Illinois 60685.
ITEM 31. MANAGEMENT SERVICES
All management contracts, if any, are discussed in Part B of this filing.
ITEM 32. UNDERTAKINGS
(a) The registrant undertakes that it will file a post-effective
amendment to this registration statement as frequently as is
necessary to ensure that the audited financial statements in the
registration statement are never more than 16 months old for as
long as purchase payments under the Contracts offered herein are
being accepted.
(b) The registrant undertakes that it will include either (1) as part
of any application to purchase a Contract offered by the
prospectus, a space that an applicant can check to request a
statement of additional information, or (2) a post card or
similar written communications affixed to or included in the
prospectus that the applicant can remove to send for a statement
of additional information.
(c) The registrant undertakes to deliver any statement of additional
information and any financial statements required to be made
available under this Form N-4 promptly upon written or oral
request to the Company at the address or phone number listed in
the prospectus.
(d) Valley Forge Life Insurance Company hereby represents that the
fees and charges deducted under the Contract, in the aggregate,
are reasonable in relation to the Services rendered, the expenses
expected to be incurred, and the risks assumed by the Valley
Forge Life Insurance Company.
II-5
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the registrant certifies that it meets the requirements of Securities Act
Rule 485(b) for effectiveness of this Registration Statement and has caused this
Registration Statement to be signed on its behalf, in the City of Chicago, and
the State of Illinois, on this 19th day of April, 2000.
VALLEY FORGE LIFE INSURANCE COMPANY on
behalf of its separate account
VALLEY FORGE LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
(Registrant)
By: /s/DAVID L. STONE
---------------------------------
VALLEY FORGE LIFE INSURANCE COMPANY
(Depositor)
By: /s/JOEL S. FELDMAN
---------------------------------
As required by the Securities Act of 1933, this registration statement has been
signed by the following persons in the capacities and on the dates indicated.
Signature Title Date
- - --------- ----- ----
/s/BERNARD L. HENGESBAUGH 4-19-00
- -------------------------- Chairman of the Board, ---------
Bernard L. Hengesbaugh Chief Executive Officer Date
and Director
/s/ROBERT V. DEUTSCH 4-19-00
- ---------------------- Chief Financial Officer ---------
Robert V. Deutsch and Director Date
/s/THOMAS PONTARELLI 4-19-00
- ---------------------- Director and Senior ---------
Thomas Pontarelli Vice President Date
/s/JONATHAN D. KANTOR 4-19-00
- ---------------------- Senior Vice President, Secretary ---------
Jonathan D. Kantor General Counsel, Director Date
/s/DONALD P. LOFE, JR. 4-18-00
- ---------------------- Group Vice President, Director ---------
Donald P. Lofe, Jr. Date
/s/JOHN M. SQUAROK 4-17-00
- ---------------------- Group Vice President, Director ---------
John M. Squarok Date
INDEX TO EXHIBITS
EX-99.B8(h) Form of Participation Agreement among the Company, CNA
Investor Services, Inc., Lazard Asset Management and
Lazard Retirement Series, Inc.
(i) Form of Participation Agreement among Templeton
Variable Products Series Fund, Franklin Templeton
Distributors, Inc. and the Company.
(j) Form of Participation Agreement among the Company, CNA
Investor Services, Inc., Alliance Capital Management
L.P. and Alliance Fund Distributors, Inc.
(k) Form of Shareholder Services Agreement between the
Company and American Century Investment Management, Inc.
(l) Form of Participation Agreement between the Company and
Morgan Stanley Dean Witter Universal Funds, Inc.
EX-99.B9 Opinion of Counsel
EX-99.B10(a) Independent Auditors' Consent
EX-99.B10(b) Consent of G. Stephen Wastek
EX-99.B13 Calculation of Performance Information
FUND PARTICIPATION AGREEMENT
This Agreement is entered into as of the ___ day of ___________, 1999,
by and among __Valley Forge Life Insurance Co.__ ("Insurer"), a life insurance
company organized under the laws of the State of __Pennsylvania__, __CNA
Investor Services, Inc. an __Illinois__ corporation ("Contract Distributor"),
LAZARD ASSET MANAGEMENT ("LAM"), a division of Lazard Freres & Co. LLC, a New
York limited liability company ("LF & Co."), and LAZARD RETIREMENT SERIES, INC.
("Fund"), a Maryland corporation (collectively, the "Parties").
ARTICLE I.
DEFINITIONS
The following terms used in this Agreement shall have the meanings set out
below:
1.1. "Act" shall mean the Investment Company Act of 1940, as amended.
1.2. "Board" shall mean the Fund's Board of Directors having the responsibility
for management and control of Fund.
1.3. "Business Day" shall mean any day for which Fund calculates net asset value
per share as described in a Portfolio Prospectus.
1.4. "Code" shall mean the Internal Revenue Code of 1986, as amended.
1.5. "Commission" shall mean the Securities and Exchange Commission.
1.6. "Contract" shall mean a variable annuity or variable life insurance
contract that uses a Portfolio or Fund as an underlying investment medium
and that is named on Schedule 1 hereto, as the Parties may amend in writing
from time to time by mutual agreement ("Schedule 1").
1.7. "Contract Prospectus" shall mean the prospectus and, if applicable,
statement of additional information, as currently in effect with the
Commission, with respect to the Contracts, including any supplements or
amendments thereto. All references to "Contract Prospectuses" shall be
deemed to also include all offering documents and other materials relating
to any Contract that is not registered under the Securities Act of 1933, as
amended ("1933 Act").
1.8. "Contractholder" shall mean any person that is a party to a Contract with a
Participating Company. Individuals who participate under a group Contract
are "Participants."
1.9. "Disinterested Board Members" shall mean those members of the Board that
are not deemed to be "interested persons" of Fund, as defined by the Act.
1.10. "General Account" shall mean the general account of Insurer.
1.11."Participating Company" shall mean any insurance company, including
Insurer, that offers variable annuity and/or variable life insurance
contracts to the public and that has entered into an agreement with Fund
for the purpose of making Fund shares available to serve as the underlying
investment medium for Contracts.
1.12. "Portfolio" shall mean each series of Fund named on Schedule 1.
1.13."Portfolio Prospectus" shall mean the prospectus and statement of
additional information, as currently in effect with the Commission, with
respect to the Portfolios, including any supplements or amendments thereto.
1.14."Separate Account" shall mean a separate account duly established by
Insurer in accordance with the laws of the State of __Illinois__ and named
on Schedule 1.
ARTICLE II.
REPRESENTATIONS AND WARRANTIES
2.1. Insurer represents and warrants that:
(a) it is an insurance company duly organized and in good standing under
__Pennsylvania__ law;
(b) it has legally and validly established and shall maintain each
Separate Account pursuant to the insurance laws and regulations of the
State of __Illinois__;
(c) it has registered and shall maintain the registration of each Separate
Account as a unit investment trust under the Act, to the extent
required by the Act, to serve as a segregated investment account for
the Contracts;
(d) each Separate Account is and at all times shall be eligible to invest
in shares of Fund without such investment disqualifying Fund as an
investment medium for insurance company separate accounts supporting
variable annuity contracts and/or variable life insurance contracts;
(e) each Separate Account is and at all times shall be a "segregated asset
account," and interests in each Separate Account that are offered to
the public shall be issued exclusively through the purchase of a
Contract that is and at all times shall be a "variable contract"
within the meaning of such terms under Section 817 of the Code and the
regulations thereunder. Insurer agrees to notify Fund and LAM
immediately upon having a reasonable basis for believing that such
requirements have ceased to be met or that they might not be met in
the future;
(f) the Contracts are and at all times shall be treated as life insurance,
endowment or annuity contracts under applicable provisions of the
Code, and it shall notify Fund immediately upon having a reasonable
basis for believing that the Contracts have ceased to be so treated or
that they might not be so treated in the future.
2.2 Insurer and Distributor represent and warrant that (a) units of interest in
each Separate Account available through the purchase of Contracts are
registered under the 1933 Act, to the extent required thereby; (b) the
Contracts shall be issued in compliance in all material respects with all
applicable federal and state laws; and (c) the sale of the Contracts shall
comply in all material respects with state insurance law requirements.
Insurer agrees to inform Fund promptly of any investment restrictions
imposed by state insurance law and applicable to Fund.
2.3 Distributor represents and warrants that it is and at all times shall be:
(a) registered with the Commission as a broker-dealer, (b) a member in good
standing of the National Association of Securities Dealers, Inc. ("NASD");
and (c) an __Illinois__ corporation duly organized, validly existing, and
in good standing under the laws of the State of, __Illinois__ with full
power, authority, and legal right to execute, deliver, and perform its
duties and comply with its obligations under this Agreement. Distributor is
a limited purpose Broker-Dealer and does not oversee the licensing of sales
practices of registered representatives.
2.4 Fund represents and warrants that:
(a) it is and shall remain registered with the Commission as an open-end,
management investment company under the Act to the extent required
thereby;
(b) its shares are registered under the 1933 Act to the extent required
thereby;
(c) it possesses, and shall maintain, all legal and regulatory licenses,
approvals, consents and/or exemptions required for it to operate and
offer its shares as an underlying investment medium for the Contracts;
(d) each Portfolio is qualified as a regulated investment company under
Subchapter M of the Code, it shall make every effort to maintain such
qualification, and it shall notify Insurer immediately upon having a
reasonable basis for believing that any Portfolio invested in by the
Separate Account has ceased to so qualify or that it might not so
qualify in the future;
(e) each Portfolio's assets shall be managed and invested in a manner that
complies with the requirements of Section 817(h) of the Code and the
regulations thereunder, to the extent applicable; and in the event of
breach of this provision by the Fund it will take all reasonable steps
to: (a) notify the Company of such breach and (b) adequately diversify
the Fund so as to achieve compliance within the grace period afforded
by Regulation 817-5. The Fund shall provide the Company information
reasonably requested in relation Section 817(h) diversification
requirements, including quarterly reports and annual certifications.
And
(f) all of its directors, officers, employees, investment advisers, and
other individuals/entities who deal with the money and/or securities
of Fund are and shall continue to be at all times covered by a blanket
fidelity bond or similar coverage for the benefit of Fund in an amount
not less than that required by Rule 17g-1 under the Act. The aforesaid
bond shall include coverage for larceny and embezzlement and shall be
issued by a reputable bonding company.
2.5 LAM represents and warrants that LF & Co., the principal underwriter of
each Portfolio's shares, that it is and at all times shall be: (a)
registered with the Commission as a broker-dealer, (b) a member in good
standing of the NASD; and (c) a New York limited liability company duly
organized, validly existing, and in good standing under the laws of the
State of New York, with full power, authority, and legal right to execute,
deliver, and perform its duties and comply with its obligations under this
Agreement. LAM further represents and warrants that it shall sell the
shares of the Portfolios to Insurer in compliance in all material respects
with all applicable federal and state securities laws.
ARTICLE III.
FUND SHARES
3.2. Fund agrees to make the shares of each Portfolio available for purchase by
Insurer and each Separate Account at net asset value and without sales
charge, subject to the terms and conditions of this Agreement. Fund may
refuse to sell the shares of any Portfolio to any person, or suspend or
terminate the offering of the shares of any Portfolio if such action is
required by law or by regulatory authorities having jurisdiction or is, in
the sole discretion of the Board, acting in good faith and in light of its
fiduciary duties under federal and any applicable state laws, necessary and
in the best interests of the shareholders of such Portfolio.
3.3. Fund agrees that it shall sell shares of the Portfolios only to persons
eligible to invest in the Portfolios in accordance with Section 817(h) of
the Code and the regulations thereunder, to the extent such Section and
regulations are applicable.
3.4. Except as noted in this Article III, Fund and Insurer agree that orders and
related payments to purchase and redeem Portfolio shares shall be processed
in the manner set out in Schedule 2 hereto, as the Parties may amend in
writing from time to time by mutual agreement.
3.11.Fund shall confirm each purchase or redemption order made by Insurer.
Transfer of Portfolio shares shall be by book entry only. No share
certificates shall be issued to Insurer. Shares ordered from Fund shall be
recorded in an appropriate title for Insurer, on behalf of each Separate or
General Account.
3.13.Fund shall promptly notify Insurer of the amount of dividend and capital
gain, if any, per share of each Portfolio to which Insurer is entitled.
Insurer hereby elects to reinvest all dividends and capital gains of any
Portfolio in additional shares of that Portfolio at the applicable net
asset value, until Insurer otherwise notifies Fund in writing. Insurer
reserves the right to revoke this election and to receive all such income
dividends and capital gain distributions in cash.
ARTICLE IV.
STATEMENTS AND REPORTS
4.1. Fund shall provide Insurer with monthly statements of account by the
fifteenth (15th) Business Day of the following month.
4.2 At least annually, Fund or its designee shall provide Insurer, free of
charge, with as many Portfolio Prospectuses as Insurer may reasonably
request for distribution by Insurer to existing Contractholders and
Participants that have invested in that Portfolio. Fund or its designee
shall provide Insurer, at Insurer's expense, with as many Portfolio
Prospectuses as Insurer may reasonably request for distribution by Insurer
to prospective purchasers of Contracts. The Fund shall bear the cost of
printing the Portfolio Prospectuses. If the Portfolio Prospectuses are
printed by the Insurer in one document with the prospectus for the
Contracts and the prospectuses for other funds, then the expenses of such
printing will be apportioned between the Insurer and the Fund in proportion
to the number of pages of the Contract's prospectus, other fund
prospectuses and the Portfolio prospectuses. This expense will be subject
to an annual maximum. That maximum will be calculated by means of a similar
proportion based upon the total dollars invested in the Portfolios as
compared to the total dollars invested in all portfolios offered in the
Contract. The form of the Fund's prospectus and/or statement of additional
information provided to the Company shall be the final form of prospectus
and statement of additional information as filed with the Securities and
Exchange Commission which form shall include only those Portfolios of the
Fund identified in Schedule 1. If requested by the Insurer in lieu of a
printed copy of the prospectuses, fund or its designee shall provide such
documentation in "camera ready" copy, or , at the request of insurer as a
diskette in the form sent to the financial printer and other assistance as
is reasonably necessary in order for the Parties once a year (or more
frequently if the Portfolio Prospectuses are supplemented or updated) to
have the Contract Prospectuses and the Portfolio Prospectuses printed
together in one document.
4.3 Fund shall provide Insurer with copies of each Portfolio's proxy materials,
notices, periodic reports and other printed materials (which the Portfolio
customarily provides to its shareholders) in quantities as Insurer may
reasonably request for distribution by Insurer to each Contractholder and
Participant that has invested in that Portfolio.
4.4 Fund shall provide to Insurer at least one complete copy of all
registration statements, Portfolio Prospectuses, reports, proxy statements,
sales literature and other promotional materials, applications for
exemptions, requests for no-action letters, and all amendments to any of
the above, that relate to Fund or its shares, contemporaneously with the
filing of such document with the Commission or other regulatory
authorities.
4.5 Insurer shall provide to Fund at least one copy of all registration
statements, Contract Prospectuses, reports, proxy statements, sales
literature which utilizes LAM's name, company or fund information or
statistics, applications for exemptions, requests for no-action letters,
and all amendments to any of the above, that relate to the Contracts or a
Separate Account, contemporaneously with the filing of such document with
the Commission or the NASD.
ARTICLE V.
EXPENSES
5.1. Except as otherwise specifically provided herein, each Party will bear all
expenses incident to its performance under this Agreement.
ARTICLE VI.
EXEMPTIVE RELIEF
6.1. Insurer acknowledges that it has reviewed a copy of Fund's mixed and shared
funding exemptive order ("Order") and, in particular, has reviewed the
conditions to the relief set forth in the related notice ("Notice"). As
required by the conditions set forth in the Notice, Insurer shall report
any potential or existing conflicts promptly to the Board. In addition,
Insurer shall be responsible for assisting the Board in carrying out its
responsibilities under the Order by providing the Board with all
information necessary for the Board to consider any issues raised,
including, without limitation, information whenever Contract voting
instructions are disregarded. Insurer, at least annually, shall submit to
the Board such reports, materials, or data as the Board may reasonably
request so that the Board may carry out fully the obligations imposed upon
it by the Order. Insurer agrees to carry out such responsibilities with a
view to the interests of existing Contractholders.
6.2. If a majority of the Board, or a majority of Disinterested Board Members,
determines that a material irreconcilable conflict exists with regard to
Contractholder investments in Fund, the Board shall give prompt notice to
all Participating Companies. If the Board determines that Insurer is a
Participating Insurance Company for whom the conflict is relevant, Insurer
shall at its sole cost and expense, and to the extent reasonably
practicable (as determined by a majority of the Disinterested Board
Members), take such action as is necessary to remedy or eliminate the
irreconcilable material conflict. Such necessary action may include, but
shall not be limited to:
(a) Withdrawing the assets allocable to some or all Separate Accounts from
Fund or any Portfolio and reinvesting such assets in a different
investment medium, or submitting the question of whether such
segregation should be implemented to a vote of all affected
Contractholders and, as appropriate, segregating the assets of any
appropriate group (i.e. variable annuity or variable life insurance
contract owners) that votes in favor of such segregation; and/or
(b) Establishing a new registered management investment company.
6.3. If a material irreconcilable conflict arises as a result of a decision by
Insurer to disregard Contractholder voting instructions and that decision
represents a minority position or would preclude a majority vote by all
Contractholders having an interest in Fund, Insurer may be required, at the
Board's election, to withdraw the investments of its Separate Accounts in
Fund.
6.4. For the purpose of this Article, a majority of the Disinterested Board
Members shall determine whether any proposed action adequately remedies any
material irreconcilable conflict. In no event shall Fund or LAM or any
other investment adviser of Fund be required to bear the expense of
establishing a new funding medium for any Contract. Insurer shall not be
required by this Article to establish a new funding medium for any Contract
if an offer to do so has been declined by vote of a majority of the
Contractholders materially and adversely affected by the material
irreconcilable conflict.
6.5. No action by Insurer taken or omitted, and no action by the Separate
Account or Fund taken or omitted as a result of any act or failure to act
by Insurer pursuant to this Article VI shall relieve Insurer of its
obligations under or otherwise affect the operation of Article V.
ARTICLE VII.
VOTING OF FUND SHARES
7.1. Insurer shall provide pass-through voting privileges to all Contractholders
or Participants as long as the Commission continues to interpret the Act as
requiring pass-through voting privileges for Contractholders or
Participants. Accordingly, Insurer, where applicable, shall vote shares of
a Portfolio held in each Separate Account in a manner consistent with
voting instructions timely received from its Contractholders or
Participants. Insurer shall be responsible for assuring that the Separate
Account calculates voting privileges in a manner consistent with other
Participating Companies. Insurer shall vote shares for which it has not
received timely voting instructions, as well as shares it owns, in the same
proportion as it votes those shares for which it has received voting
instructions.
7.2. If and to the extent Rule 6e-2 and Rule 6e-3(T) under the Act are amended,
or if Rule 6e-3 is adopted, to provide exemptive relief from any provision
of the Act or the rules thereunder with respect to mixed and shared funding
on terms and conditions materially different from any exemptions granted in
the Order, then Fund, and/or the Participating Companies, as appropriate,
shall take such steps as may be necessary to comply with Rule 6e-2 and Rule
6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such Rules
are applicable.
ARTICLE VIII.
MARKETING
8.1. Fund or LF & Co. shall periodically or upon request furnish Insurer with
Portfolio Prospectuses and sales literature or other promotional materials
for each Portfolio, in quantities as Insurer may reasonably request for
distribution to prospective purchasers of Contract. Expenses for the
printing and distribution of such documents shall be borne by Insurer.
8.2. Insurer shall designate certain persons or entities that shall have the
requisite licenses to solicit applications for the sale of Contracts.
Insurer shall make reasonable efforts to market the Contracts and shall
comply with all applicable federal and state laws in connection therewith.
8.3. Insurer shall furnish, or shall cause to be furnished, to Fund, each piece
of sales literature or other promotional material in which Fund, LAM, LF &
Co., Fund's administrator is named, at least five (5) Business Days prior
to its use. No such material shall be used if the Fund or its designee
reasonably objects to such use within fifteen business days of the receipt
of such material.
8.4. Insurer shall not give any information or make any representations or
statements on behalf of Fund, LAM, LF & Co., or concerning Fund or any
Portfolio in connection with the sale of the Contracts other than the
information or representations contained in the registration statement or a
Portfolio Prospectus, as the same may be amended or supplemented from time
to time, or in reports or proxy statements for each Portfolio, or in sales
literature or other promotional material approved by Fund.
8.5. Fund shall furnish, or shall cause to be furnished, to Insurer, each piece
of the Fund's sales literature or other promotional material in which
Insurer or a Separate Account is named, at least five (5) Business Days
prior to its use. No such material shall be used if the Insurer reasonably
objects to such use within fifteen business days after receipt of such
material.
8.6. Fund shall not, in connection with the sale of Portfolio shares, give any
information or make any representations on behalf of Insurer or concerning
Insurer, a Separate Account, or the Contracts other than the information or
representations contained in a registration statement for the Contracts or
the Contract Prospectus, as the same may be amended or supplemented from
time to time, or in published reports for each Separate Account that are in
the public domain or approved by Insurer for distribution to
Contractholders or Participants, or in sales literature or other
promotional material approved by Insurer.
8.7. For purposes of this Agreement, the phrase "sales literature or other
promotional material" or words of similar import include, without
limitation, advertisements (such as material published, or designed for
use, in a newspaper, magazine or other periodical, radio, television,
telephone or tape recording, videotape display, signs or billboards, motion
pictures or other public media), sales literature (such as any written
communication distributed or made generally available to customers or the
public, including brochures, circulars, research reports, market letters,
form letters, seminar texts, or reprints or excerpts of any other
advertisement, sales literature, or published article), educational or
training materials or other communications distributed or made generally
available to some or all agents or employees, prospectuses, statements of
additional information, shareholder reports and proxy materials, and any
other material constituting sales literature or advertising under the rules
of the National Association of Securities Dealers, Inc. ("NASD"), the Act
or the 1933 Act.
ARTICLE IX.
INDEMNIFICATION
9.1. Insurer and Distributor each agree to indemnify and hold harmless Fund,
LAM, any sub-investment adviser of a Portfolio, and their affiliates, and
each of their respective directors, trustees, general members, officers,
employees, agents and each person, if any, who controls or is associated
with any of the foregoing entities or persons within the meaning of the
1933 Act (collectively, the "Indemnified Parties" for purposes of this
Section), against any and all losses, claims, damages or liabilities joint
or several (including any investigative, legal and other expenses
reasonably incurred in connection with, and any amounts paid in settlement
of, any action, suit or proceeding or any claim asserted) (collectively,
"Losses") for which the Indemnified Parties may become subject, under the
1933 Act or otherwise, insofar as such Losses (or actions in respect to
thereof):
(a) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact (collectively "materially untrue
statement") contained in any registration statement, Contract
Prospectus, Contract, or sales literature or other promotional
material relating to a Separate Account or the Contracts
(collectively, "Account documents"), or arise out of or are based upon
the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading (collectively "material omission");
(b) arise out of or are based upon any materially untrue statement or
material omission made in any registration statement, Portfolio
Prospectus, or sales literature or other promotional material relating
to Fund or a Portfolio (collectively, "Portfolio documents"), provided
such statement or omission was made in reliance upon and in conformity
with information provided in writing to Fund by or on behalf of
Insurer specifically for use therein;
(c) arise out of or as a result of statements or representations (other
than statements or representations contained in any Portfolio document
on which Insurer or Distributor have reasonably relied) or wrongful
conduct of Insurer, Distributor, their respective agents, and persons
under their respective control, with respect to the sale and
distribution of Contracts or Portfolio shares;
(d) arise out of any material breach of any representation and/or warranty
made by Insurer or Distributor in this Agreement, or arise out of or
result from any other material breach of this Agreement by Insurer or
Distributor; or
(e) arise out of Insurer's incorrect calculation and/or untimely reporting
of net purchase or redemption orders.
Insurer and Distributor shall reimburse any Indemnified Party in
connection with investigating or defending any Loss (or actions in
respect to thereof); provided, however, that with respect to clause
(a) above neither Insurer nor Distributor shall be liable in any such
case to the extent that any Loss arises out of or is based upon any
materially untrue statement or material omission made in any Account
documents, which statement or omission was made in reliance upon and
in conformity with written information furnished to Insurer by or on
behalf of Fund specifically for use therein. This indemnity agreement
shall be in addition to any liability that Insurer or Distributor may
otherwise have.
9.2. Fund and LAM each agree to indemnify and hold harmless Insurer and
Distributor and each of their respective directors, officers, employees,
agents and each person, if any, who controls Insurer or Distributor
(collectively, "Indemnified Parties" for purposes of this Section) within
the meaning of the 1933 Act against any Losses to which they or any
Indemnified Party may become subject, under the 1933 Act or otherwise,
insofar as such Losses (or actions in respect thereof):
(a) arise out of or are based upon any materially untrue statement or any
material omission made in any Portfolio document;
(b) arise out of or are based upon any materially untrue statement or any
material omission made in any Account document, provided such
statement or omission was made in reliance upon and in conformity with
information provided in writing to Insurer by or on behalf of Fund
specifically for use therein;
(c) arise out of or as a result of statements or representations (other
than statements or representations contained in any Account document
on which Fund or LAM have reasonably relied) or wrongful conduct of
Fund, LAM, their respective agents, and persons under their respective
control, with respect to the sale of Portfolio Shares; or
(d) arise out of any material breach of any representation and/or warranty
made by Fund or LAM in this Agreement, or arise out of or result from
any other material breach of this Agreement by Fund or LAM.
Fund and LAM shall reimburse any legal or other expenses reasonably
incurred by any Indemnified Party in connection with investigating or
defending any such Loss; provided, however, that with respect to
clause (a) above neither Fund nor LAM shall be liable in any such case
to the extent that any such Loss arises out of or is based upon an
materially untrue statement or material omission made in any Portfolio
document, which statement or omission was made in reliance upon and in
conformity with written information furnished to Fund by or on behalf
of Insurer specifically for use therein. This indemnity agreement
shall be in addition to any liability that Fund or LAM may otherwise
have.
9.3. Fund and LAM shall indemnify and hold Insurer harmless against any Loss
that Insurer may incur, suffer or be required to pay due to Fund's
incorrect calculation of the daily net asset value, dividend rate or
capital gain distribution rate of a Portfolio or incorrect or untimely
reporting of the same; provided, however, that Fund shall have no
obligation to indemnify and hold harmless Insurer if the incorrect
calculation or incorrect or untimely reporting was the result of incorrect
or untimely information furnished by or on behalf of Insurer or otherwise
as a result of or relating to Insurer's breach of this Agreement. In no
event shall Fund be liable for any consequential, incidental, special or
indirect damages resulting to Insurer hereunder.
9.4 Notwithstanding anything herein to the contrary, in no event shall Fund or
LAM be liable to any individual or entity, including without limitation,
Insurer, or any Participating Insurance Company or any Contractholder, with
respect to any Losses that arise out of or result from:
(a) a breach of any representation, warranty, and/or covenant made by
Insurer hereunder or by any Participating Insurance Company under an
agreement containing substantially similar representations, warranties
and covenants;
(b) the failure by Insurer or any Participating Insurance Company to
maintain its separate account (which invests in any Portfolio) as a
legally and validly established segregated asset account under
applicable state law and as a duly registered unit investment trust
under the provisions of the Act (unless exempt therefrom); or
(c) the failure by Insurer or any Participating Insurance Company to
maintain its variable annuity and/or variable life insurance contracts
(with respect to which any Portfolio serves as an underlying funding
vehicle) as life insurance, endowment or annuity contracts under
applicable provisions of the Code.
9.5 Further, neither Fund nor LAM shall have any liability for any failure or
alleged failure to comply with the diversification requirements of Section
817(h) of the Code or the regulations thereunder if Insurer fails to comply
with any of the following clauses, and such failure could be shown to have
materially contributed to the liability:
(a) In the event the Internal Revenue Service ("IRS") asserts in writing
in connection with any governmental audit or review of Insurer or, to
Insurer's knowledge, of any Contractholder, that any Portfolio has
failed or allegedly failed to comply with the diversification
requirements of Section 817(h) of the Code or the regulations
thereunder or Insurer otherwise becomes aware of any facts that could
give rise to any claim against Fund or its affiliates as a result of
such a failure or alleged failure,
(i) Insurer shall promptly notify Fund of such assertion or potential
claim;
(ii) Insurer shall consult with Fund as to how to minimize any
liability that may arise as a result of such failure or alleged
failure;
(iii)Insurer shall use its best efforts to minimize any liability of
Fund or its affiliates resulting from such failure, including,
without limitation, demonstrating, pursuant to Treasury
Regulations Section 1.817-5(a)(2), to the Commissioner of the IRS
that such failure was inadvertent;
(iv) Insurer shall permit Fund, its affiliates and their legal and
accounting advisors to participate in any conferences, settlement
discussions or other administrative or judicial proceeding or
contests (including judicial appeals thereof) with the IRS, any
Contractholder or any other claimant regarding any claims that
could give rise to liability to Fund or its affiliates as a
result of such a failure or alleged failure;
(v) Insurer shall not with respect to any claim of the IRS or any
Contractholder that would give rise to a claim against Fund or
its affiliates compromise or settle any claim, accept any
adjustment on audit, or forego any allowable judicial appeals,
without the express written consent of Fund or its affiliates,
which shall not be unreasonably withheld, provided that Insurer
shall not be required to appeal any adverse judicial decision
unless Fund or its affiliates shall have provided an opinion of
independent counsel to the effect that a reasonable basis exists
for taking such appeal.
9.6 Promptly after receipt by an indemnified party under this Article of notice
of the commencement of any action, such indemnified party shall, if a claim
in respect thereof is to be made against the indemnifying party under this
Article, notify the indemnifying party of the commencement thereof. The
failure to so notify the indemnifying party shall not relieve the
indemnifying party from any liability under this Article IX, except to the
extent that the omission results in a failure of actual notice to the
indemnifying party and such indemnifying party is damaged solely as a
result of the failure to give such notice. In case any such action is
brought against any indemnified party, and it notified the indemnifying
party of the commencement thereof, the indemnifying party shall be entitled
to participate therein and, to the extent that it may wish, assume the
defense thereof, with counsel satisfactory to such indemnified party, and
to the extent that the indemnifying party has given notice to such effect
to the indemnified party and is performing its obligations under this
Article, the indemnifying party shall not be liable for any legal or other
expenses subsequently incurred by such indemnified party in connection with
the defense thereof, other than reasonable costs of investigation.
Notwithstanding the foregoing, in any such proceeding, any indemnified
party shall have the right to retain its own counsel, but the fees and
expenses of such counsel shall be at the expense of such indemnified party
unless (a) the indemnifying party and the indemnified party shall have
mutually agreed to the retention of such counsel or (b) the named parties
to any such proceeding (including any impleaded parties) include both the
indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or
potential differing interests between them. The indemnifying party shall
not be liable for any settlement of any proceeding effected without its
written consent.
A successor by law of any Party to this Agreement shall be entitled to the
benefits of the indemnification contained in this Article IX, which shall
survive any termination of this Agreement.
ARTICLE X.
COMMENCEMENT AND TERMINATION
10.1.This Agreement shall be effective as of the date hereof and shall continue
in force until terminated in accordance with the provisions herein.
10.2.This Agreement shall terminate without penalty as to one or more
Portfolios:
(a) At the option of Insurer, Distributor, Fund, or LAM at any time from
the date hereof upon 120 days' notice, unless a shorter time is agreed
to by the Parties;
(b) At the option of Insurer if it determines that shares of any Portfolio
are not reasonably available to meet the requirements of the
Contracts. Insurer shall furnish prompt notice of election to
terminate and termination shall be effective ten days after receipt of
notice unless Fund makes available a sufficient number of shares to
meet the requirements of the Contracts within such ten day period;
(c) At the option of Insurer or Fund, upon the institution of formal
proceedings against the other or their respective affiliates by the
Commission, the NASD or any other regulatory body, the expected or
anticipated ruling, judgment or outcome of which would, in the
Insurer's or Fund's reasonable judgment, materially impair the other's
ability to meet and perform its obligations and duties hereunder.
Prompt notice of election to terminate shall be furnished by Insurer
or Fund, as the case may be, with termination to be effective upon
receipt of notice;
(d) At the option of Insurer or Fund, if either shall determine, in its
sole judgment reasonably exercised in good faith, that the other has
suffered a material adverse change in its business or financial
condition or is the subject of material adverse publicity and such
material adverse change or material adverse publicity is likely to
have a material adverse impact upon the business and operation of the
Insurer, Fund or LAM, as the case may be. Insurer or Fund shall notify
the other in writing of any such determination and its intent to
terminate this Agreement, which termination shall be effective on the
sixtieth (60th) day following the giving of such notice, provided the
determination of Insurer or Fund, as the case may be, continues to
apply on that date.
(e) Upon termination of the Investment Management Agreement between Fund,
on behalf of its Portfolios, and LAM or its successors unless Insurer
specifically approves the selection of a new investment adviser for
the Portfolios. Fund shall promptly furnish notice of such termination
to Insurer;
(f) In the event Portfolio shares are not registered, issued or sold in
accordance with applicable federal law, or such law precludes the use
of such shares as the underlying investment medium of Contracts issued
or to be issued by Insurer. Termination shall be effective immediately
upon such occurrence without notice;
(g) At the option of Fund upon a determination by the Board in good faith
that it is no longer advisable and in the best interests of
shareholders for Fund to continue to operate pursuant to this
Agreement. Termination shall be effective upon notice by Fund to
Insurer of such termination;
(h) At the option of Fund if the Contracts cease to qualify as annuity
contracts or life insurance policies, as applicable, under the Code,
or if Fund reasonably believes that the Contracts may fail to so
qualify. Termination shall be effective immediately upon such
occurrence or reasonable belief without notice;
(i) At the option of any Party, upon another's breach of any material
provision this Agreement, which breach has not been cured to the
satisfaction of the non-breaching Parties within ten days after
written notice of such breach is delivered to the breaching Party;
(j) At the option of Fund, if the Contracts are not registered, issued or
sold in accordance with applicable federal and/or state law.
Termination shall be effective immediately upon such occurrence
without notice;
(k) Upon assignment of this Agreement, unless made with the written
consent of the non-assigning Parties.
Any such termination pursuant to this Article X shall not affect the
operation of Articles V or IX of this Agreement. The Parties agree that any
termination pursuant to Article VI shall be governed by that Article.
10.3.Notwithstanding any termination of this Agreement pursuant to Section 10.2
hereof, Fund and LAM may, at the option of Fund, continue to make available
additional Portfolio shares for so long as Fund desires pursuant to the
terms and conditions of this Agreement as provided below, for all Contracts
in effect on the effective date of termination of this Agreement
(hereinafter referred to as "Existing Contracts"). Specifically, without
limitation, if Fund so elects to make additional Portfolio shares
available, the owners of the Existing Contracts or Insurer, whichever shall
have legal authority to do so, shall be permitted to reallocate investments
among the Portfolios, redeem investments in the Portfolios and/or invest in
the Portfolios upon the making of additional purchase payments under the
Existing Contracts. In the event of a termination of this Agreement
pursuant to Section 10.2 hereof, Fund, as promptly as is practicable under
the circumstances, shall notify Insurer whether Fund shall continue to make
Portfolio shares available after such termination. If Portfolio shares
continue to be made available after such termination, the provisions of
this Agreement shall remain in effect and thereafter either Fund or Insurer
may terminate the Agreement, as so continued pursuant to this Section 10.3,
upon prior written notice to the other Parties, such notice to be for a
period that is reasonable under the circumstances but, if given by Fund,
need not be for more than six months.
10.1.In the event of any termination of this Agreement pursuant to Section 10.2
hereof, the Parties agree to cooperate and give reasonable assistance to
one another in taking all necessary and appropriate steps for the purpose
of ensuring that a Separate Account owns no shares of a Portfolio beyond
six months from the date of termination. Such steps may include, without
limitation, substituting other mutual fund shares for those of the affected
Portfolio.
ARTICLE XI.
AMENDMENTS
11.1.Any changes in the terms of this Agreement shall be made by agreement in
writing by the Parties hereto.
ARTICLE XII.
NOTICE
12.1.Each notice required by this Agreement shall be given by certified mail,
return receipt requested, to the appropriate Parties at the following
addresses:
Insurer: Valley Forge Life Insurance Company
CNA Plaza
333 Wabash, 43 South
Chicago, IL 60685
Attn: G. Stephen Wastek, Esq.
Distributor: CNA Investor Services
CNA Plaza
333 Wabash, 43 South
Chicago, IL 60685
Attn: Ron Chapon
Fund: Lazard Retirement Series, Inc.
30 Rockefeller Plaza
New York, New York 10112
Attention: Steven Swain
LAM: Lazard Asset Management
30 Rockefeller Plaza
New York, New York 10112
Attention: William Butterly
with copies to: Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York 10038-4982
Attn: Stuart H. Coleman, Esq.
Notice shall be deemed to be given on the date of receipt by the addresses as
evidenced by the return receipt.
ARTICLE XIII.
MISCELLANEOUS
13.1.This Agreement has been executed on behalf of the Parties by the
undersigned duly authorized officers in their capacities as officers of
Insurer, Distributor, LAM, and Fund.
13.1.If any provision of this Agreement is held or made invalid by a court
decision, statute, rule, or otherwise, the remainder of this Agreement will
not be affected thereby.
13.1.The rights, remedies, and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, that the Parties are entitled to under
federal and state laws.
13.1.This Agreement may be executed simultaneously in two or more counterparts,
each of which taken together shall constitute one and the same instrument.
ARTICLE XIV.
LAW
14.1.This Agreement shall be construed in accordance with the internal laws of
the State of New York, without giving effect to principles of conflict of
laws.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement to be duly
executed and attested as of the date first above written.
Valley Forge Life Insurance Company
By:___________________________________
Attest:_____________________
CNA Investor Services
By:____________________________________
Attest:_____________________
LAZARD RETIREMENT SERIES, INC.
By:____________________________________
Attest:_____________________
LAZARD ASSET MANAGEMENT,
a division of Lazard Freres & Co., LLC
By:____________________________________
Attest:______________________
SCHEDULE 1
Portfolios
Lazard Retirement Equity Portfolio
Lazard Retirement Small Cap Portfolio
Separate Accounts and Contracts
1. Valley Forge Life Insurance Company Variable Annuity Separate Acct.
Established October 15, 1995.
a) Contracts: CNA Capital Select Variable Annuity
CNA Capital Select Plus Variable Annuity
2. Valley Forge Life Insurance Company Variable Life Separate Acct.
Established October 15, 1995
a) Contracts: CNA Capital Select Variable Universal Life
SCHEDULE 2
PORTFOLIO SHARE ORDER PROCESSING
TIMELY PRICING AND ORDERS
1. Each Business Day, Fund shall use its best efforts to make each Portfolio's
closing net asset value per share ("NAV") on that Day available to Insurer
by 6:30 p.m. New York time.
2. At the end of each Business Day, Insurer shall use the information
described above to calculate each Separate Account's unit values for that
Day. Using this unit value, Insurer shall process that Day's Contract and
Separate Account transactions to determine the net dollar amount of each
Portfolio's shares to be purchased or redeemed.
3. Insurer shall transmit net purchase or redemption orders to Fund or its
designee by 9:30 a.m. New York time on the Business Day next following
Insurer's receipt of the information relating to such orders in accordance
with paragraph 1 above; provided, however, that Fund shall provide
additional time to Insurer in the event Fund is unable to meet the 6:30
p.m. deadline stated above. Such additional time shall be equal to the
additional time that Fund takes to make the net asset values available to
Insurer. For informational purposes, Insurer shall separately describe the
amount of shares of each Portfolio that is being purchased, redeemed, or
exchanged from one Portfolio to the other. In addition, Insurer shall use
its best efforts to notify Fund in advance of any unusually large purchase
or redemption orders.
TIMELY PAYMENTS
4. Insurer shall pay for any net purchase order by wiring Federal Funds to
Fund or its designated custodial account by 4:00pm New York time on the
same Business Day it transmits the order to Fund pursuant to paragraph 3
above.
5. Fund shall pay for any net redemption order by wiring the redemption
proceeds to Insurer, except as provided below, within two (2) Business Days
or, upon notice to Insurer, such longer period as permitted by the Act or
the rules, orders or regulations thereunder. In the case of any net
redemption order valued at or greater than $1 million, Fund shall wire such
amount to Insurer within seven days of the order. In the case of any net
redemption order requesting the application of proceeds from the redemption
of one Portfolio's shares to the purchase of another Portfolio's shares,
Fund shall so apply such proceeds the same Business Day that Insurer
transmits such order to Fund.
APPLICABLE PRICE
6. Fund shall execute purchase and redemption orders for a Portfolio's shares
that relate to Contract transactions at that Portfolio's NAV next
determined after Fund or its designated agent receives the order. For this
purpose, Fund hereby appoints Insurer as its agent for the limited purpose
of receiving orders for the purchase and redemption of shares of each
Portfolio for each Separate Account; provided that Fund receives both the
notice of the order in accordance with paragraph 3 above and any related
purchase payments in accordance with paragraph 4 above.
7. Fund shall execute purchase and redemption orders for a Portfolio's shares
that relate to Insurer's General Account, or that do not relate to Contract
transactions, at that Portfolio's NAV next determined after Fund (not
Insurer) receives the order and any related purchase payments in accordance
with paragraph 4 above.
8. Fund shall execute purchase and redemption orders for a Portfolio Shares
that relate to Contracts funded by registered and unregistered Separate
Accounts in the same manner, but only to the extent that Insurer represents
and warrants that it is legally or contractually obligated to treat such
orders in the same manner. Each order for Portfolio shares placed by
Insurer that is attributable, in whole or in part, to Contracts funded by
an unregistered Separate Account, shall be deemed to constitute such
representation and warranty by Insurer unless the order specifically states
to the contrary. Otherwise, Fund shall treat orders attributable to
unregistered Separate Account Contracts in the same manner as orders for
Insurer's General Account. For these purposes, a registered Separate
Account is one that is registered under the Act; an unregistered Separate
Account is one that is not.
9. Fund shall execute purchase or redemption orders for a Portfolio's shares
that do not satisfy the conditions specified in paragraphs 3 and 4 above,
as applicable, at the Portfolio's NAV next determined after such conditions
have been satisfied and in accordance with paragraphs 6 or 7, whichever
applies.
10. If Fund does not receive payment in Federal Funds for any net purchase
order in accordance with paragraph 4 above, Insurer shall promptly, upon
Fund's request, reimburse Fund for any charges, costs, fees, interest or
other expenses incurred by Fund in connection with any advances to, or
borrowings or overdrafts by, Fund, or any similar expenses incurred by
Fund, as a result of portfolio transactions effected by Fund based upon
such purchase request.
11. If Fund provides Insurer with materially incorrect net asset value per
share information through no fault of Insurer, Insurer, on behalf of the
Separate Account, shall be entitled to an adjustment to the number of
shares purchased or redeemed to reflect the correct net asset value per
share in accordance with Fund's current policies for correcting pricing
errors. Any material error in the calculation of net asset value per share,
dividend or capital gain information shall be reported promptly upon
discovery to Insurer.
PARTICIPATION AGREEMENT
AMONG TEMPLETON VARIABLE PRODUCTS SERIES FUND,
FRANKLIN TEMPLETON DISTRIBUTORS, INC. AND
VALLEY FORGE LIFE INSURANCE COMPANY
THIS AGREEMENT made as of January 1, 2000 among Templeton Variable
Products Series Fund (the "Trust"), an open-end management investment company
organized as a business trust under Massachusetts law, Franklin Templeton
Distributors, Inc., a California corporation, the Trust's principal underwriter
("Underwriter"), and Valley Forge Life Insurance Company, a life insurance
company organized as a corporation under Pennsylvania law (the "Company"), on
its own behalf and on behalf of each segregated asset account of the Company set
forth in Schedule A, as may be amended from time to time (the "Accounts").
W I T N E S S E T H:
WHEREAS, the Trust is registered with the Securities and Exchange
Commission (the "SEC") as an open-end management investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"), and has an
effective registration statement relating to the offer and sale of the various
series of its shares under the Securities Act of 1933, as amended (the "1933
Act");
WHEREAS, the Trust and the Underwriter desire that Trust shares be used
as an investment vehicle for separate accounts established for variable life
insurance policies and variable annuity contracts to be offered by life
insurance companies which have entered into fund participation agreements with
the Trust (the "Participating Insurance Companies");
WHEREAS, the beneficial interest in the Trust is divided into several
series of shares, each series representing an interest in a particular managed
portfolio of securities and other assets, and certain of those series, named in
Schedule A, (the "Portfolios") are to be made available for purchase by the
Company for the Accounts; and
WHEREAS, the Trust has received an order from the SEC, dated November
16, 1993 (File No. 812-8546), granting Participating Insurance Companies and
their separate accounts exemptions from the provisions of Sections 9(a), 13(a),
15(a) and 15(b) of the 1940 Act, and Rules 6e-2 (b) (15) and 6e-3 (T) (b) (15)
thereunder, to the extent necessary to permit shares of the Trust to be sold to
and held by variable annuity and variable life insurance separate accounts of
both affiliated and unaffiliated life insurance companies and certain qualified
pension and retirement plans (the "Shared Funding Exemptive Order");
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act unless an exemption from registration
under the 1940 Act is available and the Trust has been so advised; and has
registered or will register certain variable annuity contracts and variable life
insurance policies, listed on Schedule A attached hereto, under which the
portfolios are to be made available as investment vehicles (the "Contracts")
under the 1933 Act unless such interests under the Contracts in the Accounts are
exempt from registration under the 1933 Act and the Trust has been so advised;
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution of the Board of Directors of the
Company, on the date shown for such account on Schedule A hereto, to set aside
and invest assets attributable to one or more Contracts; and
WHEREAS, the Underwriter is registered as a broker dealer with the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended (the "1934 Act"), and is a member in good standing of the National
Association of Securities Dealers, Inc. ("NASD"); and
WHEREAS, each investment adviser listed on Schedule A (each, an
"Adviser") is duly registered as an investment adviser under the Investment
Advisers Act of 1940, as amended ("Advisers Act") and any applicable state
securities laws;
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios on behalf
of each Account to fund certain of the aforesaid Contracts and the Underwriter
is authorized to sell such shares to separate accounts such as each Account at
net asset value;
NOW THEREFORE, in consideration of their mutual promises, the parties
agree as follows:
ARTICLE I.
PURCHASE AND REDEMPTION OF TRUST PORTFOLIO SHARES
1.1 For purposes of this Article I, the Company shall be the Trust's
agent for receipt of purchase orders and requests for redemption relating to
each Portfolio from each Account, provided that the Company notifies the Trust
of such purchase orders and requests for redemption by 9:00 a.m. Eastern time on
the next following Business Day, as defined in Section 1.3.
1.2 The Trust agrees to make shares of the Portfolios available to the
Accounts for purchase at the net asset value per share next computed after
receipt of a purchase order by the Trust (or its agent), as established in
accordance with the provisions of the then current prospectus of the Trust
describing Portfolio purchase procedures on those days on which the Trust
calculates its net asset value pursuant to rules of the SEC, and the Trust shall
use its best efforts to calculate such net asset value on each day on which the
New York Stock Exchange ("NYSE") is open for trading. The Company will transmit
orders from time to time to the Trust for the purchase of shares of the
Portfolios. The Trustees of the Trust (the "Trustees") may refuse to sell shares
of any Portfolio to any person, or suspend or terminate the offering of shares
of any Portfolio if such action is required by law or by regulatory authorities
having jurisdiction or if, in the sole discretion of the Trustees acting in good
faith and in light of their fiduciary duties under federal and any applicable
state laws, such action is deemed in the best interests of the shareholders of
such Portfolio. Without limiting the foregoing, the Trustees have determined
that there is a significant risk that the Trust and its shareholders may be
adversely affected by investors whose purchase and redemption activity follows a
market timing pattern, and have authorized the Trust, the Underwriter and the
Trust's transfer agent to adopt procedures and take other action (including
without limitation rejecting specific purchase orders) as they deem necessary to
reduce, discourage or eliminate market timing activity. The Company agrees to
cooperate with the Trust to assist the Trust in implementing the Trust's
restrictions on Market Timers.
1.3 The Company shall submit payment for the purchase of shares of a
Portfolio on behalf of an Account no later than the close of business on the
next Business Day after the Trust receives the purchase order. Payment shall be
made in federal funds transmitted by wire to the Trust or its designated
custodian. Upon receipt by the Trust of the federal funds so wired, such funds
shall cease to be the responsibility of the Company and shall become the
responsibility of the Trust for this purpose. "Business Day" shall mean any day
on which the NYSE is open for trading and on which the Trust calculates its net
asset value pursuant to the rules of the SEC.
1.4 The Trust will redeem for cash any full or fractional shares of any
Portfolio, when requested by the Company on behalf of an Account, at the net
asset value next computed after receipt by the Trust (or its agent) of the
request for redemption, as established in accordance with the provisions of the
then current prospectus of the Trust describing Portfolio redemption procedures.
The Trust shall make payment for such shares in the manner established from time
to time by the Trust. Redemption with respect to a Portfolio will normally be
paid to the Company for an Account in federal funds transmitted by wire to the
Company before the close of business on the next Business Day after the receipt
of the request for redemption. Such payment may be delayed if, for example, the
Portfolio's cash position so requires or if extraordinary market conditions
exist, but in no event shall payment be delayed for a greater period than is
permitted by the 1940 Act.
1.5 Payments for the purchase of shares of the Trust's Portfolios by
the Company under Section 1.3 and payments for the redemption of shares of the
Trust's Portfolios under Section 1.4 may be netted against one another on any
Business Day for the purpose of determining the amount of any wire transfer on
that Business Day.
1.6 Issuance and transfer of the Trust's Portfolio shares will be by
book entry only. Stock certificates will not be issued to the Company or the
Account. Portfolio Shares purchased from the Trust will be recorded in the
appropriate title for each Account or the appropriate subaccount of each
Account.
1.7 The Trust shall furnish, on or before the ex-dividend date, notice
to the Company of any income dividends or capital gain distributions payable on
the shares of any Portfolio of the Trust. The Company hereby elects to receive
all such income dividends and capital gain distributions as are payable on a
Portfolio's shares in additional shares of the Portfolio. The Trust shall notify
the Company of the number of shares so issued as payment of such dividends and
distributions.
1.8 The Trust shall calculate the net asset value of each Portfolio on
each Business Day, as defined in Section 1.3. The Trust shall make the net asset
value per share for each Portfolio available to the Company or its designated
agent on a daily basis as soon as reasonably practical after the net asset value
per share is calculated (normally by 6:30 p.m. Eastern time) and shall use
reasonable efforts to make such net asset value per share available by 7:00 p.m.
Eastern time each Business Day.
1.9 The Trust agrees that its Portfolio shares will be sold only to
Participating Insurance Companies and their separate accounts and to certain
qualified pension and retirement plans to the extent permitted by the Shared
Funding Exemptive Order. No shares of any Portfolio will be sold directly to the
general public. The Company agrees that it will use Trust shares only for the
purposes of funding the Contracts through the Accounts listed in Schedule A, as
amended from time to time.
1.10 The Company agrees that all net amounts available under the
Contracts shall be invested in the Trust, in such other Funds advised by an
Adviser or its affiliates as may be mutually agreed to in writing by the parties
hereto, or in the Company's general account, provided that such amounts may also
be invested in an investment company other than the Trust if: (a) such other
investment company, or series thereof, has investment objectives or policies
that are substantially different from the investment objectives and policies of
the Portfolios; or (b) the Company gives the Trust and the Underwriter 45 days
written notice of its intention to make such other investment company available
as a funding vehicle for the Contracts; or (c) such other investment company is
available as a funding vehicle for the Contracts at the date of this Agreement
and the Company so informs the Trust and the Underwriter prior to their signing
this Agreement (a list of such investment companies appearing on Schedule B to
this Agreement); or (d) the Trust or Underwriter consents to the use of such
other investment company.
1.11 The Trust agrees that all Participating Insurance Companies shall
have the obligations and responsibilities regarding pass-through voting and
conflicts of interest corresponding to those contained in Section 2.10 and
Article IV of this Agreement.
1.12 Each party to this Agreement shall have the right to rely on
information or confirmations provided by any other party (or by any affiliate of
any other party), and shall not be liable in the event that an error results
from any incorrect information or confirmations supplied by any other party. If
an error is made in reliance upon incorrect information or confirmations, any
amount required to make a Contract owner's account whole shall be borne by the
party who provided the incorrect information or confirmation.
ARTICLE II.
OBLIGATIONS OF THE PARTIES; FEES AND EXPENSES
2.1 The Trust shall prepare and be responsible for filing with the SEC
and any state regulators requiring such filing all shareholder reports, notices,
proxy materials (or similar materials such as voting instruction solicitation
materials), prospectuses and statements of additional information of the Trust.
The Trust shall bear the costs of registration and qualification of its shares
of the Portfolios, preparation and filing of the documents listed in this
Section 2.1 and all taxes to which an issuer is subject on the issuance and
transfer of its shares.
2.2 At the option of the Company, the Trust or the Underwriter shall
either (a) provide the Company with as many copies of portions of the Trust's
current prospectus, annual report, semi-annual report and other shareholder
communications, including any amendments or supplements to any of the foregoing,
pertaining specifically to the Portfolios as the Company shall reasonably
request; or (b) provide the Company with a camera ready copy of such documents
in a form suitable for printing and from which information relating to series of
the Trust other than the Portfolios has been deleted to the extent practicable.
The Trust or the Underwriter shall provide the Company with a copy of its
current statement of additional information, including any amendments or
supplements, in a form suitable for duplication by the Company. Expenses of
furnishing such documents for marketing purposes shall be borne by the Company
and expenses of furnishing such documents for current contract owners invested
in the Trust shall be borne by the Trust or the Underwriter.
2.3 The Trust (at its expense) shall provide the Company with copies of
any Trust-sponsored proxy materials in such quantity as the Company shall
reasonably require for distribution to Contract owners. The Company shall bear
the costs of distributing proxy materials (or similar materials such as voting
solicitation instructions), prospectuses and statements of additional
information to Contract owners. The Company assumes sole responsibility for
ensuring that such materials are delivered to Contract owners in accordance with
applicable federal and state securities laws.
2.4 If and to the extent required by law, the Company shall: (i)
solicit voting instructions from Contract owners; (ii) vote the Trust shares in
accordance with the instructions received from Contract owners; and (iii) vote
Trust shares for which no instructions have been received in the same proportion
as Trust shares of such Portfolio for which instructions have been received; so
long as and to the extent that the SEC continues to interpret the 1940 Act to
require pass-through voting privileges for variable contract owners. The Company
reserves the right to vote Trust shares held in any segregated asset account in
its own right, to the extent permitted by law.
2.5 Except as provided in section 2.6, the Company shall not use any
designation comprised in whole or part of the names or marks "Franklin" or
"Templeton" or any other Trademark relating to the Trust or Underwriter without
prior written consent, and upon termination of this Agreement for any reason,
the Company shall cease all use of any such name or mark as soon as reasonably
practicable.
2.6 The Company shall furnish, or cause to be furnished to the Trust or
its designee, at least one complete copy of each registration statement,
prospectus, statement of additional information, retirement plan disclosure
information or other disclosure documents or similar information, as applicable
(collectively "disclosure documents"), as well as any report, solicitation for
voting instructions, sales literature and other promotional materials, and all
amendments to any of the above that relate to the Contracts or the Accounts
prior to its first use. The Company shall furnish, or shall cause to be
furnished, to the Trust or its designee each piece of sales literature or other
promotional material in which the Trust or an Adviser is named, at least 15
Business Days prior to its use. No such material shall be used if the Trust or
its designee reasonably objects to such use within five Business Days after
receipt of such material. For purposes of this paragraph, "sales literature or
other promotional material" includes, but is not limited to, portions of the
following that use any Trademark related to the Trust or Underwriter or refer to
the Trust or affiliates of the Trust: advertisements (such as material published
or designed for use in a newspaper, magazine or other periodical, radio,
television, telephone or tape recording, videotape display, signs or billboards,
motion pictures or electronic communication or other public media), sales
literature (i.e., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts or
any other advertisement, sales literature or published article or electronic
communication), educational or training materials or other communications
distributed or made generally available to some or all agents or employees, and
disclosure documents, shareholder reports and proxy materials.
2.7 The Company and its agents shall not give any information or make
any representations or statements on behalf of the Trust or concerning the
Trust, the Underwriter or an Adviser in connection with the sale of the
Contracts other than information or representations contained in and accurately
derived from the registration statement or prospectus for the Trust shares (as
such registration statement and prospectus may be amended or supplemented from
time to time), annual and semi-annual reports of the Trust, Trust-sponsored
proxy statements, or in sales literature or other promotional material approved
by the Trust or its designee, except as required by legal process or regulatory
authorities or with the written permission of the Trust or its designee.
2.8 The Trust shall use reasonable efforts to provide the Company, on a
timely basis, with such information about the Trust, the Portfolios and each
Adviser, in such form as the Company may reasonably require, as the Company
shall reasonably request in connection with the preparation of disclosure
documents and annual and semi-annual reports pertaining to the Contracts.
2.9 The Trust shall not give any information or make any
representations or statements on behalf of the Company or concerning the
Company, the Accounts or the Contracts other than information or representations
contained in and accurately derived from disclosure documents for the Contracts
(as such disclosure documents may be amended or supplemented from time to time),
or in materials approved by the Company for distribution including sales
literature or other promotional materials, except as required by legal process
or regulatory authorities or with the written permission of the Company.
2.10 So long as, and to the extent that, the SEC interprets the 1940
Act to require pass-through voting privileges for Contract owners, the Company
will provide pass-through voting privileges to Contract owners whose Contract
values are invested, through the registered Accounts, in shares of one or more
Portfolios of the Trust. The Trust shall require all Participating Insurance
Companies to calculate voting privileges in the same manner and the Company
shall be responsible for assuring that the Accounts calculate voting privileges
in the manner established by the Trust. With respect to each registered Account,
the Company will vote shares of each Portfolio of the Trust held by a registered
Account and for which no timely voting instructions from Contract owners are
received in the same proportion as those shares held by that registered Account
for which voting instructions are received. The Company and its agents will in
no way recommend or oppose or interfere with the solicitation of proxies for
Portfolio shares held to fund the Contracts without the prior written consent of
the Trust, which consent may be withheld in the Trust's sole discretion.
2.11 The Trust and Underwriter shall pay no fee or other compensation
to the Company under this Agreement except as provided on Schedule C, if
attached. Nevertheless, the Underwriter or an affiliate may make payments (other
than pursuant to a Rule 12b-1 Plan) to the Company or its affiliates or to the
Contracts' underwriter in amounts agreed to by the Underwriter or an affiliate
in writing and such payments may be made out of fees otherwise payable to the
Underwriter or its affiliates, profits of the Underwriter or its affiliates, or
other resources available to the Underwriter or its affiliates.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
3.1 The Company represents and warrants that it is an insurance company
duly organized and in good standing under the laws of its state of incorporation
and that it has legally and validly established each Account as a segregated
asset account under such law as of the date set forth in Schedule A.
3.2 The Company represents and warrants that, with respect to each
Account, (1) the Company has registered or, prior to any issuance or sale of the
Contracts, will register the Account as a unit investment trust in accordance
with the provisions of the 1940 Act to serve as a segregated asset account for
the Contracts, or (2) if the Account is exempt from registration as an
investment company under Section 3(c) of the 1940 Act, the Company will make
every effort to maintain such exemption and will notify the Trust and the
Adviser immediately upon having a reasonable basis for believing that such
exemption no longer applies or might not apply in the future.
3.3 The Company represents and warrants that, with respect to each Contract, (1)
the Contract will be registered under the 1933 Act, or (2) if the Contract is
exempt from registration under Section 3(a)(2) of the 1933 Act or under Section
4(2) and Regulation D of the 1933 Act, the Company will make every effort to
maintain such exemption and will notify the Trust and the Adviser immediately
upon having a reasonable basis for believing that such exemption no longer
applies or might not apply in the future. The Company further represents and
warrants that the Contracts will be sold by broker-dealers, or their registered
representatives, who are registered with the SEC under the 1934 Act and who are
members in good standing of the NASD; the Contracts will be issued and sold in
compliance in all material respects with all applicable federal and state laws;
and the sale of the Contracts shall comply in all material respects with state
insurance suitability requirements. CNA Investor Services, Inc., the distributor
of the products, is a limited purpose broker-dealer and not directly responsible
for suitability or compliance issues related to the products or registered
representative. However, the Company represents that CNA Investor Services, Inc.
has selling agreements only with broker-dealers that perform appropriate
supervision of their registered representatives to ensure that appropriate
suitability determinations are made with respect to the sale of products.
For any unregistered Accounts which are exempt from registration under
the `40 Act in reliance upon Sections 3(c)(1) or 3(c)(7) thereof, the Company
represents and warrants that:
(a) each Account and sub-account thereof has a principal underwriter
which is registered as a broker-dealer under the Securities
Exchange Act of 1934, as amended;
(b) Trust shares are and will continue to be the only investment
securities held by the corresponding Account sub-accounts; and
(c) with regard to each Portfolio, the Company, on behalf of the
corresponding sub-account, will:
(1) seek instructions from all Contract owners with regard to
the voting of all proxies with respect to Trust shares and
vote such proxies only in accordance with such instructions
or vote such shares held by it in the same proportion as the
vote of all other holders of such shares; and
(2) refrain from substituting shares of another security for
such shares unless the SEC has approved such substitution in
the manner provided in Section 26 of the `40 Act.
3.4 The Trust represents and warrants that it is duly organized and
validly existing under the laws of the State of Massachusetts and that it does
and will comply in all material respects with the 1940 Act and the rules and
regulations thereunder.
3.5 The Trust represents and warrants that the Portfolio shares offered
and sold pursuant to this Agreement will be registered under the 1933 Act and
the Trust shall be registered under the 1940 Act prior to and at the time of any
issuance or sale of such shares. The Trust shall amend its registration
statement under the 1933 Act and the 1940 Act from time to time as required in
order to effect the continuous offering of its shares. The Trust shall register
and qualify its shares for sale in accordance with the laws of the various
states only if and to the extent deemed advisable by the Trust or the
Underwriter.
3.6 The Trust represents and warrants that the investments of each
Portfolio will comply with the diversification requirements for variable
annuity, endowment or life insurance contracts set forth in Section 817(h) of
the Internal Revenue Code of 1986, as amended ("Code"), and the rules and
regulations thereunder, including without limitation Treasury Regulation
1.817-5, and will notify the Company immediately upon having a reasonable basis
for believing any Portfolio has ceased to comply or might not so comply and will
in that event immediately take all reasonable steps to adequately diversify the
Portfolio to achieve compliance within the grace period afforded by Regulation
1.817-5.
3.7 The Trust represents and warrants that it is currently qualified as
a "regulated investment company" under Subchapter M of the Code, that it will
make every effort to maintain such qualification and will notify the Company
immediately upon having a reasonable basis for believing it has ceased to so
qualify or might not so qualify in the future.
3.8 The Trust represents and warrants that should it ever desire to
make any payments to finance distribution expenses pursuant to Rule 12b-1 under
the 1940 Act, the Trustees, including a majority who are not "interested
persons" of the Trust under the 1940 Act ( "disinterested Trustees" ), will
formulate and approve any plan under Rule 12b-1 to finance distribution
expenses.
3.9 The Trust represents and warrants that it, its directors, officers,
employees and others dealing with the money or securities, or both, of a
Portfolio shall at all times be covered by a blanket fidelity bond or similar
coverage for the benefit of the Trust in an amount not less that the minimum
coverage required by Rule 17g-1 or other regulations under the 1940 Act. Such
bond shall include coverage for larceny and embezzlement and be issued by a
reputable bonding company.
3.10 The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals or entities
dealing with the money and/or securities of the Trust are and shall be at all
times covered by a blanket fidelity bond or similar coverage for the benefit of
the Trust, in an amount not less than $5 million. The aforesaid bond shall
include coverage for larceny and embezzlement and shall be issued by a reputable
bonding company. The Company agrees to make all reasonable efforts to see that
this bond or another bond containing these provisions is always in effect, and
agrees to notify the Trust and the Underwriter in the event that such coverage
no longer applies.
3.11 The Underwriter represents that each Adviser is duly organized and
validly existing under applicable corporate law and that it is registered and
will during the term of this Agreement remain registered as an investment
adviser under the Advisers Act.
3.12 The Trust currently intends for one or more classes of shares
(each, a "Class") to make payments to finance its distribution expenses,
including service fees, pursuant to a Plan adopted under Rule 12b-1 under the
1940 Act ("Rule 12b-1"), although it may determine to discontinue such practice
in the future. To the extent that any Class of the Trust finances its
distribution expenses pursuant to a Plan adopted under Rule 12b-1, the Trust
undertakes to comply with any then current SEC and SEC staff interpretations
concerning Rule 12b-1 or any successor provisions.
ARTICLE IV.
POTENTIAL CONFLICTS
4.1 The parties acknowledge that a Portfolio's shares may be made
available for investment to other Participating Insurance Companies. In such
event, the Trustees will monitor the Trust for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
Participating Insurance Companies. An irreconcilable material conflict may arise
for a variety of reasons, including: (a) an action by any state insurance
regulatory authority; (b) a change in applicable federal or state insurance,
tax, or securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretative letter, or any similar action by insurance,
tax, or securities regulatory authorities; (c) an administrative or judicial
decision in any relevant proceeding; (d) the manner in which the investments of
any Portfolio are being managed; (e) a difference in voting instructions given
by variable annuity contract and variable life insurance contract owners; or (f)
a decision by an insurer to disregard the voting instructions of contract
owners. The Trust shall promptly inform the Company of any determination by the
Trustees that an irreconcilable material conflict exists and of the implications
thereof.
4.2 The Company agrees to promptly report any potential or existing
conflicts of which it is aware to the Trustees. The Company will assist the
Trustees in carrying out their responsibilities under the Shared Funding
Exemptive Order by providing the Trustees with all information reasonably
necessary for the Trustees to consider any issues raised including, but not
limited to, information as to a decision by the Company to disregard Contract
owner voting instructions. All communications from the Company to the Trustees
may be made in care of the Trust.
4.3 If it is determined by a majority of the Trustees, or a majority of
the disinterested Trustees, that a material irreconcilable conflict exists that
affects the interests of Contract owners, the Company shall, in cooperation with
other Participating Insurance Companies whose contract owners are also affected,
at its own expense and to the extent reasonably practicable (as determined by
the Trustees) take whatever steps are necessary to remedy or eliminate the
irreconcilable material conflict, which steps could include: (a) withdrawing the
assets allocable to some or all of the Accounts from the Trust or any Portfolio
and reinvesting such assets in a different investment medium, including (but not
limited to) another Portfolio of the Trust, or submitting the question of
whether or not such withdrawal should be implemented to a vote of all affected
Contract owners and, as appropriate, withdrawing the assets of any appropriate
group (i.e. , annuity contract owners, life insurance policy owners, or variable
contract owners of one or more Participating Insurance Companies) that votes in
favor of such withdrawal, or offering to the affected Contract owners the option
of making such a change; and (b) establishing a new registered management
investment company or managed separate account.
4.4 If a material irreconcilable conflict arises because of a decision
by the Company to disregard Contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Trust's election, to withdraw the affected Account's
investment in the Trust and terminate this Agreement with respect to such
Account; provided, however, that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable conflict
as determined by a majority of the disinterested Trustees. Any such withdrawal
and termination must take place within six (6) months after the Trust gives
written notice that this provision is being implemented. Until the end of such
six (6) month period, the Trust shall continue to accept and implement orders by
the Company for the purchase and redemption of shares of the Trust.
4.5 If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with a
majority of other state regulators, then the Company will withdraw the affected
Account's investment in the Trust and terminate this Agreement with respect to
such Account within six (6) months after the Trustees inform the Company in
writing that it has determined that such decision has created an irreconcilable
material conflict; provided, however, that such withdrawal and termination shall
be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested Trustees. Until the
end of such six (6) month period, the Trust shall continue to accept and
implement orders by the Company for the purchase and redemption of shares of the
Trust.
4.6 For purposes of Sections 4.3 through 4.6 of this Agreement, a
majority of the disinterested Trustees shall determine whether any proposed
action adequately remedies any irreconcilable material conflict, but in no event
will the Trust be required to establish a new funding medium for the Contracts.
In the event that the Trustees determine that any proposed action does not
adequately remedy any irreconcilable material conflict, then the Company will
withdraw the Account's investment in the Trust and terminate this Agreement
within six (6) months after the Trustees inform the Company in writing of the
foregoing determination; provided, however, that such withdrawal and termination
shall be limited to the extent required by any such material irreconcilable
conflict as determined by a majority of the disinterested Trustees.
4.7 The Company shall at least annually submit to the Trustees such
reports, materials or data as the Trustees may reasonably request so that the
Trustees may fully carry out the duties imposed upon them by the Shared Funding
Exemptive Order, and said reports, materials and data shall be submitted more
frequently if reasonably deemed appropriate by the Trustees.
4.8 If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended,
or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
1940 Act or the rules promulgated thereunder with respect to mixed or shared
funding (as defined in the Shared Funding Exemptive Order) on terms and
conditions materially different from those contained in the Shared Funding
Exemptive Order, then the Trust and/or the Participating Insurance Companies, as
appropriate, shall take such steps as may be necessary to comply with Rules 6e-2
and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such rules are
applicable.
ARTICLE V.
INDEMNIFICATION
5.1 Indemnification By the Company
(a) The Company agrees to indemnify and hold harmless
the Underwriter, the Trust and each of its Trustees, officers,
employees and agents and each person, if any, who controls the
Trust within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" and individually the
"Indemnified Party" for purposes of this Article V) against
any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the
Company, which consent shall not be unreasonably withheld) or
expenses (including the reasonable costs of investigating or
defending any alleged loss, claim, damage, liability or
expense and reasonable legal counsel fees incurred in
connection therewith) (collectively, "Losses"), to which the
Indemnified Parties may become subject under any statute or
regulation, or at common law or otherwise, insofar as such
Losses are related to the sale or acquisition of Trust Shares
or the Contracts and
(i) arise out of or are based upon any
untrue statements or alleged untrue statements of any
material fact contained in a disclosure document for
the Contracts or in the Contracts themselves or in
sales literature generated or approved by the Company
on behalf of the Contracts or Accounts (or any
amendment or supplement to any of the foregoing)
(collectively, "Company Documents" for the purposes
of this Article V), or arise out of or are based upon
the omission or the alleged omission to state therein
a material fact required to be stated therein or
necessary to make the statements therein not
misleading, provided that this indemnity shall not
apply as to any Indemnified Party if such statement
or omission or such alleged statement or omission was
made in reliance upon and was accurately derived from
written information furnished to the Company by or on
behalf of the Trust for use in Company Documents or
otherwise for use in connection with the sale of the
Contracts or Trust shares; or
(ii) arise out of or result from statements
or representations (other than statements or
representations contained in and accurately derived
from Trust Documents as defined in Section 5.2
(a)(i)) or wrongful conduct of the Company or persons
under its control, with respect to the sale or
acquisition of the Contracts or Trust shares; or
(iii) arise out of or result from any untrue
statement or alleged untrue statement of a material
fact contained in Trust Documents as defined in
Section 5.2(a)(i) or the omission or alleged omission
to state therein a material fact required to be
stated therein or necessary to make the statements
therein not misleading if such statement or omission
was made in reliance upon and accurately derived from
written information furnished to the Trust by or on
behalf of the Company; or
(iv) arise out of or result from any failure
by the Company to provide the services or furnish the
materials required under the terms of this Agreement;
or
(v) arise out of or result from any material
breach of any representation and/or warranty made by
the Company in this Agreement or arise out of or
result from any other material breach of this
Agreement by the Company.
(b) The Company shall not be liable under this
indemnification provision with respect to any Losses to which
an Indemnified Party would otherwise be subject by reason of
such Indemnified Party's willful misfeasance, bad faith, or
gross negligence in the performance of such Indemnified
Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations and duties under this
Agreement or to the Trust or Underwriter, whichever is
applicable. The Company shall also not be liable under this
indemnification provision with respect to any claim made
against an Indemnified Party unless such Indemnified Party
shall have notified the Company in writing within a reasonable
time after the summons or other first legal process giving
information of the nature of the claim shall have been served
upon such Indemnified Party (or after such Indemnified Party
shall have received notice of such service on any designated
agent), but failure to notify the Company of any such claim
shall not relieve the Company from any liability which it may
have to the Indemnified Party against whom such action is
brought otherwise than on account of this indemnification
provision. In case any such action is brought against the
Indemnified Parties, the Company shall be entitled to
participate, at its own expense, in the defense of such
action. Unless the Indeminfied Party releases the Company from
any further obligations under this Section 5.1, the Company
also shall be entitled to assume the defense thereof, with
counsel satisfactory to the party named in the action. After
notice from the Company to such party of the Company's
election to assume the defense thereof, the Indemnified Party
shall bear the fees and expenses of any additional counsel
retained by it, and the Company will not be liable to such
party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in
connection with the defense thereof other than reasonable
costs of investigation.
(c) The Indemnified Parties will promptly notify the
Company of the commencement of any litigation or proceedings
against them in connection with the issuance or sale of the
Trust shares or the Contracts or the operation of the Trust.
5.2 Indemnification By The Underwriter
(a) The Underwriter agrees to indemnify and hold harmless the
Company, the underwriter of the Contracts and each of its directors and
officers and each person, if any, who controls the Company within the
meaning of Section 15 of the 1933 Act (collectively, the "Indemnified
Parties" and individually an "Indemnified Party" for purposes of this
Section 5.2) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the
Underwriter, which consent shall not be unreasonably withheld) or
expenses (including the reasonable costs of investigating or defending
any alleged loss, claim, damage, liability or expense and reasonable
legal counsel fees incurred in connection therewith) (collectively,
"Losses") to which the Indemnified Parties may become subject under any
statute, at common law or otherwise, insofar as such Losses are related
to the sale or acquisition of the Trust's Shares or the Contracts and:
(i) arise out of or are based upon any untrue
statements or alleged untrue statements of any material fact
contained in the Registration Statement, prospectus or sales
literature of the Trust (or any amendment or supplement to any
of the foregoing) (collectively, the "Trust Documents") or
arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify shall
not apply as to any Indemnified Party if such statement or
omission of such alleged statement or omission was made in
reliance upon and in conformity with information furnished to
the Underwriter or Trust by or on behalf of the Company for
use in the Registration Statement or prospectus for the Trust
or in sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the Contracts
or Trust shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or representations
contained in the disclosure documents or sales literature for
the Contracts not supplied by the Underwriter or persons under
its control) or wrongful conduct of the Trust, Adviser or
Underwriter or persons under their control, with respect to
the sale or distribution of the Contracts or Trust shares; or
(iii) arise out of any untrue statement or alleged
untrue statement of a material fact contained in a disclosure
document or sales literature covering the Contracts, or any
amendment thereof or supplement thereto, or the omission or
alleged omission to state therein a material fact required to
be stated therein or necessary to make the statement or
statements therein not misleading, if such statement or
omission was made in reliance upon information furnished to
the Company by or on behalf of the Trust; or
(iv) arise as a result of any failure by the Trust to
provide the services and furnish the materials under the terms
of this Agreement (including a failure, whether unintentional
or in good faith or otherwise, to comply with the
qualification representation specified in Section 3.7 of this
Agreement and the diversification requirements specified in
Section 3.6 of this Agreement); or
(v) arise out of or result from any material breach
of any representation and/or warranty made by the Underwriter
in this Agreement or arise out of or result from any other
material breach of this Agreement by the Underwriter; as
limited by and in accordance with the provisions of Sections
5.2(b) and 5.2(c) hereof.
(b) The Underwriter shall not be liable under this
indemnification provision with respect to any Losses to which an
Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or gross negligence
in the performance of such Indemnified Party's duties or by reason of
such Indemnified Party's reckless disregard of obligations and duties
under this Agreement or to each Company or the Account, whichever is
applicable.
(c) The Underwriter shall not be liable under this
indemnification provision with respect to any claim made against an
Indemnified Party unless such Indemnified Party shall have notified the
Underwriter in writing within a reasonable time after the summons or
other first legal process giving information of the nature of the claim
shall have been served upon such Indemnified Party (or after such
Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify the Underwriter of any such
claim shall not relieve the Underwriter from any liability which it may
have to the Indemnified Party against whom such action is brought
otherwise than on account of this indemnification provision. In case
any such action is brought against the Indemnified Parties, the
Underwriter will be entitled to participate, at its own expense, in the
defense thereof. Unless the Indemified Party releases the Underwriter
from any further obligations under this Section 5.2, the Underwriter
also shall be entitled to assume the defense thereof, with counsel
satisfactory to the party named in the action. After notice from the
Underwriter to such party of the Underwriter's election to assume the
defense thereof, the Indemnified Party shall bear the expenses of any
additional counsel retained by it, and the Underwriter will not be
liable to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
(d) The Company agrees promptly to notify the Underwriter of
the commencement of any litigation or proceedings against it or any of
its officers or directors in connection with the issuance or sale of
the Contracts or the operation of each Account.
5.3 Indemnification By The Trust
(a) The Trust agrees to indemnify and hold harmless the
Company, and each of its directors and officers and each person, if
any, who controls the Company within the meaning of Section 15 of the
1933 Act (collectively, the "Indemnified Parties" for purposes of this
Section 5.3) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the
Trust, which consent shall not be unreasonably withheld) or litigation
(including legal and other expenses) to which the Indemnified Parties
may become subject under any statute, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) or settlements result from the gross
negligence, bad faith or willful misconduct of the Board or any member
thereof, are related to the operations of the Trust, and arise out of
or result from any material breach of any representation and/or
warranty made by the Trust in this Agreement or arise out of or result
from any other material breach of this Agreement by the Trust; as
limited by and in accordance with the provisions of Section 5.3(b) and
5.3(c) hereof. It is understood and expressly stipulated that neither
the holders of shares of the Trust nor any Trustee, officer, agent or
employee of the Trust shall be personally liable hereunder, nor shall
any resort be had to other private property for the satisfaction of any
claim or obligation hereunder, but the Trust only shall be liable.
(b) The Trust shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation incurred or assessed against any Indemnified Party as such
may arise from such Indemnified Party's willful misfeasance, bad faith,
or gross negligence in the performance of such Indemnified Party's
duties or by reason of such Indemnified Party's reckless disregard of
obligations and duties under this Agreement or to the Company, the
Trust, the Underwriter or each Account, whichever is applicable.
(c) The Trust shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party
unless such Indemnified Party shall have notified the Trust in writing
within a reasonable time after the summons or other first legal process
giving information of the nature of the claims shall have been served
upon such Indemnified Party (or after such Indemnified Party shall have
received notice of such service on any designated agent), but failure
to notify the Trust of any such claim shall not relieve the Trust from
any liability which it may have to the Indemnified Party against whom
such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against
the Indemnified Parties, the Trust will be entitled to participate, at
its own expense, in the defense thereof. Unless the Indemnified Party
releases the Trust from any further obligations under this Section 5.3,
the Trust also shall be entitled to assume the defense thereof, with
counsel satisfactory to the party named in the action. After notice
from the Trust to such party of the Trust's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses
of any additional counsel retained by it, and the Trust will not be
liable to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
(d) The Company and the Underwriter agree promptly to notify
the Trust of the commencement of any litigation or proceedings against
it or any of its respective officers or directors in connection with
this Agreement, the issuance or sale of the Contracts, with respect to
the operation of either the Account, or the sale or acquisition of
share of the Trust.
ARTICLE VI.
TERMINATION
6.1 This Agreement may be terminated by any party in its entirety or
with respect to one, some or all Portfolios for any reason by ninety (90) days
advance written notice delivered to the other parties, and shall terminate
immediately in the event of its assignment, as that term is used in the 1940
Act.
6.2 This Agreement may be terminated immediately by either the Trust or
the Underwriter upon written notice to the Company if:
(a) the Company notifies the Trust or the Underwriter that
the exemption from registration under Section 3(c) of the 1940 Act no
longer applies, or might not apply in the future, to the unregistered
Accounts, or that the exemption from registration under Section 4(2) or
Regulation D promulgated under the 1933 Act no longer applies or might
not apply in the future, to interests under the unregistered Contracts;
or
(b) either one or both the Trust or the Underwriter
respectively, shall determine, in their sole judgment exercised in good
faith, that the Company has suffered a material adverse change in its
business, operations, financial condition or prospects since the date
of this Agreement or is the subject of material adverse publicity; or
(c) the Company gives the Trust and the Underwriter the
written notice specified in Section 1.10 hereof and at the same time
such notice was given there was no notice of termination outstanding
under any other provision of this Agreement; provided, however, that
any termination under this Section 6.2(c) shall be effective forty-five
(45) days after the notice specified in section 1.10 was given; or
6.3 If this Agreement is terminated for any reason, except under
Article IV (Potential Conflicts) above, the Trust shall, at the option of the
Company, continue to make available additional shares of any Portfolio and
redeem shares of any Portfolio pursuant to all of the terms and conditions of
this Agreement for all Contracts in effect on the effective date of termination
of this Agreement. If this Agreement is terminated pursuant to Article IV, the
provisions of Article IV shall govern.
6.4 The provisions of Articles II (Representations and Warranties) and
V (Indemnification) shall survive the termination of this Agreement. All other
applicable provisions of this Agreement shall survive the termination of this
Agreement, as long as shares of the Trust are held on behalf of Contract owners
in accordance with Section 6.3, except that the Trust and the Underwriter shall
have no further obligation to sell Trust shares with respect to Contracts issued
after termination.
6.5 The Company shall not redeem Trust shares attributable to the
Contracts (as opposed to Trust shares attributable to the Company's assets held
in the Account) except (i) as necessary to implement Contract owner initiated or
approved transactions, (ii) as required by state and/or federal laws or
regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption"), or (iii) as
permitted by an order of the SEC pursuant to Section 26(b) of the 1940 Act. Upon
request, the Company will promptly furnish to the Trust and the Underwriter the
opinion of counsel for the Company (which counsel shall be reasonably
satisfactory to the Trust and the Underwriter) to the effect that any redemption
pursuant to clause (ii) above is a Legally Required Redemption. Furthermore,
except in cases where permitted under the terms of the Contracts, the Company
shall not prevent Contract owners from allocating payments to a Portfolio that
was otherwise available under the Contracts without first giving the Trust or
the Underwriter 90 days notice of it s intention to do so.
ARTICLE VII.
NOTICES.
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Trust:
Templeton Variable Products Series Fund
500 E. Broward Boulevard
Fort Lauderdale, FL 33394-3091
Attention: Barbara J. Green, Trust Secretary
WITH A COPY TO:
Franklin Resources
777 Mariners Island Boulevard
San Mateo, CA 94404
Attention: Karen L. Skidmore, Associate General
Counsel
If to the Underwriter:
Franklin Templeton Distributors, Inc.
777 Mariners Island Boulevard
San Mateo, CA 94404
Attention: Deborah R. Gatzek, Senior Vice President
and Assistant Secretary
If to the Company:
Valley Forge Life Insurance Company
CNA Plaza
333 S. Wabash, 43 South
Chicago, IL 60685
Attention: G. Stephen Wastek, Esq.
ARTICLE VIII.
MISCELLANEOUS
8.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
8.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
8.3 If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
8.4 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of Florida. It
shall also be subject to the provisions of the federal securities laws and the
rules and regulations thereunder and to any orders of the SEC on behalf of the
Trust granting exemptive relief therefrom and the conditions of such orders.
Copies of any such orders shall be promptly forwarded by the Trust to the
Company.
8.5 The parties to this Agreement acknowledge and agree that all
liabilities of the Trust arising, directly or indirectly, under this Agreement,
of any and every nature whatsoever, shall be satisfied solely out of the assets
of the Trust and that no Trustee, officer, agent or holder of shares of
beneficial interest of the Trust shall be personally liable for any such
liabilities.
8.6 Each party shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD, and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
8.7 Each party hereto shall treat as confidential the names and
addresses of the Contract owners and all information reasonably identified as
confidential in writing by any other party hereto, and, except as permitted by
this Agreement or as required by legal process or regulatory authorities, shall
not disclose, disseminate, or utilize such names and addresses and other
confidential information until such time as they may come into the public
domain, without the express written consent of the affected party. Without
limiting the foregoing, no party hereto shall disclose any information that such
party has been advised is proprietary, except such information that such party
is required to disclose by any appropriate governmental authority (including,
without limitation, the SEC, the NASD, and state securities and insurance
regulators).
8.8 The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to under
state and federal laws.
8.9 The parties to this Agreement acknowledge and agree that this
Agreement shall not be exclusive in any respect, except as provided in Section
1.10.
8.10 Neither this Agreement nor any rights or obligations hereunder may
be assigned by either party without the prior written approval of the other
party.
8.11 No provisions of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by both
parties.
IN WITNESS WHEREOF, the parties have caused their duly
authorized officers to execute this Participation Agreement as of the date and
year first above written.
The Company:
Valley Forge Life Insurance Company
By its authorized officer
By: S/David L. Stone
---------------------
Name: David L. Stone
Title: Vice President
The Trust:
Templeton Variable Products Series Fund
By its authorized officer
By: S/Karen L. Skidmore
-----------------------
Name: Karen L. Skidmore
Title: Assistant Vice President, Assistant Secretary
The Underwriter:
Franklin Templeton Distributors, Inc.
By its authorized officer
By: S/Philip J. Kearns
-------------------------
Name: Philip J. Kearns
Title: Vice President
<TABLE>
<CAPTION>
SCHEDULE A
CONTRACTS ISSUED BY VALLEY FORGE LIFE
INSURANCE COMPANY
Contract 1 Contract 2 Contract 3
<S> <C> <C> <C>
CONTRACT/PRODUCT CNA Capital Select VA CNA Capital Select VUL
Name and Type
REGISTERED (Y/N) Yes Yes
SEC REGISTRATION NUMBER--1933 333-01087 333-01949
Act
REPRESENTATIVE V100-1128-A V100-1132-A
Form Numbers
SEPARATE ACCOUNT Valley Forge Life Insurance Valley Forge Life Insurance
Name/Date Company Variable Annuity Company Variable Life Separate
Established Separate Account / October 15, 1995 Account / October 15, 1995
SEC REGISTRATION
Number-1940
Act
TEMPLETON TVP--Templeton Developing TVP--Templeton Developing
Variable Markets Fund-Class 2-Templeton Markets Fund-Class 2-Templeton
Products Series Asset Management, Ltd. Asset Management, Ltd.
Fund ("TVP") -
Portfolios and VP-Templeton Asset Allocation TVP-Templeton Asset Allocation
Classes - Adviser T Fund-Class 2-Templeton Fund-Class 2-Templeton
Investment Counsel, Inc. Investment Counsel, Inc.
</TABLE>
SCHEDULE B
OTHER PORTFOLIOS AVAILABLE UNDER THE CONTRACTS
FIDELITY
MFS
FEDERATED
FRED ALGER
JANUS
SOGEN
VAN ECK
SCHEDULE C
RULE 12B-1 PLANS
COMPENSATION SCHEDULE
Each Portfolio named below shall pay the following amounts pursuant to the terms
and conditions referenced below under its Class 2 Rule 12b-1 Distribution Plan,
stated as a percentage per year of Class 2's average daily net assets
represented by shares of Class 2.
Portfolio Name Maximum Annual Payment Rate
- -------------- ---------------------------
Templeton Developing Markets Fund 0.25%
Templeton Asset Allocation Fund 0.25%
Agreement Provisions
If the Company, on behalf of any Account, purchases Trust Portfolio
shares (Eligible Shares") which are subject to a Rule 12b-1 Plan adopted under
the 1940 Act (the "Plan"), the Company may participate in the Plan.
To the extent the Company or its affiliates, agents or designees
(collectively "you") you provide administrative and other services which assist
in the promotion and distribution of Eligible Shares or Variable Contracts
offering Eligible Shares, the Underwriter, the Trust or their affiliates
(collectively, "we") may pay you a Rule 12b-1 fee. "Administrative and other
services" may include, but are not limited to, furnishing personal services to
owners of Contracts which may invest in Eligible Shares ("Contract Owners"),
answering routine inquiries regarding a Portfolio, coordinating responses to
Contract Owner inquiries regarding the Portfolios, maintaining such accounts or
providing such other enhanced services as a Trust Portfolio or Contract may
require, maintaining customer accounts and records, or providing other services
eligible for service fees as defined under NASD rules. Your acceptance of such
compensation is your acknowledgment that eligible services have been rendered.
All Rule 12b-1 fees, shall be based on the value of Eligible Shares owned by the
Company on behalf of its Accounts, and shall be calculated on the basis and at
the rates set forth in the Compensation Schedule stated above. The aggregate
annual fees paid pursuant to each Plan shall not exceed the amounts stated as
the "annual maximums" in the Portfolio's prospectus, unless an increase is
approved by shareholders as provided in the Plan. These maximums shall be a
specified percent of the value of a Portfolio's net assets attributable to
Eligible Shares owned by the Company on behalf of its Accounts (determined in
the same manner as the Portfolio uses to compute its net assets as set forth in
its effective Prospectus).
You shall furnish us with such information as shall reasonably be
requested by the Trust's Boards of Trustees ("Trustees") with respect to the
Rule 12b-1 fees paid to you pursuant to the Plans. We shall furnish to the
Trustees, for their review on a quarterly basis, a written report of the amounts
expended under the Plans and the purposes for which such expenditures were made.
The Plans and provisions of any agreement relating to such Plans must
be approved annually by a vote of the Trustees, including the Trustees who are
not interested persons of the Trust and who have no financial interest in the
Plans or any related agreement ("Disinterested Trustees"). Each Plan may be
terminated at any time by the vote of a majority of the Disinterested Trustees,
or by a vote of a majority of the outstanding shares as provided in the Plan, on
sixty (60) days' written notice, without payment of any penalty. The Plans may
also be terminated by any act that terminates the Underwriting Agreement between
the underwriter and the Trust, and/or the management or administration agreement
between Franklin Advisers, Inc. or Templeton Investment Counsel, Inc. or their
affiliates and the Trust. Continuation of the Plans is also conditioned on
Disinterested Trustees being ultimately responsible for selecting and nominating
any new Disinterested Trustees. Under Rule 12b-1, the Trustees have a duty to
request and evaluate, and persons who are party to any agreement related to a
Plan have a duty to furnish, such information as may reasonably be necessary to
an informed determination of whether the Plan or any agreement should be
implemented or continued. Under Rule 12b-1, the Trust is permitted to implement
or continue Plans or the provisions of any agreement relating to such Plans from
year-to-year only if, based on certain legal considerations, the Trustees are
able to conclude that the Plans will benefit each affected Trust Portfolio and
class. Absent such yearly determination, the Plans must be terminated as set
forth above. In the event of the termination of the Plans for any reason, the
provisions of this Schedule C relating to the Plans will also terminate.
Any obligation assumed by the Trust pursuant to this Agreement shall be limited
in all cases to the assets of the Trust and no person shall seek satisfaction
thereof from shareholders of the Trust. You agree to waive payment of any
amounts payable to you by Underwriter under a Plan until such time as the
Underwriter has received such fee from the Fund.
The provisions of the Plans shall control over the provisions of the
Participation Agreement, including this Schedule C, in the event of any
inconsistency.
You agree to provide complete disclosure as required by all applicable statutes,
rules and regulations of all rule 12b-1 fees received from us in the prospectus
of the contracts.
PARTICIPATION AGREEMENT
AMONG
VALLEY FORGE LIFE INSURANCE COMPANY,
CNA INVESTOR SERVICES, INC.,
ALLIANCE CAPITAL MANAGEMENT L.P.
AND
ALLIANCE FUND DISTRIBUTORS, INC.
DATED AS OF
DECEMBER 1, 1999
PARTICIPATION AGREEMENT
THIS AGREEMENT, made and entered into as of the 1st day of December, 1999
("Agreement"), by and among Valley Forge Life Insurance Company, a Pennsylvania
life insurance company ("Insurer") (on behalf of itself and its "Separate
Account," defined below); CNA Investor Services, Inc., an Illinois corporation
("Contracts Distributor"), the principal underwriter with respect to the
Contracts referred to below; Alliance Capital Management L.P., a Delaware
limited partnership ("Adviser"), the investment adviser of the Fund referred to
below; and Alliance Fund Distributors, Inc., a Delaware corporation
(Distributor"), the Fund's principal underwriter (collectively, the "Parties"),
WITNESSETH THAT:
WHEREAS Insurer, the Distributor, and Alliance Variable Products Series
Fund, Inc. (the "Fund") desires that Class B shares of the Fund's Growth and
Income and Premiere Growth Portfolios (the "Portfolios"; reference herein to the
"Fund" includes reference to each Portfolio to the extent the context requires)
be made available by Distributor to serve as underlying investment media for
variable life and annuity contracts (the "Contracts"), to be offered through
Contracts Distributor and other registered broker-dealer firms as agreed to by
Insurer and Contracts Distributor; and
WHEREAS the Contracts provide for the allocation of net amounts received by
Insurer to separate series (the "Divisions"; reference herein to the "Separate
Account" includes reference to each Division to the extent the context requires)
of the Separate Account for investment in Class B shares of corresponding
Portfolios of the Fund that are made available through the Separate Account to
act as underlying investment media,
NOW, THEREFORE, in consideration of the mutual benefits and promises
contained herein, the Fund and Distributor will make Class B shares of the
Portfolios available to Insurer for this purpose at net asset value and with no
sales charges, all subject to the following provisions:
Section 1. Additional Portfolios
The Fund has and may, from time to time, add additional Portfolios, which
will become subject to this Agreement, if, upon the written consent of each of
the Parties hereto, they are made available as investment media for the
Contracts.
Section 2. Processing Transactions
2.1 Timely Pricing and Orders.
The Adviser or its designated agent will provide closing net asset value,
dividend and capital gain information for each Portfolio to Insurer at the close
of trading on each day (a "Business Day") on which (a) the New York Stock
Exchange is open for regular trading, (b) the Fund calculates the Portfolio's
net asset value and (c) Insurer is open for business. The Fund or its designated
agent will use its best efforts to provide this information by 6:00 p.m.,
Eastern time. Insurer will use these data to calculate unit values, which in
turn will be used to process transactions that receive that same Business Day's
Separate Account Division's unit values. Such Separate Account processing will
be done the same evening, and corresponding orders with respect to Fund shares
will be placed the morning of the following Business Day. Insurer will use its
best efforts to place such orders with the Fund by 10:00 a.m., Eastern time.
2.2 Timely Payments.
Insurer will transmit orders for purchases and redemptions of Fund shares
to Distributor, and will wire payment for net purchases to a custodial account
designated by the Fund on the day the order for Fund shares is placed, to the
extent practicable. Payment for net redemptions will be wired by the Fund to an
account designated by Insurer on the same day as the order is placed, to the
extent practicable, and in any event be made within six calendar days after the
date the order is placed in order to enable Insurer to pay redemption proceeds
within the time specified in Section 22(e) of the Investment Company Act of
1940, as amended (the "1940 Act").
2.3 Redemption in Kind.
The Fund reserves the right to pay any portion of a redemption in kind of
portfolio securities, if the Fund's board of directors (the "Board of
Directors") determines that it would be detrimental to the best interests of
shareholders to make a redemption wholly in cash.
2.4 Applicable Price.
The Parties agree that Portfolio share purchase and redemption orders
resulting from Contract owner purchase payments, surrenders, partial
withdrawals, routine withdrawals of charges, or other transactions under
Contracts will be executed at the net asset values as determined as of the close
of regular trading on the New York Stock Exchange on the Business Day that
Insurer receives such orders and processes such transactions, which, Insurer
agrees shall occur not earlier than the Business Day prior to Distributor's
receipt of the corresponding orders for purchases and redemptions of Portfolio
shares. For the purposes of this section, Insurer shall be deemed to be the
agent of the Fund for receipt of such orders from holders or applicants of
contracts, and receipt by Insurer shall constitute receipt by the Fund. All
other purchases and redemptions of Portfolio shares by Insurer, will be effected
at the net asset values next computed after receipt by Distributor of the order
therefor, and such orders will be irrevocable. Insurer hereby elects to reinvest
all dividends and capital gains distributions in additional shares of the
corresponding Portfolio at the record-date net asset values until Insurer
otherwise notifies the Fund in writing, it being agreed by the Parties that the
record date and the payment date with respect to any dividend or distribution
will be the same Business Day.
Section 3. Costs and Expenses
3.1 General.
Except as otherwise specifically provided herein, each Party will bear all
expenses incident to its performance under this Agreement.
3.2 Registration.
The Fund will bear the cost of its registering as a management investment
company under the 1940 Act and registering its shares under the Securities Act
of 1933, as amended (the "1933 Act"), and keeping such registrations current and
effective; including, without limitation, the preparation of and filing with the
SEC of Forms N-SAR and Rule 24f-2 Notices respecting the Fund and its shares and
payment of all applicable registration or filing fees with respect to any of the
foregoing. Insurer will bear the cost of registering the Separate Account as a
unit investment trust under the 1940 Act and registering units of interest under
the Contracts under the 1933 Act and keeping such registrations current and
effective; including, without limitation, the preparation and filing with the
SEC of Forms N-SAR and Rule 24f-2 Notices respecting the Separate Account and
its units of interest and payment of all applicable registration or filing fees
with respect to any of the foregoing.
3.3 Other (Non-Sales-Related) Expenses.
The Fund will bear the costs of preparing, filing with the SEC and setting
for printing the Fund's prospectus, statement of additional information and any
amendments or supplements thereto (collectively, the "Fund Prospectus"),
periodic reports to shareholders, Fund proxy material and other shareholder
communications and any related requests for voting instructions from
Participants (as defined below). Insurer will bear the costs of preparing,
filing with the SEC and setting for printing, the Separate Account's prospectus,
statement of additional information and any amendments or supplements thereto
(collectively, the "Separate Account Prospectus"), any periodic reports to
owners, annuitants or participants under the Contracts (collectively,
"Participants"), and other Participant communications. The Fund and Insurer each
will bear the costs of printing in quantity and delivering to existing
Participants the documents as to which it bears the cost of preparation as set
forth above in this Section 3.3, it being understood that reasonable cost
allocations will be made in cases where any such Fund and insurer documents are
printed or mailed on a combined or coordinated basis. If requested by Insurer,
the Fund will provide annual Prospectus text to Insurer on diskette for printing
and binding with the Separate Account Prospectus.
3.4 Other Sales-Related Expenses.
Expenses of distributing the Portfolio's shares and the Contracts will be
paid by Contracts Distributor and other parties, as they shall determine by
separate agreement.
3.5 Parties to Cooperate.
The Adviser, Insurer, Contracts Distributor, and Distributor each agrees to
cooperate with the others, as applicable, in arranging to print, mail and/or
deliver combined or coordinated prospectuses or other materials of the Fund and
Separate Account.
Section 4. Legal Compliance
4.1 Tax Laws
(a) The Adviser will use its best efforts to qualify and to maintain
qualification of each Portfolio as a regulated investment company ("RIC") under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and
the Adviser or Distributor will notify Insurer immediately upon having a
reasonable basis for believing that a Portfolio has ceased to so qualify or that
it might not so qualify in the future.
(b) Insurer represents that it believes, in good faith, that the Contracts
will be treated as annuity and life insurance contracts under applicable
provisions of the Code and that it will make every effort to maintain such
treatment. Insurer will notify the Fund and Distributor immediately upon having
a reasonable basis for believing that any of the Contacts have ceased to be so
treated of that they might not be so treated in the future.
(c) The Fund will use its best efforts to comply and to maintain each
Portfolio's compliance with the diversification requirements set forth in
Section 817(h) of the Code and Section 1.817-5(b) of the regulations under the
Code, and the Fund, Adviser or Distributor will notify Insurer immediately upon
having a reasonable basis for believing that a Portfolio has ceased to so comply
or that a Portfolio might not so comply in the future.
(d) Insurer represents that it believes, in good faith, that the Separate
Account is a "segregated asset account" and that interests in the Separate
Account are offered exclusively through the purchase of or transfer into a
"variable account," within the meaning of such terms under Section 817(h) of the
Code and the regulations thereunder. Insurer will make every effort to continue
to meet such definitional requirements, and it will notify the Fund and
Distributor immediately upon having a reasonable basis for believing that such
requirements have ceased to be met or that they might not be met in the future.
(e) The Adviser will manage the Fund as a RIC in compliance with Subchapter
M of the Code and will use its best efforts to manage to be in compliance with
Section 817(h) of the Code and regulations thereunder. The Fund has adopted and
will maintain procedures for ensuring that the Fund is managed in compliance
with Subchapter M and Section 817(h) and regulations thereunder.
(f) Should the Distributor or Adviser become aware of a failure of Fund, or
any of its Portfolios, to be in compliance with Subchapter M of the Code or
Section 817(h) of the Code and regulations thereunder, they represent and agree
that they will immediately notify Insurer of such in writing.
4.2 Insurance and Certain Other Laws.
(a) The Adviser will use its best efforts to cause the Fund to comply with
any applicable state insurance laws or regulations, to the extent specifically
requested in writing by Insurer. If it cannot comply, it will so notify Insurer
in writing.
(b) Insurer represents and warrants that (i) it is an insurance company
duly organized, validly existing and in good standing under the laws of the
State of Pennsylvania and has full corporate power, authority and legal right to
execute, deliver and perform its duties and comply with its obligations under
this Agreement, (ii) it has legally and validly established and maintains the
Separate Account as a segregated asset account under Illinois State Law, and
(iii) the Contracts comply in all material respects with all other applicable
federal and state laws and regulations.
(c) Insurer and Contracts Distributor represent and warrant that Contracts
Distributor is a business corporation duly organized, validly existing, and in
good standing under the laws of the State of Illinois and has full corporate
power, authority and legal right to execute, deliver, and perform its duties and
comply with its obligations under this Agreement.
(d) Distributor represents and warrants that it is a business corporation
duly organized, validly existing, and in good standing under the laws of the
State of Delaware and has full corporate power, authority and legal right to
execute, deliver, and perform its duties and comply with its obligations under
this Agreement.
(e) Distributor represents and warrants that the Fund is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
Maryland and has full power, authority and legal right to execute, deliver, and
perform its duties and comply with its obligations under this Agreement.
(f) Adviser represents and warrants that it is a limited partnership duly
organized, validly existing, and in good standing under the laws of the State of
Delaware and has full power, authority and legal right to execute, deliver, and
perform its duties and comply with its obligations under this Agreement.
4.3 Securities Laws.
(a) Insurer represents and warrants that (i) interests in the Separate
Account pursuant to the Contracts will be registered under the 1933 Act to the
extent required by the 1933 Act and the Contracts will be duly authorized for
issuance and sold in compliance with applicable state law, (ii) the Separate
Account is and will remain registered under the 1940 Act to the extent required
by the 1940 Act, (iii) the Separate Account does and will comply in all material
respects with the requirements of the 1940 Act and the rules thereunder, (iv)
the Separate Account's 1933 Act registration statement relating to the
Contracts, together with any amendments thereto, will, at all times comply in
all material respects with the requirements of the 1933 Act and the rules
thereunder, and (v) the Separate Account Prospectus will at all times comply in
all material respects with the requirements of the 1933 Act and the rules
thereunder.
(b) The Adviser and Distributor represent and warrant that (i) Fund shares
sold pursuant to this Agreement will be registered under the 1933 Act to the
extent required by the 1933 Act and duly authorized for issuance and sold in
compliance with Maryland law, (ii) the Fund is and will remain registered under
the 1940 Act to the extent required by the 1940 Act, (iii) the Fund will amend
the registration statement for its shares under the 1933 Act and itself under
the 1940 Act from time to time as required in order to effect the continuous
offering of its shares, (iv) the Fund does and will comply in all material
respects with the requirements of the 1940 Act and the rules thereunder, (v) the
Fund's 1933 Act registration statement, together with any amendments thereto,
will at all times comply in all material respects with the requirements of the
1933 Act and rules thereunder, and (vi) the Fund Prospectus will at all times
comply in all material respects with the requirements of the 1933 Act and the
rules thereunder.
(c) The Fund will register and qualify its shares for sales in accordance
with the laws of any state or other jurisdiction only if and to the extent
reasonably deemed advisable by the Fund, Insurer or any other life insurance
company utilizing the Fund.
(d) Distributor and Contracts Distributor each represents and warrants that
it is registered as a broker-dealer with the SEC under the Securities Exchange
Act of 1934, as amended, and is a member in good standing of the National
Association of Securities Dealers Inc. (the "NASD").
4.4. Notice of Certain Proceedings and Other Circumstances.
(a) Distributor or the Fund shall immediately notify Insurer of (i) the
issuance by any court or regulatory body of any stop order, cease and desist
order, or other similar order with respect to the Fund's registration statement
under the 1933 Act or the Fund Prospectus, (ii) any request by the SEC for any
amendment to such registration statement or Fund Prospectus, (iii) the
initiation of any proceedings for that purpose or for any other purpose relating
to the registration or offering of the Fund's shares , or (iv) any other action
or circumstances that may prevent the lawful offer or sale of Fund shares in any
state or jurisdiction, including, without limitation, any circumstances in which
(x) the Fund's shares are not registered and, in all material respects, issued
and sold in accordance with applicable state and federal law or (y) such law
precludes the use of such shares as an underlying investment medium of the
Contracts issued or to be issued by Insurer. Distributor and the Fund will make
every reasonable effort to prevent the issuance of any such stop order, cease
and desist order or similar order and, if any such order is issued, to obtain
the lifting thereof at the earliest possible time.
(b) Insurer and Contracts Distributor shall immediately notify the Fund of
(i) the issuance by any court or regulatory body of any stop order, cease and
desist order or similar order with respect to the Separate Account's
registration statement under the 1933 Act relating to the Contracts or the
Separate Account Prospectus, (ii) any request by the SEC for any amendment to
such registration statement or Separate Account Prospectus, (iii) the initiation
of any proceedings for that purpose or for any other purpose relating to the
registration or offering of the Separate Account interests pursuant to the
Contracts, or (iv) any other action or circumstances that may prevent the lawful
offer or sale of said interests in any state or jurisdiction, including, without
limitation, any circumstances in which said interests are not registered and, in
all material respects, issued and sold in accordance with applicable state and
federal law. Insurer and Contracts Distributor will make every reasonable effort
to prevent the issuance of any such stop order, cease and desist order or
similar order and, if any such order is issued, to obtain the lifting thereof at
the earliest possible time.
4.5 Insurer to Provide Documents.
Upon request, Insurer will provide the Fund and the Distributor one
complete copy of SEC registration statements, Separate Account Prospectuses,
reports, any preliminary and final voting instruction solicitation material,
applications for exemptions, requests for no-action letters, and amendments to
any of the above, that relate to the Separate Account or the Contracts,
contemporaneously with the filing of such document with the SEC or other
regulatory authorities.
4.6 Fund to Provide Documents.
Upon request, the Fund will provide to Insurer one complete copy of SEC
registration statements, Fund Prospectuses, reports, any preliminary and final
proxy material, applications for exemptions, requests for no-action letters, and
all amendments to any of the above, that relate to the Fund or its shares,
contemporaneously with the filing of such document with the SEC or other
regulatory authorities.
Section 5. Mixed and Shared Funding
5.1 General.
The Fund has obtained an order exempting it from certain provisions of the
1940 Act and rules thereunder so that the Fund is available for investment by
certain other entities, including, without limitation, separate accounts funding
variable life insurance policies and separate accounts of insurance companies
unaffiliated with Insurer ("Mixed and Shared Funding Order"). The Parties
recognize that the SEC has imposed terms and conditions for such orders that are
substantially identical to many of the provisions of this Section 5.
5.2 Disinterested Directors.
The Fund agrees that its Board of Directors shall at all times consist of
directors a majority of whom (the "Disinterested Directors") are not interested
persons of Adviser or Distributor within the meaning of Section 2(a)(19) of the
1940 Act.
5.3 Monitoring for Material Irreconcilable Conflicts.
The Fund agrees that its Board of Directors will monitor for the existence
of any material irreconcilable conflict between the interests of the
participants in all separate accounts of life insurance companies utilizing the
Fund, including the Separate Account. Insurer agrees to inform the Board of
Directors of the Fund of the existence of or any potential for any such material
irreconcilable conflict of which it is aware. The concept of a "material
irreconcilable conflict" is not defined by the 1940 Act or the rules thereunder,
but the Parties recognize that such a conflict may arise for a variety of
reasons, including, without limitation:
(a) an action by any state insurance or other regulatory authority;
(b) a change in applicable federal or state insurance, tax, or securities laws
or regulations, or a public ruling, private letter ruling, no-action or
interpretative letter, or any similar action by insurance, tax, or
securities regulatory authorities;
(c) an administrative or judicial decision in any relevant proceeding;
(d) the manner in which the investments of any Portfolio are being managed;
(e) a difference in voting instructions given by variable annuity contract and
variable life insurance contract participants or by participants of
different life insurance companies utilizing the Fund; or
(f) a decision by a life insurance company utilizing the Fund to disregard the
voting instructions of participants.
Insurer will assist the Board of Directors in carrying out its
responsibilities by providing the Board of Directors with all information
reasonably necessary for the Board of Directors to consider any issue raised,
including information as to a decision by Insurer to disregard voting
instructions of Participants.
5.4 Conflict Remedies.
(a) It is agreed that if it is determined by a majority of the members of the
Board of Directors or a majority of the Disinterested Directors that a
material irreconcilable conflict exists, Insurer and the other life
insurance companies utilizing the Fund will, at their own expense and to
the extent reasonably practicable (as determined by a majority of the
Disinterested Directors), take whatever steps are necessary to remedy or
eliminate the material irreconcilable conflict, which steps may include,
but are not limited to:
(i) withdrawing the assets allocable to some or all of the separate
accounts from the Fund or any Portfolio and reinvesting such assets in
a different investment medium, including another Portfolio of the
Fund, or submitting the question whether such segregation should be
implemented to a vote of all affected participants and, as
appropriate, segregating the assets of any particular group (e.g.,
annuity contract owners or participants, life insurance contract
owners or all contract owners and participants of one or more life
insurance companies utilizing the Fund) that votes in favor of such
segregation, or offering to the affected contract owners or
participants the option of making such a change; and
(ii) establishing a new registered investment company of the type defined
as a "Management Company" in section 4(3) of the 1940 Act or a new
separate account that is operated as a Management Company.
(b) If the material irreconcilable conflict arises because of Insurer's
decision to disregard Participant voting instructions and that decision
represents a minority position or would preclude a majority vote, Insurer
may be required, at the Fund's election, to withdraw the Separate Account's
investment in the Fund. No charge or penalty will be imposed as a result of
such withdrawal. Any such withdrawal must take place within six months
after the Fund gives notice to Insurer that this provision is being
implemented, and until such withdrawal Distributor and the Fund shall
continue to accept and implement orders by Insurer for the purchase and
redemption of shares of the Fund.
(c) If a material irreconcilable conflict arises because a particular state
insurance regulator's decision applicable to Insurer conflicts with the
majority of other state regulators, then Insurer will withdraw the Separate
Account's investment in the Fund within six months after the Fund's Board
of Directors informs Insurer that it has determined that such decision has
created a material irreconcilable conflict, and until such withdrawal
Distributor and Fund shall continue to accept and implement orders by
Insurer for the purchase and redemption of shares of the Fund.
(d) Insurer agrees that any remedial action taken by it in resolving any
material irreconcilable conflict will be carried out at its expense and
with a view only to the interests of Participants.
(e) For purposes hereof, a majority of the Disinterested Directors will
determine whether or not any proposed action adequately remedies any
material irreconcilable conflict. In no event, however, will the Fund or
Distributor be required to establish a new funding medium for any
Contracts. Insurer will not be required by the terms hereof to establish a
new funding medium for any Contracts if an offer to do so has been declined
by vote of a majority of Participants materially adversely affected by the
material irreconcilable conflict.
5.5 Notice to Insurer.
The Fund will promptly make known in writing to Insurer the Board of
Directors' determination of the existence of a material irreconcilable conflict,
a description of the facts that give rise to such conflict and the implications
of such conflict.
5.6 Information Requested by Board of Directors.
Insurer and the Fund will at least annually submit to the Board of
Directors of the Fund such reports, materials or data as the Board of Directors
may reasonably request so that the Board of Directors may fully carry out the
obligations imposed upon it by the provisions hereof, and said reports,
materials and data will be submitted at any reasonable time deemed appropriate
by the Board of Directors. All reports received by the Board of Directors of
potential or existing conflicts, and all Board of Directors actions with regard
to determining the existence of a conflict, notifying life insurance companies
utilizing the Fund of a conflict, and determining whether any proposed action
adequately remedies a conflict, will be properly recorded in the minutes of the
Board of Directors or other appropriate records, and such minutes or other
records will be made available to the SEC upon request.
5.7 Compliance with SEC Rules.
If, at any time during which the Fund is serving an investment medium for
variable life insurance policies, 1940 Act Rules 6e-3(T) or, if applicable, 6e-2
are amended or Rule 6e-3 is adopted to provide exemptive relief with respect to
mixed and shared funding, the Parties agree that they will comply with the terms
and conditions thereof and that the terms of this Section 5 shall be deemed
modified if and only to the extent required in order also to comply with the
terms and conditions of such exemptive relief that is afforded by any of said
rules that are applicable.
Section 6. Termination
6.1 Events of Termination.
Subject to Section 6.4 below, this Agreement will terminate as to a
Portfolio:
(a) at the option of Insurer or Distributor upon 120 days written notice to the
other Parties, or
(b) at the option of the Fund upon (i) at least ninety days advance written
notice to the other parties, and (ii) approval by (x) a majority of the
disinterested Directors upon finding that a continuation of this Contract
is contrary to the best interests of the Fund, or (y) a majority vote of
the shares of the affected Portfolio in the corresponding Division of the
Separate Account (pursuant to the procedures set forth in Section 11 of
this Agreement for voting Trust shares in accordance with Participant
instructions).
(c) at the option of the Fund upon institution of formal proceedings against
Insurer or Contracts Distributor by the NAD, the SEC, any state insurance
regulator or any other regulatory body regarding Insurer's obligations
under this Agreement or related to the sale of the Contracts, the operation
of the Separate Account, or the purchase of the Fund shares, if, in each
case, the Fund reasonably determines that such proceedings, or the facts on
which such proceedings would be based, have a material likelihood of
imposing material adverse consequences on the Portfolio to be terminated;
or
(d) at the option of Insurer upon institution of formal proceedings against the
Fund, Adviser, or Distributor by the NASD, the SEC, or any state insurance
regulator or any other regulatory body regarding the Fund's, Adviser's or
Distributor's obligations under this Agreement or related to the operation
or management of the Fund or the purchase of Fund shares, if, in each case,
Insurer reasonably determines that such proceedings, or the facts on which
such proceedings would be based, have a material likelihood of imposing
material adverse consequences on Insurer, Contracts Distributor or the
Division corresponding to the Portfolio to be terminated; or
(e) at the option of any Party in the event that (i) the Portfolio's shares are
not registered and, in all material respects, issued and sold in accordance
with any applicable state and federal law or (ii) such law precludes the
use of such shares as an underlying investment medium of the Contracts
issued or to be issued by Insurer; or
(f) upon termination of the corresponding Division's investment in the
Portfolio pursuant to Section 5 hereof; or
(g) at the option of Insurer if the Portfolio ceases to qualify as a RIC under
Subchapter M of the Code or under successor or similar provisions; or
(h) at the option of Insurer if the Portfolio fails to comply with Section
817(h) of the Code or with successor or similar provisions; or
(i) at the option of Insurer if Insurer reasonably believes that any change in
a Fund's investment adviser or investment practices will materially
increase the risks incurred by Insurer.
6.2 Funds to Remain Available.
Except (i) as necessary to implement Participant-initiated transactions,
(ii) as required by state insurance laws or regulations, (iii) as required
pursuant to Section 5 of this Agreement, or (iv) with respect to any Portfolio
as to which this Agreement has terminated, Insurer shall not (x) redeem Fund
shares attributable to the Contracts, or (y) prevent Participants from
allocating payments to or transferring amounts from a Portfolio that was
otherwise available under the Contracts, until, in either case, 90 calendar days
after Insurer shall have notified the Fund or Distributor of its intention to do
so.
6.3 Survival or Warranties and Indemnifications.
All warranties and indemnifications will survive the termination of this
Agreement.
6.4 Continuance of Agreement for Certain Purposes.
Notwithstanding any termination of this Agreement, the Distributor shall
continue to make available shares of the Portfolios pursuant to the terms and
conditions of this Agreement, for all Contracts in effect on the effective date
or termination of this Agreement (the "Existing Contracts"), except as otherwise
provided under Section 5 of this Agreement. Specifically, and without
limitation, the Distributor shall facilitate the sale and purchase of shares of
the Portfolios as necessary in order to process premium payments, surrenders and
other withdrawals, and transfers or reallocations of values under Existing
Contracts.
Section 7. Parties to Cooperate Respecting Termination
The other Parties hereto agree to cooperate with and give reasonable
assistance to Insurer in taking all necessary and appropriate steps for the
purpose of ensuring that the Separate Account owns no shares of a Portfolio
after the Final Termination Date with respect thereto.
Section 8. Assignment
This Agreement may not be assigned by any Party, except with the written
consent of each other Party.
Section 9. Class B Distribution Payments
From time to time during the term of this Agreement the Distributor may
make payments to the Contracts Distributor pursuant to a distribution plan
adopted by the Fund with respect to the Class B shares of the Portfolios
pursuant to Rule 12b-1 under the 1940 Act (the "Rule 12b-1 Plan) in
consideration of the Contracts Distributor's furnishing distribution services
relating to the Class B shares of the Portfolios and providing administrative,
accounting and other services, including personal service and/or the maintenance
of Participant accounts, with respect to such shares. The Distributor has no
obligation to make any such payments, and the Contracts Distributor waives any
such payment, until the Distributor receives monies therefor from the Fund. Any
such payments made pursuant to this Section 9 shall by subject to the following
terms and conditions:
(a) Any such payments shall be in such amounts as the Distributor may from
time to time advise the Contacts Distributor in writing but in any event not in
excess of the amounts permitted by the Rule 12b-1 Plan. Such payments may
include a service fee in the amount of .25 of 1% per annum of the average daily
net assets of the Fund attributable to the Class B shares of a Portfolio held by
clients of the Contracts Distributor. Any such service fee shall be paid solely
for personal service and/or the maintenance of Participant accounts.
(b) The provisions of this Section 9 relate to a plan adopted by the Fund
pursuant to Rule 12b-1. In accordance with Rule 12b-1, any person authorized to
direct the disposition of monies paid or payable by the Fund pursuant to this
Section 9 shall provide the Fund's Board of Directors, and the Directors shall
review, at least quarterly, a written report of the amounts so expended and the
purposes for which such expenditures were made.
(c) The provisions of this Section 9 shall remain in effect for not more
than a year and thereafter for successive annual periods only so long as such
continuance is specifically approved at least annually in conformity with Rule
12b-1 and the 1940 Act. The provisions of this Section 9 shall automatically
terminate in the event of the assignment (as defined by the 1940 Act) of this
Agreement, in the event the Rule 12b-1 Plan terminates or is not continued or in
the event this Agreement terminates or ceases to remain in effect. In addition,
the provisions of this Section 9 may be terminated at any time, without penalty,
by either the Distributor or the Contracts Distributor with respect to any
Portfolio on not more than 60 days' nor less than 30 days' written notice
delivered or mailed by registered mail, postage prepaid, to the other party.
Section 10. Notices
Notices and communications required or permitted by Section 2 hereof will
be given by means mutually acceptable to the Parties concerned. Each other
notice or communication required or permitted by this Agreement will be given to
the following persons at the following addresses and facsimile numbers, or such
other persons, addresses or facsimile numbers at the Party receiving such
notices or communications may subsequently direct in writing:
Valley Forge Life Insurance Company
333 S. Wabash, 43 South
Chicago, IL 60685
Attn: G. Stephen Wastek, Esq.
CNA Investor's Services, Inc.
333 S. Wabash, 34 South
Chicago, IL 60685
Attn: Ron Chapon
Alliance Fund Distributors, Inc.
1345 Avenue of the Americas
New York NY 10105
Attn: Edmund P. Bergan
FAX: (212) 969-2290
Alliance Capital Management L.P.
1345 Avenue of the Americas
New York NY 10105
Attn: Edmund P. Bergan
FAX: (212) 969-2290
Section 11. Voting Procedures
Subject to the cost allocation procedures set forth in Section 3 hereof,
Insurer will distribute all proxy material furnished by the Fund to Participants
and will vote Fund shares in accordance with instructions received from
Participants. Insurer will vote Fund shares that are (a) not attributable to
Participants or (b) attributable to Participants, but for which no instructions
have been received, in the same proportion as Fund shares for which said
instructions have been received from Participants. Insurer agrees that it will
disregard Participant voting instructions only to the extent if would be
permitted to do so pursuant to Rule 6e-3 (T)(b)(15)(iii) under the 1940 Act if
the Contracts were variable life insurance policies subject to that rule. Other
participating life insurance companies utilizing the Fund will be responsible
for calculating voting privileges in a manner consistent with that of Insurer,
as prescribed by this Section 11.
Section 12. Foreign Tax Credits
The Adviser agrees to consult in advance with Insurer concerning any
decision to elect or not to elect pursuant to Section 853 of the Code to pass
through the benefit of any foreign tax credits to the Fund's shareholders.
Section 13. Indemnification
13.1 Of Fund, Distributor and Adviser by Insurer.
(a) Except to the extent provided in Sections 13.1(b) and 13.1(c), below,
Insurer agrees to indemnify and hold harmless the Fund, Distributor and
Adviser, each of their directors and officers, and each person, if any, who
controls the Fund, Distributor or Adviser within the meaning of Section 15
of the 1933 Act (collectively, the "Indemnified Parties" for purposes of
this Section 13.1) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of Insurer)
or actions in respect thereof (including, to the extent reasonable, legal
and other expenses), to which the Indemnified Parties may become subject
under any statute, regulation, at common law or otherwise, insofar as such
losses, claims, damages, liabilities or actions are related to the sale,
acquisition, or holding of the Fund's shares and:
(i) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Separate Account's
1933 Act registration statement, the Separate Account Prospectus, the
Contracts or, to the extent prepared by Insurer or Contracts
Distributor, sales literature or advertising for the Contracts (or any
amendment or supplement to any of the foregoing), or arise out of or
are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading; provided that this agreement to
indemnify shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission was made
in reliance upon and in conformity with information furnished to
Insurer or Contracts Distributor by or on behalf of the Fund,
Distributor or Adviser for use in the Separate Account's 1933 Act
registration statement, the Separate Account Prospectus, the
Contracts, or sales literature or advertising (or any amendment or
supplement to any of the foregoing); or
(ii) arise out of or as a result of any other statements or representations
(other than statements or representations contained in the Fund's 1933
Act registration statement, Fund Prospectus, sales literature or
advertising of the Fund, or any amendment or supplement to any of the
foregoing, not supplied for use therein by or on behalf of Insurer or
Contracts Distributor) or the negligent, illegal or fraudulent conduct
of Insurer or Contracts Distributor or persons under their control
(including, without limitation, their employees and "Associated
Persons," as that term is defined in paragraph (m) of Article I of the
NASD's By-Laws), in connection with the sale or distribution of the
Contracts or Fund shares; or
(iii)arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Fund's 1933 Act
registration statement, Fund Prospectus, sales literature or
advertising of the Fund, or any amendment or supplement to any of the
foregoing, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading if such a statement or omission was
made in reliance upon and in conformity with information furnished to
the Fund, Adviser or Distributor by or on behalf of Insurer or
Contracts Distributor for use in the Fund's 1933 Act registration
statement, Fund Prospectus, sales literature or advertising of the
Fund, or any amendment or supplement to any of the foregoing; or
(iv) arise as a result of any failure by Insurer or Contracts Distributor
to perform the obligations, provide the services and furnish the
materials required of them under the terms of this Agreement.
(b) Insurer shall not be liable under this Section 13.1 with respect to any
losses, claims, damages, liabilities or actions to which an Indemnified
Party would otherwise be subject by reason of willful misfeasance, bad
faith, or gross negligence in the performance by that Indemnified Party of
its duties or by reason of that Indemnified Party's reckless disregard of
obligations or duties under this Agreement or to Distributor or to the
Fund.
(c) Insurer shall not be liable under this Section 13.1 with respect to any
action against an Indemnified Party unless the Fund, Distributor or Adviser
shall have notified Insurer in writing within a reasonable time after the
summons or other first legal process giving information of the nature of
the action shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify Insurer of any such action shall
not relieve Insurer from any liability which it may have to the Indemnified
Party against whom such action is brought otherwise than on account of this
Section 13.1 in case any such action is brought against an Indemnified
Party, Insurer shall be entitled to participate, at its own expense, in the
defense of such action. Insurer shall be entitled to assume the defense
thereof. After notice from Insurer to such Indemnified Party of Insurer's
election to assume the defense thereof, the Indemnified Party will
cooperate fully with Insurer and shall bear the fees and expenses of any
additional counsel retained by it, and Insurer will not be liable to such
Indemnified Party under this Agreement for any legal or other expenses
subsequently incurred by such Indemnified Party independently in connection
with the defense thereof, other than reasonable costs of investigation.
13.2 Indemnification of Insurer and Contracts Distributor by Adviser.
(a) Except to the extent provided in Sections 13.2(d) and 13.2(e), below,
Adviser agrees to indemnify and hold harmless Insurer and Contracts
Distributor, each of their directors and officers, and each person, if any,
who controls Insurer or Contracts Distributor within the meaning of Section
15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of
this Section 13.2) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of Adviser)
or actions in respect thereof (including, to the extent reasonable, legal
and other expenses) to which the Indemnified Parties may become subject
under any statute, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or actions are related to the sale,
acquisition, or holding of the Fund's shares and:
(i) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Fund's 1933 Act
registration statement, Fund Prospectus, sales literature or
advertising of the Fund or, to the extent not prepared by Insurer or
Contracts Distributor, sales literature or advertising for the
Contracts (or any amendment or supplement to any of the foregoing), or
arise out of or are based upon the omission or the alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided that
this agreement to indemnify shall not apply as to any Indemnified
Party if such statement or omission or such alleged statement or
omission was made in reliance upon and in conformity with information
furnished to Distributor, Adviser or the Fund by or on behalf of
Insurer or Contracts Distributor for use in the funds 1933 act
registration statement, Fund Prospectus, or in sales literature or
advertising (or any amendment or supplement to any of the foregoing);
or
(ii) arise out of or as a result of any other statements or representations
(other than statements or representations contained in the Separate
Account's 1933 Act registration statement, Separate Account
Prospectus, sales literature or advertising for the Contracts, or any
amendment or supplement to any of the foregoing, not supplied for use
therein by or on behalf of Distributor, Adviser, or the Fund) or the
negligent, illegal or fraudulent conduct of the Fund, Distributor,
Adviser or persons under their control (including, without limitation,
their employees and Associated Persons), in connection with the sale
or distribution of the Contracts or Fund shares; or
(iii)arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Separate Account's
1933 Act registration statement, Separate Account Prospectus, sales
literature or advertising covering the Contracts, or any amendment or
supplement to any of the foregoing, or the omission or alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statement therein not misleading, if
such statement or omission was made in reliance upon and in conformity
with information furnished to Insurer or Contracts Distributor by or
on behalf of the Fund, Distributor or Adviser for use in the Separate
Account's 1933 Act registration statement, Separate Account
Prospectus, sales literature or advertising covering the Contracts, or
any amendment or supplement to any of the foregoing; or
(iv) arise as a result of any failure by the Fund, Adviser or Distributor
to perform the obligations, provide the services and furnish the
materials required of them under the terms of this Agreement;
(b) Except to the extent provided in Sections 13.2(d) and 13.2(e) hereof,
Adviser agrees to indemnify and hold harmless the Indemnified Parties from and
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement thereof with, except as set forth in Section 13.2(c) below, the
written consent of Adviser) or actions in respect thereof (including, to the
extent reasonable, legal and other expenses) to which the Indemnified Parties
may become subject directly or indirectly under any statute, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or actions
directly or indirectly result from or arise out of the failure of any Portfolio
to operate as a regulated investment company in compliance with (i) Subchapter M
of the Code and regulations thereunder and (ii) Section 817(h) of the Code and
regulations thereunder (except to the extent that such failure is caused by
Insurer), including, without limitation, any income taxes and related penalties,
rescission charges, liability under state law to Contract owners or Participants
asserting liability against Insurer or Contracts Distributor pursuant to the
Contracts, the costs of any ruling and closing agreement or other settlement
with the Internal Revenue Service, and the cost of any substitution by Insurer
of shares of another investment company or portfolio for those of any adversely
affected Portfolio as a funding medium for the Separate Account that Insurer
deems necessary or appropriate as a result of the noncompliance.
(c) The written consent of Adviser referred to in Section 13.2(b) above
shall not be required with respect to amounts paid in connection with any ruling
and closing agreement or other settlement with the Internal Revenue Service.
(d) Adviser shall not be liable under this Section 13.2 with respect to any
losses, claims; damages, liabilities or actions to which an Indemnified Party
would otherwise be subject by reason of willful misfeasance, bad faith, or gross
negligence in the performance by that Indemnified Party of its duties or by
reason of such Indemnified Party's reckless disregard of its obligations and
duties under this Agreement or to Insurer, Contracts Distributor or to the
Separate Account.
(e) Adviser shall not be liable under this Section 13.2 with respect to any
action against an Indemnified Party unless Insurer or Contracts Distributor
shall have notified Adviser in writing within a reasonable time after the
summons or other first legal process giving information of the nature of the
action shall have been served upon such Indemnified Party (or after such
Indemnified Party shall have received notice of such service on any designated
agent), but failure to notify Adviser of any such action shall not relieve
Adviser from any liability which it may have to the Indemnified Party against
whom such action is brought otherwise than on account of this Section 13.2. In
case any such action is brought against an Indemnified Party, Adviser will be
entitled to participate, at its own expense, in the defense of such action.
Adviser also shall be entitled to assume the defense thereof (which shall
include, without limitation, the conduct of any ruling request and closing
agreement or other settlement proceeding with the Internal Revenue Service).
After notice from Adviser to such Indemnified Party of Adviser's election to
assume the defense thereof, the Indemnified Party will cooperate fully with
Adviser and shall bear the fees and expenses of any additional counsel retained
by it, and Adviser will not be liable to such Indemnified Party under this
Agreement for any legal or other expenses subsequently incurred by such
Indemnified Party independently in connection with the defense thereof, other
than reasonable costs of investigation.
13.3 Effect of Notice.
Any notice given by the indemnifying Party to an Indemnified Party referred
to in Section 13.1(c) or 13.2(e) above of participation in or control of any
action by the indemnifying Party will in no event be deemed to be an admission
by the indemnifying Party of liability, culpability, or responsibility, and the
indemnifying Party will remain free to contest liability with respect to the
claim among the Parties or otherwise.
Section 13. Applicable Law
This Agreement will be construed and the provisions hereof interpreted
under and in accordance with New York law, without regard for that state's
principles of conflict of laws.
Section 14. Execution in Counterparts
This Agreement may be executed simultaneously in two or more counterparts,
each of which taken together will constitute one and the same instrument.
Section 15. Severability
If any provision of this Agreement is held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement will not
be affected thereby.
Section 16. Rights Cumulative
The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, that the Parties are entitled to under federal and state
laws.
Section 17. Restrictions on Sales of Fund Shares
Insurer agrees that the Fund will be permitted (subject to the other terms
of this Agreement) to make its shares available to separate accounts of other
life insurance companies.
Section 18. Headings
The Table of Contents and headings used in this Agreement are for purposes
of reference only and shall not limit or define the meaning of the provisions of
this Agreement.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed
in their names and on their behalf by and through their duly authorized officers
signing below.
VALLEY FORGE LIFE INSURANCE
COMPANY
By: S/David L. Stone
-------------------------
Name: David L. Stone
Title: Vice President
CNA INVESTOR SERVICES, INC.
By: S/Ronald Chapon
------------------------
Name: Ronald Chapon
Title: Vice President
ALLIANCE CAPITAL MANAGEMENT LP
By: Alliance Capital Management Corporation,
its General Partner
By: __________________________________
Name: /s/
Title: /s/
ALLIANCE FUND DISTRIBUTORS, INC.
By: ___________________________________
Name: /s/
Title: Senior Vice President
SHAREHOLDER SERVICES AGREEMENT
THIS SHAREHOLDER SERVICES AGREEMENT is made and entered into as of December
31, 1999 by and between VALLEY FORGE LIFE INSURANCE COMPANY (the "Company"), and
AMERICAN CENTURY INVESTMENT MANAGEMENT, INC. ("ACIM").
WHEREAS, the Company offers to the public certain group and individual
variable annuity and variable life insurance contracts (the "Contracts"); and
WHEREAS, the Company wishes to make available as investment options under
the Contracts VP Income & Growth and VP Value (the "Funds"), each of which is a
series of mutual fund shares registered under the Investment Company Act of
1940, as amended, and issued by American Century Variable Portfolios, Inc. (the
"Issuer"); and
WHEREAS, on the terms and conditions hereinafter set forth, ACIM desires to
make shares of the Funds available as investment options under the Contracts and
to retain the Company to perform certain administrative services on behalf of
the Funds, and the Company is willing and able to furnish such services;
NOW, THEREFORE, the Company and ACIM agree as follows:
1. TRANSACTIONS IN THE FUNDS. Subject to the terms and conditions of this
Agreement, ACIM will cause the Issuer to make shares of the Funds available to
be purchased, exchanged, or redeemed, by or on behalf of the Accounts (defined
in SECTION 7(A) below) through a single account per Fund at the net asset value
applicable to each order. The Funds' shares shall be purchased and redeemed on a
net basis in such quantity and at such time as determined by the Company to
satisfy the requirements of the Contracts for which the Funds serve as
underlying investment media. Dividends and capital gains distributions will be
automatically reinvested in full and fractional shares of the Funds.
2. ADMINISTRATIVE SERVICES. The Company agrees to provide all
administrative services for the Contract owners, including but not limited to
those services specified in EXHIBIT A (the "Administrative Services"). Neither
ACIM nor the Issuer shall be required to provide Administrative Services for the
benefit of Contract owners. The Company agrees that it will maintain and
preserve all records as required by law to be maintained and preserved in
connection with providing the Administrative Services, and will otherwise comply
with all laws, rules and regulations applicable to the marketing of the
Contracts and the provision of the Administrative Services. Upon request, the
Company will provide ACIM or its representatives reasonable information
regarding the quality of the Administrative Services being provided and its
compliance with the terms of this Agreement.
3. TIMING OF TRANSACTIONS. ACIM hereby appoints the Company as agent for
the Funds for the limited purpose of accepting purchase and redemption orders
for Fund shares from the Contract owners. On each day the New York Stock
Exchange (the "Exchange") is open for business (each, a "Business Day"), the
Company may receive instructions from the Contract owners for the purchase or
redemption of shares of the Funds ("Orders"). Orders received and accepted by
the Company prior to the close of regular trading on the Exchange (the "Close of
Trading") on any given Business Day (currently, 4:00 p.m. Eastern time) and
transmitted to the Funds' transfer agent by 10:00 p.m. Eastern time on such
Business Day will be executed at the net asset value determined as of the Close
of Trading on such Business Day. Any Orders received by the Company on such day
but after the Close of Trading, and all Orders that are transmitted to the
Funds' transfer agent after 10:00 p.m. Eastern time on such Business Day, will
be executed at the net asset value determined as of the Close of Trading on the
next Business Day following the day of receipt of such Order. The day as of
which an Order is executed by the Funds' transfer agent pursuant to the
provisions set forth above is referred to herein as the "Trade Date". All orders
are subject to acceptance or rejection by ACIM or the Funds in the sole
discretion of either of them.
4. PROCESSING OF TRANSACTIONS.
(a) If transactions in Fund shares are to be settled through the National
Securities Clearing Corporation's Mutual Fund Settlement, Entry, and
Registration Verification (Fund/SERV) system, the terms of the FUND/SERV
AGREEMENT, between Company and American Century Services Corporation, shall
apply.
(b) If transactions in Fund shares are to be settled directly with the
Funds' transfer agent, the following provisions shall apply:
(1) By 6:30 p.m. Eastern time on each Business Day, ACIM (or one of
its affiliates) will provide to the Company via facsimile or other
electronic transmission acceptable to the Company the Funds' net asset
value, dividend and capital gain information and, in the case of income
funds, the daily accrual for interest rate factor (mil rate), determined at
the Close of Trading.
(2) By 10:00 p.m. Eastern time on each Business Day, the Company will
provide to ACIM via facsimile or other electronic transmission acceptable
to ACIM a report stating whether the instructions received by the Company
from Contract owners by the Close of Trading on such Business Day resulted
in the Accounts being a net purchaser or net seller of shares of the Funds.
As used in this Agreement, the phrase "other electronic transmission
acceptable to ACIM" includes the use of remote computer terminals located
at the premises of the Company, its agents or affiliates, which terminals
may be linked electronically to the computer system of ACIM, its agents or
affiliates (hereinafter, "Remote Computer Terminals").
(3) Upon the timely receipt from the Company of the report described
in (2) above, the Funds' transfer agent will execute the purchase or
redemption transactions (as the case may be) at the net asset value
computed as of the Close of Trading on the Trade Date. Payment for net
purchase transactions shall be made by wire transfer to the applicable Fund
custodial account designated by the Funds on the Business Day next
following the Trade Date. Such wire transfers shall be initiated by the
Company's bank prior to 4:00 p.m. Eastern time and received by the Funds
prior to 6:00 p.m. Eastern time on the Business Day next following the
Trade Date ("T+1"). If payment for a purchase Order is not timely received,
such Order will be, at ACIM's option, either (i) executed at the net asset
value determined on the Trade Date, and the Company shall be responsible
for all costs to ACIM or the Funds resulting from such delay, or (ii)
executed at the net asset value next computed following receipt of payment.
Payments for net redemption transactions shall be made by wire transfer by
the Issuer to the account(s) designated by the Company on T+1; provided,
however, the Issuer reserves the right to settle redemption transactions
within the time period set forth in the applicable Fund's then-current
prospectus. On any Business Day when the Federal Reserve Wire Transfer
System is closed, all communication and processing rules will be suspended
for the settlement of Orders. Orders will be settled on the next Business
Day on which the Federal Reserve Wire Transfer System is open and the
original Trade Date will apply.
5. PROSPECTUS AND PROXY MATERIALS.
(a) ACIM shall provide the Company with copies of the Issuer's proxy
materials, periodic fund reports to shareholders and other materials that are
required by law to be sent to the Issuer's shareholders. In addition, ACIM shall
provide the Company with a sufficient quantity of prospectuses of the Funds to
be used in conjunction with the transactions contemplated by this Agreement,
together with such additional copies of the Issuer's prospectuses as may be
reasonably requested by Company. If the Company provides for pass-through voting
by the Contract owners, or if the Company determines that pass-through voting is
required by law, ACIM will provide the Company with a sufficient quantity of
proxy materials for each, as directed by the Company.
(b) The cost of preparing, printing and shipping of the prospectuses, proxy
materials, periodic fund reports and other materials of the Issuer to the
Company shall be paid by ACIM or its agents or affiliates; provided, however,
that if at any time ACIM or its agent reasonably deems the usage by the Company
of such items to be excessive, it may, prior to the delivery of any quantity of
materials in excess of what is deemed reasonable, request that the Company
demonstrate the reasonableness of such usage. If ACIM believes the
reasonableness of such usage has not been adequately demonstrated, it may
request that the party responsible for such excess usage pay the cost of
printing (including press time) and delivery of any excess copies of such
materials. Unless the Company agrees to make such payments, ACIM may refuse to
supply such additional materials and ACIM shall be deemed in compliance with
this SECTION 5 if it delivers to the Company at least the number of prospectuses
and other materials as may be required by the Issuer under applicable law.
(c) The cost of any distribution of prospectuses, proxy materials, periodic
fund reports and other materials of the Issuer to the Contract owners shall be
paid by the Company and shall not be the responsibility of ACIM or the Issuer.
6. COMPENSATION AND EXPENSES.
(a) The Accounts shall be the sole shareholder of Fund shares purchased for
the Contract owners pursuant to this Agreement (the "Record Owner"). The Record
Owner shall properly complete any applications or other forms required by ACIM
or the Issuer from time to time.
(b) ACIM acknowledges that it will derive a substantial savings in
administrative expenses, such as a reduction in expenses related to postage,
shareholder communications and recordkeeping, by virtue of having a single
shareholder account per Fund for the Accounts rather than having each Contract
owner as a shareholder. In consideration of the Administrative Services and
performance of all other obligations under this Agreement by the Company, ACIM
will pay the Company a fee (the "Administrative Services Fee") equal to 25 basis
points (0.25%) per annum of the average aggregate amount invested by the Company
under this Agreement.
(c) The payments received by the Company under this Agreement are for
administrative and shareholder services only and do not constitute payment in
any manner for investment advisory services or for costs of distribution.
(d) For the purposes of computing the payment to the Company contemplated
by this SECTION 6, the average aggregate amount invested by the Company on
behalf of the Accounts in the Funds over a one month period shall be computed by
totaling the Company's aggregate investment (share net asset value multiplied by
total number of shares of the Funds held by the Company) on each Business Day
during the month and dividing by the total number of Business Days during such
month.
(e) ACIM will calculate the amount of the payment to be made pursuant to
this SECTION 6 at the end of each calendar quarter and will make such payment to
the Company within 30 days thereafter. The check for such payment will be
accompanied by a statement showing the calculation of the amounts being paid by
ACIM for the relevant months and such other supporting data as may be reasonably
requested by the Company and shall be mailed to:
CNA
100 CNA Drive
Nashville, TN 37214
Attention: Carol Kuntz
Phone No.: (615) 871-1806
Fax No.: (615) 871-1448
7. REPRESENTATIONS.
(a) The Company represents and warrants that (i) this Agreement has been
duly authorized by all necessary corporate action and, when executed and
delivered, shall constitute the legal, valid and binding obligation of the
Company, enforceable in accordance with its terms; (ii) it has established the
Valley Forge Life Insurance Company Variable Annuity and Variable Life Separate
Account (the "Account"), which is a duly authorized and established separate
account under Illinois Insurance law, and has registered each Account as a unit
investment trust under the Investment Company Act of 1940 (the "1940 Act") to
serve as an investment vehicle for the Contracts; (iii) each Contract provides
for the allocation of net amounts received by the Company to an Account for
investment in the shares of one or more specified investment companies selected
among those companies available through the Account to act as underlying
investment media; (iv) selection of a particular investment company is made by
the Contract owner under a particular Contract, who may change such selection
from time to time in accordance with the terms of the applicable Contract; and
(v) the activities of the Company contemplated by this Agreement comply in all
material respects with all provisions of federal and state securities laws
applicable to such activities.
(b) ACIM represents that (i) this Agreement has been duly authorized by all
necessary corporate action and, when executed and delivered, shall constitute
the legal, valid and binding obligation of ACIM, enforceable in accordance with
its terms; (ii) the prospectus of each Fund complies in all material respects
with federal and state securities laws, and (iii) shares of the Issuer are
registered and authorized for sale in accordance with all federal and state
securities laws.
8. ADDITIONAL COVENANTS AND AGREEMENTS.
(a) Each party shall comply with all provisions of federal and state laws
applicable to its respective activities under this Agreement. All obligations of
each party under this Agreement are subject to compliance with applicable
federal and state laws.
(b) Each party shall promptly notify the other parties in the event that it
is, for any reason, unable to perform any of its obligations under this
Agreement.
(c) The Company covenants and agrees that all Orders accepted and
transmitted by it hereunder with respect to each Account on any Business Day
will be based upon instructions that it received from the Contract owners, in
proper form prior to the Close of Trading of the Exchange on that Business Day.
The Company shall time stamp all Orders or otherwise maintain records that will
enable the Company to demonstrate compliance with SECTION 8(C) hereof.
(d) The Company covenants and agrees that all Orders transmitted to the
Issuer, whether by telephone, telecopy, or other electronic transmission
acceptable to ACIM, shall be sent by or under the authority and direction of a
person designated by the Company as being duly authorized to act on behalf of
the owner of the Accounts. ACIM shall be entitled to rely on the existence of
such authority and to assume that any person transmitting Orders for the
purchase, redemption or transfer of Fund shares on behalf of the Company is "an
appropriate person" as used in Sections 8-107 and 8-401 of the Uniform
Commercial Code with respect to the transmission of instructions regarding Fund
shares on behalf of the owner of such Fund shares. The Company shall maintain
the confidentiality of all passwords and security procedures issued, installed
or otherwise put in place with respect to the use of Remote Computer Terminals
and assumes full responsibility for the security therefor. The Company further
agrees to be responsible for the accuracy, propriety and consequences of all
data transmitted to ACIM by the Company by telephone, telecopy or other
electronic transmission acceptable to ACIM.
(e) The Company agrees that, to the extent it is able to do so, it will use
its best efforts to give equal emphasis and promotion to shares of the Funds as
is given to other underlying investments of the Accounts, subject to applicable
Securities and Exchange Commission and/or National Association of Security
Dealers rules. In addition, the Company shall not impose any fee, condition, or
requirement for the use of the Funds as investment options for the Contracts
that operates to the specific prejudice of the Funds vis-a-vis the other
investment media made available for the Contracts by the Company.
(f) The Company shall not, without the written consent of ACIM, make
representations concerning the Issuer or the shares of the Funds except those
contained in the then-current prospectus and in current printed sales literature
approved by ACIM or the Issuer.
(g) Advertising and sales literature with respect to the Issuer or the
Funds prepared by the Company, its agents or ACIM, if any, for use in marketing
shares of the Funds as underlying investment media to Contract owners shall be
submitted to the Company or ACIM for review and approval before such material is
used. No such material shall be used if either party reasonably objects to such
use within twenty-one (21) business days of receipt of such material.
9. USE OF NAMES. Except as otherwise expressly provided for in this
Agreement, neither ACIM nor any of its affiliates or the Funds shall use any
trademark, trade name, service mark or logo of the Company, or any variation of
any such trademark, trade name, service mark or logo, without the Company's
prior written consent, the granting of which shall be at the Company's sole
option. Except as otherwise expressly provided for in this Agreement, the
Company shall not use any trademark, trade name, service mark or logo of the
Issuer, ACIM or any of its affiliates or any variation of any such trademarks,
trade names, service marks, or logos, without the prior written consent of
either the Issuer or ACIM, as appropriate, the granting of which shall be at the
sole option of ACIM and/or the Issuer.
10. PROXY VOTING.
(a) The Company shall provide pass-through voting privileges to all
Contract owners so long as the SEC continues to interpret the 1940 Act as
requiring such privileges. It shall be the responsibility of the Company to
assure that it and the separate accounts of the other Participating Companies
(as defined in SECTION 12(A) below) participating in any Fund calculate voting
privileges in a consistent manner.
(b) The Company will distribute to Contract owners all proxy material
furnished by ACIM and will vote shares in accordance with instructions received
from such Contract owners. The Company shall vote Fund shares for which no
voting instructions are received in the same proportion as shares for which such
instructions have been received. The Company and its agents shall not oppose or
interfere with the solicitation of proxies for Fund shares held for such
Contract owners.
11. INDEMNITY.
(a) ACIM agrees to indemnify and hold harmless the Company and its
officers, directors, employees, agents, affiliates and each person, if any, who
controls the Company within the meaning of the Securities Act of 1933
(collectively, the "Indemnified Parties" for purposes of this SECTION 11(A))
against any losses, claims, expenses, damages or liabilities (including amounts
paid in settlement thereof) or litigation expenses (including legal and other
expenses) (collectively, "Losses"), to which the Indemnified Parties may become
subject, insofar as such Losses result from a breach by ACIM of a material
provision of this Agreement. ACIM will reimburse any legal or other expenses
reasonably incurred by the Indemnified Parties in connection with investigating
or defending any such Losses. ACIM shall not be liable for indemnification
hereunder if such Losses are attributable to the negligence or misconduct of the
Company in performing its obligations under this Agreement.
(b) The Company agrees to indemnify and hold harmless ACIM and the Issuer,
and their respective officers, directors, employees, agents, affiliates and each
person, if any, who controls Issuer or ACIM within the meaning of the Securities
Act of 1933 (collectively, the "Indemnified Parties" for purposes of this
SECTION 11(B)) against any Losses to which the Indemnified Parties may become
subject, insofar as such Losses result from a breach by the Company of a
material provision of this Agreement or the use by any person of the Remote
Computer Terminals. The Company will reimburse any legal or other expenses
reasonably incurred by the Indemnified Parties in connection with investigating
or defending any such Losses. The Company shall not be liable for
indemnification hereunder if such Losses are attributable to the negligence or
misconduct of ACIM or the Issuer in performing their obligations under this
Agreement.
(c) Promptly after receipt by an indemnified party hereunder of notice of
the commencement of action, such indemnified party will, if a claim in respect
thereof is to be made against the indemnifying party hereunder, notify the
indemnifying party of the commencement thereof; but the omission so to notify
the indemnifying party will not relieve it from any liability which it may have
to any indemnified party otherwise than under this SECTION 11. In case any such
action is brought against any indemnified party, and it notifies the
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate therein and, to the extent that it may wish to, assume
the defense thereof, with counsel satisfactory to such indemnified party, and
after notice from the indemnifying party to such indemnified party of its
election to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this SECTION 11 for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation.
(d) If the indemnifying party assumes the defense of any such action, the
indemnifying party shall not, without the prior written consent of the
indemnified parties in such action, settle or compromise the liability of the
indemnified parties in such action, or permit a default or consent to the entry
of any judgment in respect thereof, unless in connection with such settlement,
compromise or consent, each indemnified party receives from such claimant an
unconditional release from all liability in respect of such claim.
12. POTENTIAL CONFLICTS
(a) The Company has received a copy of an application for exemptive relief,
as amended, filed by the Issuer on December 21, 1987, with the SEC and the order
issued by the SEC in response thereto (the "Shared Funding Exemptive Order").
The Company has reviewed the conditions to the requested relief set forth in
such application for exemptive relief. As set forth in such application, the
Board of Directors of the Issuer (the "Board") will monitor the Issuer for the
existence of any material irreconcilable conflict between the interests of the
contract owners of all separate accounts ("Participating Companies") investing
in funds of the Issuer. An irreconcilable material conflict may arise for a
variety of reasons, including: (i) an action by any state insurance regulatory
authority; (ii) a change in applicable federal or state insurance, tax, or
securities laws or regulations, or a public ruling, private letter ruling,
no-action or interpretative letter, or any similar actions by insurance, tax or
securities regulatory authorities; (iii) an administrative or judicial decision
in any relevant proceeding; (iv) the manner in which the investments of any
portfolio are being managed; (v) a difference in voting instructions given by
variable annuity contract owners and variable life insurance contract owners; or
(vi) a decision by an insurer to disregard the voting instructions of contract
owners. The Board shall promptly inform the Company if it determines that an
irreconcilable material conflict exists and the implications thereof.
(b) The Company will report any potential or existing conflicts of which it
is aware to the Board. The Company will assist the Board in carrying out its
responsibilities under the Shared Funding Exemptive Order by providing the Board
with all information reasonably necessary for the Board to consider any issues
raised. This includes, but is not limited to, an obligation by the Company to
inform the Board whenever contract owner voting instructions are disregarded.
(c) If a majority of the Board, or a majority of its disinterested Board
members, determines that a material irreconcilable conflict exists with regard
to contract owner investments in a Fund, the Board shall give prompt notice to
all Participating Companies. If the Board determines that the Company is
responsible for causing or creating said conflict, the Company shall at its sole
cost and expense, and to the extent reasonably practicable (as determined by a
majority of the disinterested Board members), take such action as is necessary
to remedy or eliminate the irreconcilable material conflict. Such necessary
action may include but shall not be limited to:
(i) withdrawing the assets allocable to the Accounts from the Fund and
reinvesting such assets in a different investment medium or submitting the
question of whether such segregation should be implemented to a vote of all
affected contract owners and as appropriate, segregating the assets of any
appropriate group (i.e., annuity contract owners, life insurance contract
owners, or variable contract owners of one or more Participating Companies)
that votes in favor of such segregation, or offering to the affected
contract owners the option of making such a change; and/or
(ii) establishing a new registered management investment company or
managed separate account.
(d) If a material irreconcilable conflict arises as a result of a decision
by the Company to disregard its contract owner voting instructions and said
decision represents a minority position or would preclude a majority vote by all
of its contract owners having an interest in the Issuer, the Company at its sole
cost, may be required, at the Board's election, to withdraw an Account's
investment in the Issuer and terminate this Agreement; provided, however, that
such withdrawal and termination shall be limited to the extent required by the
foregoing material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
(e) For the purpose of this SECTION 12, a majority of the disinterested
Board members shall determine whether or not any proposed action adequately
remedies any irreconcilable material conflict, but in no event will the Issuer
be required to establish a new funding medium for any Contract. The Company
shall not be required by this SECTION 12 to establish a new funding medium for
any Contract if an offer to do so has been declined by vote of a majority of the
Contract owners materially adversely affected by the irreconcilable material
conflict.
13. TERMINATION; WITHDRAWAL OF OFFERING. This Agreement may be terminated
by either party upon 120 days' prior written notice to the other parties.
Notwithstanding the above, the Issuer reserves the right, without prior notice,
to suspend sales of shares of any Fund, in whole or in part, or to make a
limited offering of shares of any of the Funds in the event that (A) any
regulatory body commences formal proceedings against the Company, ACIM,
affiliates of ACIM, or the Issuer, which proceedings ACIM reasonably believes
may have a material adverse impact on the ability of ACIM, the Issuer or the
Company to perform its obligations under this Agreement or (B) in the judgment
of ACIM, declining to accept any additional instructions for the purchase or
sale of shares of any such Fund is warranted by market, economic or political
conditions. Notwithstanding the foregoing, this Agreement may be terminated
immediately (i) by any party as a result of any other breach of this Agreement
by another party, which breach is not cured within 30 days after receipt of
notice from the other party, or (ii) by any party upon a determination that
continuing to perform under this Agreement would, in the reasonable opinion of
the terminating party's counsel, violate any applicable federal or state law,
rule, regulation or judicial order. Termination of this Agreement shall not
affect the obligations of the parties to make payments under SECTION 4 for
Orders received by the Company prior to such termination and shall not affect
the Issuer's obligation to maintain the Accounts as set forth by this Agreement.
Following termination, ACIM shall not have any Administrative Services payment
obligation to the Company (except for payment obligations accrued but not yet
paid as of the termination date).
14. NON-EXCLUSIVITY. Each of the parties acknowledges and agrees that this
Agreement and the arrangement described herein are intended to be non-exclusive
and that each of the parties is free to enter into similar agreements and
arrangements with other entities.
15. SURVIVAL. The provisions of SECTION 9 (use of names) and SECTION 11
(indemnity) of this Agreement shall survive termination of this Agreement.
16. AMENDMENT. Neither this Agreement, nor any provision hereof, may be
amended, waived, discharged or terminated orally, but only by an instrument in
writing signed by all of the parties hereto.
17. NOTICES. All notices and other communications hereunder shall be given
or made in writing and shall be delivered personally, or sent by telex,
telecopier, express delivery or registered or certified mail, postage prepaid,
return receipt requested, to the party or parties to whom they are directed at
the following addresses, or at such other addresses as may be designated by
notice from such party to all other parties.
To the Company:
Valley Forge Life Insurance Company
CNA Plaza, 43 South
Chicago, Illinois 60685
Attn: G. Stephen Wasteck, Esq.
(312) 822-5971 (office number)
(312) 822-1186 (telecopy number)
To the Issuer or ACIM:
American Century Investment Management, Inc.
4500 Main Street
Kansas City, Missouri 64111
Attention: Charles A. Etherington, Esq.
(816) 340-4051 (office number)
(816) 340-4964 (telecopy number)
Any notice, demand or other communication given in a manner prescribed in this
SECTION 17 shall be deemed to have been delivered on receipt.
18. SUCCESSORS AND ASSIGNS. This Agreement may not be assigned without the
written consent of all parties to the Agreement at the time of such assignment.
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective permitted successors and assigns.
19. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one agreement, and
any party hereto may execute this Agreement by signing any such counterpart.
20. SEVERABILITY. In case any one or more of the provisions contained in
this Agreement should be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby.
21. ENTIRE AGREEMENT. This Agreement, including the attachments hereto,
constitutes the entire agreement between the parties with respect to the matters
dealt with herein, and supersedes all previous agreements, written or oral, with
respect to such matters.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date set forth above.
VALLEY FORGE LIFE INSURANCE AMERICAN CENTURY INVESTMENT
COMPANY MANAGEMENT, INC.
By:_______________________ By:_____________________
Name:_____________________ William M. Lyons
Title:____________________ Executive Vice President
EXHIBIT A
ADMINISTRATIVE SERVICES
Pursuant to the Agreement to which this is attached, the Company shall perform
all administrative and shareholder services required or requested under the
Contracts with respect to the Contract owners, including, but not limited to,
the following:
1. Maintain separate records for each Contract owner, which records shall
reflect the shares purchased and redeemed and share balances of such Contract
owners. The Company will maintain a single master account with each Fund on
behalf of the Contract owners and such account shall be in the name of the
Company (or its nominee) as the record owner of shares owned by the Contract
owners.
2. Disburse or credit to the Contract owners all proceeds of redemptions of
shares of the Funds and all dividends and other distributions not reinvested in
shares of the Funds.
3. Prepare and transmit to the Contract owners, as required by law or the
Contracts, periodic statements showing the total number of shares owned by the
Contract owners as of the statement closing date, purchases and redemptions of
Fund shares by the Contract owners during the period covered by the statement
and the dividends and other distributions paid during the statement period
(whether paid in cash or reinvested in Fund shares), and such other information
as may be required, from time to time, by the Contracts.
4. Transmit purchase and redemption orders to the Funds on behalf of the
Contract owners in accordance with the procedures set forth in SECTION 4 to the
Agreement.
5. Distribute to the Contract owners copies of the Funds' prospectus, proxy
materials, periodic fund reports to shareholders and other materials that the
Funds are required by law or otherwise to provide to their shareholders or
prospective shareholders.
6. Maintain and preserve all records as required by law to be maintained
and preserved in connection with providing the Administrative Services for the
Contracts.
PARTICIPATION AGREEMENT
Among
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
MORGAN STANLEY DEAN WITTER
INVESTMENT MANAGEMENT INC.
MILLER ANDERSON & SHERRERD, LLP
And
VALLEY FORGE LIFE INSURANCE COMPANY
DATED AS OF
January 1, 2000
TABLE OF CONTENTS
Page
ARTICLE I. Purchase of Funds Shares
ARTICLE II. Representations and Warranties
ARTICLE III. Prospectuses, Reports to Shareholders
And Proxy Statements, Voting
ARTICLE IV. Sales Material and Information
ARTICLE V. Fees and Expenses
ARTICLE VI. Diversification
ARTICLE VII. Potential Conflicts
ARTICLE VIII. Indemnification
ARTICLE IX. Applicable Law
ARTICLE X. Termination
ARTICLE XI. Notices
ARTICLE XII. Miscellaneous
SCHEDULE A Separate Accounts and Associated Contracts
SCHEDULE B Portfolios of Morgan Stanley Dean
Witter Universal Funds, Inc. Available
Under this Agreement
SCHEDULE C Proxy Voting Procedures
THIS AGREEMENT, made and entered into as of the 1st day of January,
2000 by and among VALLEY FORGE LIFE INSURANCE COMPANY (hereinafter the
"Company"), a Pennsylvania corporation, on its own behalf and on behalf of each
separate account of the Company set forth on Schedule A hereto as may be amended
from time to time (each such account hereafter referred to as the "Account") and
MORGAN STANLEY DEN WITTER UNIVERSAL FUNDS, INC. (hereinafter the "Fund"), a
Maryland corporation, and MORGAN STANLEY DEAN WITTER INVESTMENT MANAGEMENT, INC.
and MILLER ANDERSON & SHERRERD, LLP (hereinafter collectively the "Advisers" and
individually the "Adviser"), a Delaware corporation and a Pennsylvania limited
liability partnership, respectively.
WHEREAS, the Fund engages in business as an open-end management
investment company and is available to act as (i) the investment vehicle for
separate accounts established by insurance companies for individual and group
life insurance policies and annuity contracts with variable accumulation and/or
pay-out provisions (hereinafter referred to individually and/or collectively as
"Variable Insurance Products") and (ii) the investment vehicle for certain
qualified pension and retirement plans (hereinafter "Qualified Plans"); and
WHEREAS, insurance companies desiring to utilize the Fund as an
investment vehicle under their Variable Insurance Products enter into
participation agreements with the Fund and the Advisers (the "Participating
Insurance Companies"); and
WHEREAS, shares of the Fund are divided into several series of shares,
each representing the interest in a particular managed portfolio of securities
and other assets, any one or more of which may be made available under this
Agreement; and
WHEREAS, the Fund intends to offer shares of the series set forth on
Schedule B hereto (each such series hereinafter referred to as a "Portfolio") as
may be amended from time to time by mutual agreement of the parties hereto, to
the Account(s) of the Company; and
WHEREAS, the Fund has obtained an order from the Securities and
Exchange Commission, dated September 19, 1996 (file No. 812-10118), granting
Participating Insurance Companies and Variable Insurance Product separate
accounts exemptions from the provisions of Section 9(a), 13(a), 15(a), and 15(b)
of the Investment Company Act of 1940, as amended (hereinafter the "1940 Act"),
and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to
permit shares of the Fund to be sold to and held by Variable Insurance Product
separate accounts of both affiliated and unaffiliated life insurance companies
and Qualified Plans (hereinafter the "Shared Funding Exemptive Order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, each Adviser is duly registered as an investment adviser under
the Investment Advisers Act of 1940, as amended, and any applicable state
securities laws; and
WHEREAS, each Adviser manages certain Portfolios of the Fund; and
WHEREAS, Morgan Stanley & Co. Incorporated (the "Underwriter") is
registered as a broker/dealer under the Securities Exchange Act of 1934, as
amended (hereinafter the "1934 Act"), is a member in good standing of the
National Association of Securities Dealers, Inc. (hereinafter "NASD") and serves
as principal underwriter of the shares of the Fund; and
WHEREAS, the Company has registered or will register under the 1933 Act
the Variable Insurance Products identified on Schedule A hereto (the
"Contracts"), as such Schedule may be amended from time to time by mutual
written agreement of the parties hereto; and
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution or under authority of the Board of
Directors of the Company, on the date shown for such Account on Schedule A
hereto, to set aside and invest assets attributable to the Contracts; and
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares of the Portfolios on behalf
of each Account to fund the Contracts and the Underwriter is authorized to sell
such shares to each such Account at net asset value.
NOW, THEREFORE, in consideration of their mutual promises, the Company,
the Fund and the Advisers agree as follows:
ARTICLE I. PURCHASE OF FUND SHARES
1.1 The Fund agrees to make available for purchase by the Company
shares of the Portfolios and shall execute order placed for each Account on a
daily basis at the net asset value next computed after receipt by the Fund or
its designee of such order. For purposes of this Section 1.1, the Company shall
be the designee of the Fund for receipt of such orders from each Account and
receipt by such designee shall constitute receipt by the Fund, provided that the
Fund receives notice of such order by 10:00 a.m. Eastern time on the next
following Business Day. "Business Day" shall mean any day on which the New York
Stock Exchange is open for trading and on which the Fund calculates its net
asset value pursuant to the rules of the Securities and Exchange Commission.
1.2 The Fund, so long as this Agreement is in effect, agrees to make
its shares available indefinitely for purchase at the applicable net asset value
per share by the Company and its Accounts on those days on which the Fund
calculates its net asset value pursuant to rules of the Securities and Exchange
commission and the Fund shall use reasonable efforts to calculate such net asset
value of each day which the New York Stock Exchanged is open for trading.
Notwithstanding the foregoing, the Board of Directors of the Fund (hereinafter
the "Board") may refuse to permit the Fund to sell shares of any Portfolio to
any person, or suspend or terminate the offering of shares of any Portfolio if
such action is required by law or by regulatory authorities having jurisdiction
or is, in the sole discretion of the Board acting in good faith and in light of
their fiduciary duties under federal and any applicable state laws, necessary in
the best interests of the shareholders of such Portfolio.
1.3 The Fund agrees that shares of the Fund will be sold only to Participating
Insurance Companies and their separate accounts and to certain Qualified Plans.
No shares of any Portfolio will be sold to the general public.
1.4 The Fund agrees to redeem for cash, on the Company's request, any full or
fractional shares of the Fund held by the Company, executing such requests on
a daily basis at the net asset value next computed after receipt by the Fund
or its designee of the request for redemption. For purposes of this Section
1.4, the Company shall be the designee of the Fund for receipt of requests for
redemption from each Account and receipt by such designee shall constitute
receipt by the Fund; provided that the Fund receives notice of such request
for redemption by 10:00 a.m. Eastern time on the next following Business Day.
1.5 The Company agrees that purchases and redemptions of Portfolio shares
offered by the then current prospectus of the Fund shall be made in accordance
with the provisions of such prospectus. The Company will give the Fund and the
Advisers 45 days written notice of its intention to make available in the
future, as a funding vehicle under the Contracts, any other investment company.
1.6 The Company shall pay for Fund shares on the next Business Day after an
order to purchase Fund shares is made in accordance with the provisions of
Section 1.1 hereof. Payment shall be in federal funds transmitted by wire. For
purposes of Section 2.10 and 2.11, upon receipt by the Fund of the federal funds
so wired, such funds shall cease to be the responsibility of the Company and
shall become the responsibility of the Fund.
1.7 Issuance and transfer of the Fund's shares will be by book entry only. Stock
certificates will not be issued to the Company or any Account. Shares ordered
from the Fund will be recorded in an appropriate title for each Account or the
appropriate subaccount of each Account.
1.8 The Fund shall furnish same day notice (by wire or telephone, followed by
written confirmation) to the Company of any income, dividends or capital gain
distributions payable on the Portfolio's shares. The Company hereby elects to
receive all such income dividends and capital gain distributions as are payable
on the Portfolio shares in additional shares of that Portfolio. The Company
reserves the right to revoke this election and to receive all such income
dividends and capital gain distributions in cash. The Fund shall notify the
Company of the number of shares so issued as payment of such dividends and
distributions.
1.9 The Fund shall make the net asset value per share for each Portfolio
available to the Company on a daily basis as soon as reasonably practical after
the net asset value per share is calculated (normally by 6:30 p.m. Eastern time)
and shall use its best efforts to make such net asset value per share available
by 7:00 p.m.
Eastern time.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1 The Company represents and warrants that the Contracts are or will be
registered under the 1933 Act, that the Contracts will be issued in compliance
in all material respects with all applicable federal and state laws; and that
the Company will require of every person distributing the Contracts that (i) the
contracts be offered and sold in compliance in all material respects with all
applicable federal and state laws and (ii) each Contract, at the time it is
issued, be a suitable purchase for the applicant therefor under applicable state
insurance laws. The Company further represents and warrants that: (I) it is an
insurance company duly organized and in good standing under applicable law, (ii)
it has legally and validly established each Account prior to any issuance or
sale thereof as a segregated asset account under applicable laws and
regulations, and (iii) it has registered or, prior to any issuance or sale of
the Contracts, will register each Account as a unit investment trust in
accordance with the provisions of the 1940 Act to serve as a segregated
investment account for the Contracts.
2.2 The Fund represents and warrants that Fund shares sold pursuant to this
Agreement shall be registered under the 1933 Act, duly authorized for issuance
and sold in compliance with the laws of the State of Maryland and all applicable
federal and state securities laws and that the Fund is and shall remain
registered under the 1940 Act. The Fund shall amend the registration statement
for its shares under the 1933 Act and the 1940 Act from time to time as required
in order to effect the continuous offering of its shares. The Fund shall
register and qualify the share for sale in accordance with the laws of the
various states only if and to the extent deemed advisable by the Fund.
2.3 The Fund represents that it is currently qualified as a Regulated Investment
Company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), and that it will make every effort to maintain such qualification
(under Subchapter M or any successor similar provision) and that it will notify
the Company immediately upon having a reasonable basis for believing that it has
ceased to so qualify.
2.4 The Company represents that the Contracts are currently treated as life
insurance policies or annuity contracts, under applicable provisions of the Code
and that it will make every effort to maintain such treatment and that it will
notify the Fund immediately upon having a reasonable basis for believing that it
has ceased to so qualify.
2.5 The Fund represents that to the extent that it decides to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act, the Fund
undertakes to have a board of directors, a majority of whom are not interested
persons of the Fund, formulate and approve any plan under Rule 12b-1 to finance
distribution expenses.
2.6 The Fund makes no representation as to whether any aspect of its operations
(including, but not limited to, fees and expenses and investment policies)
complies with the insurance laws or regulations of the various states except
that the Fund represents that the Portfolios' investment policies, fees and
expenses are and shall at all times remain in compliance wit the laws of the
State of Maryland that the Portfolios' operation are and shall at all times
remain in material compliance with the laws of the State of Maryland to the
extent required to perform this Agreement.
2.7 The Fund represents that it is lawfully organized and validly existing under
the laws of the State of Maryland and that it does and will comply in all
material respects with the 1940 Act.
2.8 Each Adviser represents and warrants that it is and shall remain duly
registered in all material respects under all applicable federal and state
securities laws and that it will perform its obligations for the Fund in
compliance in all material respects with the laws of its state of domicile and
any applicable state and federal securities laws.
2.9 The Fund represents and warrants that its directors, officers, employees,
and other individuals/entities dealing with the money and/or securities of the
Fund are and shall continue to be at all times covered by a blanket fidelity
bond or similar coverage for the benefit of the Fund in an amount not less than
the minimal coverage as required currently by Rule 17g-(1) of the 1940 Act or
related provisions as may be promulgated from time to time. The aforesaid
blanket fidelity bond shall include coverage for larceny and embezzlement and
shall be issued by a reputable bonding company.
2.10 The Company represents and warrants that all of its directors, officers,
employees, investment advisers, and other individuals/entities dealing with the
money and/or securities of the Fund are covered by a blanket fidelity bond or
similar coverage, in such amount as is customary for companies engaged in
similar businesses and industries and as reasonably necessary in light of the
Company's obligations under this Agreement. The aforesaid includes coverage for
larceny and embezzlement and shall be issued by a reputable bonding company. The
Company agrees to make all reasonable efforts to see that this bond or another
bond containing these provisions is always in effect, and agrees to notify the
Fund and the Advisers in the event that such coverage no longer applies.
ARTICLE III. PROSPECTUSES, REPORTS TO SHAREHOLDERS AND PROXY STATEMENTS; VOTING
3.1 The Fund or its designee shall provide the Company with as many printed
copies of the Fund's current prospectus and statement of additional information
as the Company may reasonably request. If requested by the Company, in lieu of
providing printed copies the Fund shall provide camera-ready film or computer
diskettes containing the Fund's prospectus and statement of additional
information, and such other assistance as is reasonably necessary in order for
the Company once each year (or more frequently if the prospectus and/or
statement of additional information for the Fund is amended during the year) to
have the prospectus for the Contracts and the Fund's prospectus printed together
in one document, and to have the statement of additional information for the
Fund and the statement of additional information for the Contracts printed
together in one document. Alternatively, the Company may print the Fund's
prospectus and/or its statement of additional information in combination with
other fund companies' prospectuses and statements of additional information.
3.2 Except as provided in this Section 3.2, all expenses of preparing, setting
in type, printing and distributing Fund prospectuses and statements of
additional information shall be the expense of the Company. For prospectuses and
statements of additional information provided by the Company to its Contract
owners who currently own shares of one or more Portfolios ("Existing Contract
Owners"), in order to update disclosure as required by the 1933 Act and/or the
1940 Act, the cost of printing shall be borne by the Fund. If the Company
chooses to receive camera-ready film or computer diskettes in lieu of receiving
printed copies of the Fund's prospectus, the Fund shall bear the cost of
typesetting to provide the Fund's prospectus to the Company in the format in
which the Fund is accustomed to formatting prospectuses, and the Company shall
bear the expense of adjusting or changing the format to conform with any of its
prospectuses. In such event, the Fund will reimburse the Company in an amount
equal to the product of x and y where x is the number of such prospectuses
distributed to Existing Contract Owners, and y is the Fund's per unit cost of
typesetting and printing the Fund' s prospectus. The same procedures shall be
followed with respect to the Fund's statement of additional information. The
Company agrees to provide the Fund or its designee with such information as may
be reasonably requested by the Fund to assure that the Fund's expenses do not
include the cost of printing, typesetting or distributing any prospectuses or
statements of additional information other than those actually distributed to
Existing Contract Owners.
3.3 The Fund's statement of additional information shall be obtainable from the
Fund, the Company or such other person as the Fund may designate, as agreed upon
by the parties.
3.4 The Fund, at its expense, shall provide the Company with Copies of its proxy
statements, reports to shareholders, and other communications (except for
prospectuses and statements of additional information, which are covered in
section 3.1) to shareholders in such quantity as the Company shall reasonably
require for distributing to Contract owners.
3.5 If and to the extent required by law the Company shall:
(i) solicit voting instructions from Contract Owners;
(ii) vote the Fund shares in accordance with instructions received from
Contract owners; and
(iii)vote Fund shares for which no instructions have been received in the
same proportion as Funds of such Portfolio for which instructions have
been received;
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund shares
held in any segregated asset account in its own right, to the extent permitted
by low. The Fund and the Company shall follow the procedures, and shall have the
corresponding responsibilities, for the handling of proxy and voting instruction
solicitations, as set forth in Schedule C attached hereto and incorporated
herein by reference. Participating Insurance Companies shall be responsible for
ensuring that each of their separate accounts participating in the Fund
calculates voting privileges in a manner consistent with the standards set forth
on Schedule C, which standards will also be provided to the other Participating
Insurance Companies.
3.6. The Fund will comply with all provisions of the 1940 Act requiring voting
by shareholders, and in particular the Fund will either provide for annual
meetings or comply with Section 16(c) of the 1940 Act (although the Fund is
not one of the trusts described in Section 16(c) as well as with Sections
16(a) and, if and when applicable, 16(b). Further, the Fund will act in
accordance with the Securities and Exchange Commission's interpretation of
the requirements of Section 16(a) with respect to periodic elections of
directors and with whatever rules the Commission may promulgate with
respect thereto.
3.7 The Fund shall use reasonable efforts to provide Fund prospectuses,
reports to shareholders, proxy materials and other Fund communications (or
camera-ready equivalents) to the Company sufficiently in advance of the
Company's mailing dates to enable the Company to complete, at reasonable cost,
the printing, assembling and/or distribution of the communications in accordance
with applicable laws and regulations.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1.a. The Company shall furnish, or shall cause to be furnished, to
the Fund or its designee, each piece of sales literature or other promotional
material in which the Fund or an Adviser is named, at least ten Business Days
prior to its use. No such material shall be used without the prior approval of
the Fund or its designee. The Fund shall use its reasonable best efforts to
review any such material as soon as practicable after receipt and no later than
ten Business Days after receipt of such material.
4.1.b. The Fund shall furnish, or shall cause to be furnished, to the
Company or its designee, each piece of sales literature or other promotional
material in which the Company is named, at least ten Business Days prior to its
use. No such material shall be used without the prior approval of the Company or
its designee. The Company shall use its reasonable best efforts to review any
such material as soon as practicable after receipt and no later than ten
Business Days after receipt of such material.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or prospectus for the
Fund shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or its
designee, except with the permission of the Fund.
4.3. The Fund or its designee shall furnish, or shall cause to be
furnished, to the Company or its designee, each piece of sales literature or
other promotional material in which the Company and/or its Account(s) is named
at least ten Business Days prior to its use. No such material shall be used if
the Company or its designee reasonably objects to such use within ten Business
Days after receipt of such material.
4.4. The Fund and the Advisers shall not give any information or make
any representations on behalf of the Company or concerning the Company, each
Account, or the Contracts, other than the information or representations
contained in a registration statement or prospectus for the Contracts, as such
registration statement and prospectus may be amended or supplemented from time
to time, or in published reports for each Account which are in the public domain
or approved by the Company for distribution to Contact owners, or in sales
literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one complete copy of
all registration statements, prospectuses, statements of additional information,
reports, proxy statements, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Fund or its shares and are relevant to
the Company or the Contracts.
4.6. The Company will provide to the Fund at least one complete copy of
all registration statements, prospectuses, statements of additional information,
reports, solicitations for voting instructions, sales literature and other
promotional materials, applications for exemptions, requests for no action
letters, and all amendments to any of the above, that relate to the investment
in the Fund under the Contracts.
4.7 For purposes of this Article IV, the phrase "sales literature or other
promotional material" includes, but is not limited to, any of the following that
refer to the Fund or any affiliate of the Fund: advertisements (such as material
published, or designed for use in, a newspaper, magazine, or other periodical,
radio, television, telephone or tape recording, videotape display, signs or
billboards, motion pictures, or other public media), sales literature (i.e..,
any written communication distributed or made generally available to customers
or the public, including brochures, circulars, research reports, market letters,
form letters, seminar texts, reprints or excerpts of any other advertisement,
sales literature, or published article), educational or training materials or
other communications distributed or made generally available to some or all
agents or employees, and registration statements, prospectuses, statements of
additional information, shareholder reports, and proxy materials.
ARTICLE V. FEES AND EXPENSES
5.1. The Fund shall pay no fee or other compensation to the Company
under this Agreement, except that if the Fund or any Portfolio adopts and
implements a plan pursuant to Rule 12b-I to finance distribution expenses, then
the Underwriter may make payments to the Company or to the underwriter for the
Contracts if and in amounts agreed to by the Underwriter in writing.
5.2. All expenses incident to performance by the Fund under this Agreement shall
be paid by the Fund. The Fund shall see to it that all its shares are registered
and authorized for issuance in accordance with applicable federal law and, if
and to the extent deemed advisable by the Fund, in accordance with applicable
state laws prior to their sale. Except as otherwise set forth in Section 3.2 of
this Agreement, the Fund shall bear the expenses for the cost of registration
and qualification of the Fund's shares, preparation and filing of the Fund's
prospectus and registration statement, proxy materials and reports, setting the
prospectus in type, setting in type and printing the proxy materials and reports
to shareholders, the preparation of all statements and notices required by any
federal or state law, and all taxes on the issuance or transfer of the Fund's
shares.
5.3 The Company shall bear the expenses of distributing the Fund's
prospectus, proxy materials and reports to owners of Contracts issued by the
Company.
ARTICLE VI. DIVERSIFICATION
6.1. The Fund will at all times invest money from the Contracts in such
a manner as to ensure that the Contracts will be treated as variable contracts
under the Code and the regulations issued thereunder. Without limiting the scope
of the foregoing, the Fund will at all times comply with Section 817(h) of the
Code and Treasury Regulation 1.817-5, relating to the diversification
requirements for variable annuity, endowment, or life insurance contracts and
any amendments or other modifications to such Section or Regulations. In the
event of a breach of this Article VI by the Fund, it will take all reasonable
steps (a) to notify Company of such breach and (b) to adequately diversify the
Fund so as to achieve compliance within the grace period afforded by Regulation
817-5.
ARTICLE VII. POTENTIAL CONFLICTS
7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict may
arise for a variety of reasons, including: (a) an
action by any state insurance regulatory authority; (b) a change in applicable
federal or state insurance, tax, or securities laws or regulations, or a public
ruling, private letter ruling, no-action or interpretative letter, or any
similar action by insurance, tax, or securities regulatory authorities; (c)
administrative or judicial decision in any relevant proceeding; (d) the manner
in which the investments of any Portfolio are being managed; (e) a difference in
voting instructions given by Contract owners; or (f) a decision by a
Participating Insurance Company to disregard the voting instructions of Contract
owners. The Board shall promptly inform the Company if it determines that an
irreconcilable material conflict exists and the implications thereof.
7.2 The Company will report any potential or existing conflicts of which it is
aware to the Board. The Company will assist the Board in carrying out its
responsibilities under the Shared Funding Exemptive Order, by providing the
Board with all information reasonably necessary for the Board to consider any
issues raised. This includes, but is not limited to, an obligation by the
Company to inform the Board whenever contract owner voting instructions are
disregarded.
7.3 If it is determined by a majority of the Board, or a majority of its
disinterested members, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense and
to the extent reasonably practicable (as determined by a majority of the
disinterested directors), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1)
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a vote
of all affected Contract owners and, as appropriate, segregating the assets of
any appropriate group (i.e., annuity contract owners, life insurance policy
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
Contract owners the option of making such a change; and (2) establishing a new
registered management investment company of managed separate account.
7.4 If a material irreconcilable conflict arises because of a decision by the
Company to disregard contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's
investment in the Fund and terminate this Agreement with respect to such Account
(at the Company's expense); provided, however that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested members
of the Board.
7.5 If a material irreconcilable conflict arises because a particular state
insurance regulator's decision applicable to the Company conflicts with the
majority of other state regulators, then the Company will withdraw the affected
Account's investment in the Fund and terminate this Agreement with respect to
such Account within six months after the Board informs the Company in writing
that it has determined that such decision has created an irreconcilable material
conflict; provided, however, that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable conflict
as determined by a majority of the disinterested members of the Board. Until the
end of the foregoing six month period, the Underwriter and Fund shall continue
to accept and implement orders by the Company for the purchase (and redemption)
of shares of the Fund.
7.6. For purposes of Sections 7.3 through 7.5 of this Agreement, a majority of
the disinterested members of the Board shall determine whether any proposed
action adequately remedies any irreconcilable material conflict, but in no event
will the Fund be required to establish a new funding medium for the Contracts.
The Company shall not be required by Section 7.3 to establish a new funding
medium for the Contracts if an offer to do so has been declined by vote of a
majority of Contract owners materially adversely affected by the irreconcilable
material conflict.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or Rule
6e-3 is adopted, to provide exemptive relief from any provision of the 1940 Act
or the rules promulgated thereunder with respect to mixed or shared funding (as
defined in the Shared Funding Exemptive order) on terms and conditions
materially different from those contained in the Shared Funding Exemptive Order,
then (a) the fund and/or the Participating Insurance Companies, as appropriate,
shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T),
as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable;
and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall
continue in effect only to the extent that terms and conditions substantially
identical to such Sections are contained in such Rule(s) as so amended or
adopted.
ARTICLE VIII. INDEMNIFICATION
8.1 Indemnification by the Company
8.1(a). The Company agrees to indemnify and hold harmless the Fund and
each member of the board and officers, and each Adviser and each director and
officer of each Adviser, and each person, if any, who controls the Fund or the
Adviser within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" and individually, "Indemnified Party," for purposes of
this Section 8.1) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the company)
or litigation (including reasonable legal and other expenses), to which the
Indemnified Parties may become subject under any statute, regulation, at common
law or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) of settlements are related to the sale
or acquisition of the Fund' shares or the Contracts and:
(i) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained n
the registration statement or prospectus for the Contracts
or contained in the Contracts or sales literature for the
contracts (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission
or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the
statements therein not misleading, provided that this
agreement to indemnify shall not apply as to any Indemnified
Party if such statement or omission or such alleged
statement or omission was made in reliance upon and in
conformity with information furnished to the Company by or
on behalf of the Fund for use in the registration statement
or prospectus for the Contracts or in the contracts or sales
literature (or any amendment or supplement) or otherwise for
use in connection with the sale of the Contracts or Fund
shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
registration statement, prospectus or sales literature of
the Fund not supplied by the Company, or persons under its
control and other than statements or representations
authorized by the Fund or an Adviser)d or unlawful conduct
of the Company or persons under its control, with respect to
the sale or distribution of the Contracts or Fund shares; or
(iii)arise out of or as a result of any untrue statement or
alleged untrue statement of a material fact contained in a
registration statement, prospectus, or sales literature of
the Fund or any amendment thereof or supplement thereto or
the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the
statements therein not misleading if such a statement or
omission was made in reliance upon and in conformity with
information furnished to the Fund by or on behalf of the
Company; or
(iv) arise as a result of any failure by the Company to provide
the services and furnish the materials under the terms of
this Agreement; or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Company.
Each of paragraphs (i) through (v) above is limited by and in accordance with
the provisions of Sections 8.1(b) and 8.1(c) below.
8.1(b). The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this Agreement.
8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Company of any
such claim shall not relieve the Company from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified parties, the Company shall be entitled to participate,
at its own expense, in the defense of such action. The Company also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action. After notice from the Company to such party of the
Company's election to assume the defense thereof, the Indemnified Party shall
bear the fees and expenses of any additional counsel retained by it, and the
Company will not be liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
8.1(d). The Indemnified Parties will promptly notify the Company of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Fund shares or the Contracts or the operation of the
Fund.
8.2 Indemnification by Advisers
8.2(a). Each Adviser agrees, with respect to each Portfolio that it
manages, to indemnify and hold harmless the Company and each of its directors
and officers and each person, if any, who controls the Company within the
meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties"
and individually, "Indemnified Party," for purposes of this Section 8.2) against
any and all losses, claims, damages, liabilities (including amounts paid in
settlement with the written consent of the Adviser) or litigation (including
reasonable legal and other expenses) to which the Indemnified Parties may become
subject under any statute, regulation, at common law or otherwise, insofar as
such losses, claims, damages, liabilities or expenses (or actions in respect
thereof) or settlements are related to the sale or acquisition of shares of the
Portfolio that it manages or the Contracts and:
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
the registration statement or prospectus or sales literature
of the Fund (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission
or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the
statements therein not misleading, provided that this
agreement to indemnify shall not apply as to any Indemnified
Party if such statement or omission or such alleged
statement or omission was made in reliance upon and in
conformity with information furnished to the Fund by or on
behalf of the Company for use in the registration statement
or prospectus for the Fund or in sales literature (or any
amendment or supplement) or otherwise for use in connection
with the sale of the Contracts or Portfolio shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
registration statement, prospectus or sales literature for
the Contracts not supplied by the Fund or persons under its
control and other than statements or representations
authorized by the Company) or unlawful conduct of the Fund,
Adviser(s) or Underwriter or persons under their control,
with respect to the sale or distribution of the Contracts of
Portfolio shares; or
(iii)arise out of or as a result of any untrue statement or
alleged untrue statement of a material fact contained in a
registration statement, prospectus, or sales literature
covering the Contracts, or any amendment thereof or
supplement thereto, or the omission or alleged omission to
state therein a material fact required to be stated therein
or necessary to make the statement or statements therein not
misleading, if such statement or omission was made in
reliance upon information furnished to the Company by or on
behalf of the Fund; or
(iv) arise as a result of any failure by the Adviser to provide
the services and furnish the materials under the terms of
this Agreement; or
(v) arise out of or result form any material breach of any
representation and/or warranty made by the Adviser in this
Agreement or arise out of or result form any other material
breach of this Agreement by the Adviser.
Each of paragraphs (I) through (v) above is limited by and in accordance with
provisions of Sections 8.2(b) and 8.2(c) below.
8.2(b). An Adviser shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement.
8.2(c). An Adviser shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified party unless
such Indemnified Party shall have notified the Adviser in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Adviser of any
such claim shall not relieve the Adviser from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified parties, the Adviser will be entitled to participate, at
its own expense, in the defense thereof. The Adviser also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Adviser to such party of the Adviser's election to
assume the defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the Adviser will not be
liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
8.2(d). The Company agrees promptly to notify the Adviser of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Contracts or the
operation of each Account.
8.3. Indemnification by the Fund
8.3(a). The Fund agrees to indemnify and hold harmless the Company, and
each of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act (hereinafter
collectively, the "Indemnified Parties" and individually, "Indemnified Party,"
for purposes of this Section 8.3) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written consent of
the Fund) or litigation (including reasonable legal and other expenses) to which
the Indemnified Parties may become subject under any statute, regulation, at
common law or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) or settlements result from the gross
negligence, bad faith or willful misconduct of the Board or any member thereof,
are related to the operations of the Fund and:
(i) arise as a result of any failure by the Fund to provide the services
and furnish the materials under the terms of this Agreement; or
(ii) arise out of or result from any material breach of any representation
and/or warranty made by the Fund in this Agreement or arise out of or
result from any other material breach of this Agreement by the Fund.
Each of paragraphs (I) and (ii) above is limited by and in accordance with the
provisions of Section 8.3(b) and 8.3(c) below.
8.3(b). The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement.
8.3(c). The Fund shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified party shall have notified the Fund in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon such Indemnified Party (or after
such Indemnified party shall have received notice of such service on any
designated agent), but failure to notify the Fund of any such claim shall not
relieve the Fund from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action brought against the
Indemnified Parties, the Fund will be entitled to participate, at its own
expense, in the defense thereof. The Fund also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named in the action.
After notice from the Fund to such party of the Fund's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Fund will not be liable to such party
under this Agreement for any legal or other expenses subsequently incurred by
such party independently in connection with the defense thereof other than
reasonable costs of investigation.
8.3(d). The Company agrees promptly to notify the Fund of the
commencement of any litigation or proceedings against it or any of its
respective officers or directors in connection with this Agreement, the issuance
or sale of the Contracts, with respect to the operation of either Account, or
the sale or acquisition of shares of the Fund.
ARTICLE IX. APPLICABLE LAW
9.1 This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of the State of New York.
9,2 This Agreement shall be subject to the provisions of the 1933, 1934
and 1940 Acts, and the rules and regulations and rulings thereunder, including
such exemptions from those statutes, rules and regulations as the Securities and
Exchange Commission may grant (including, but not limited to, the Shared Funding
Exemptive Order) and the terms hereof shall be interpreted and construed in
accordance therewith.
ARTICLE X. TERMINATION
10.1. This Agreement shall continue in full force and effect until the first to
occur of:
(a) termination by any party for any reason by ninety(90) days advance
written notice delivered to the other party; or
(b) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio based upon the Company's
determination that shares of such Portfolio are not reasonably
available to meet the requirements of the Contracts; or
(c) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio in the event any of the
Portfolio's shares are not registered, issued or sold in accordance
with applicable state and/or federal law or such law precludes the use
of such shares as the underlying investment media of the Contracts
issued or to be issued by the Company; or
(d) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio in the event that such Portfolio
ceases to qualify as a Regulated Investment Company under Subchapter M
of the Code or under any successor or similar provision, or if the
Company reasonably believes that the Fund mail fail to so qualify; or
(e) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio in the event that such Portfolio
fails to meet the diversification requirements specified in Article VI
hereof; or
(f) termination by the Fund or an Adviser by written notice to the Company
if the Fund or the Adviser shall determine, in its sole judgment
exercised in good faith, that the Company and/or its affiliated
companies has suffered a material adverse change in its business,
operation, financial condition or prospects since the date of this
Agreement or is the subject of material adverse publicity; or
(g) termination by the Company by written notice to the Fund and the
Adviser, if the Company shall determine, in its sole judgment
exercised in good faith, that either Fund or the Adviser has suffered
a material adverse change in its business, operations, financial
condition or prospects since the date of this Agreement or is the
subject of material adverse publicity; or
(h) termination by the Fund or the Adviser by written notice to the
Company, if the Company gives the Fund and the Adviser the written
notice specified in Section 1.5 hereof and at the time such notice was
given there was no notice of termination outstanding under any other
provision of this Agreement; provided, however, any termination under
this Section 10.2(h) shall be effective forty five (45) days after the
notice specified in Section 1.5 was given; or
(i) termination by the Fund, an Adviser or the Company upon another
party's material breach of any provision of this Agreement.
10.2. Notwithstanding any termination of this Agreement, the Fund shall at the
option of the Company, continue to make available additional shares of the
Portfolios pursuant to the terms and conditions of this Agreement, for all
Contracts in effect on the effective date of termination of this Agreement
(hereinafter referred to as the "Existing Contracts"). Specifically, without
limitation, the owners of the Existing Contracts shall be permitted to direct
reallocation of investments in the Fund, redemption of investments in the Fund
and/or investment in the Fund upon the making of additional purchase payments
under the Existing Contracts. The parties agree that this Section 10.2 shall not
apply to any terminations under Article VII and the effect of such Article VII
terminations shall be governed by Article VII of this Agreement.
10.3 The Company shall not redeem Fund shares attributable to the
Contracts (as distinct from Fund shares attributable to the Company's assets
held in the Account) except (I) as necessary to implement Contract Owner
initiated or approved transactions, or (ii) as required by state and/or federal
laws or regulations or judicial or other legal precedent or general application
(hereinafter referred to as a "Legally Required Redemption") or (iii) as
permitted by an order of the Securities and Exchange Commission pursuant to
Section 26(b) of the 1940 Act. Upon request, the Company will promptly furnish
to the Fund the opinion of counsel for the Company (which counsel shall be
reasonably satisfactory to the Fund) to the effect that any redemption pursuant
to clause (ii) above is a Legally Required Redemption. Furthermore, except in
cases where permitted under the terms of the Contracts, the Company shall not
prevent Contract Owners from allocating payments to a Portfolio that was
otherwise available under the Contracts without first giving the Fund 90 days
prior written notice of its intention to do so.
ARTICLE XI. NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund:
Morgan Stanley Dean Witter Universal Funds, Inc.
c/o Morgan Stanley Dean Witter
Investment Management Inc.
1221 Avenue of the Americas
New York, New York 10020
Attention: Harold J. Schaaff, Jr., Esq.
If to the Advisers:
Morgan Stanley Dean Witter Investment Management, Inc.
1221 Avenue of the Americas
New York, New York 10020
Attention: Harold J. Schaaff, Jr., Esq.
and
Miller Anderson & Sherrerd, LLP
One Tower Bridge
West Conshohocken, Pennsylvania 19428
Attention: Lorraine Truten
If to the Company:
Valley Forge Life Insurance Company
333 S. Wabash, 43 South
Chicago, Illinois 60685
Attention: G. Stephen Wastek, Esq.
ARTICLE XII. MISCELLANEOUS
12.1. All persons dealing with the Fund must look solely to the property of
the Fund for the Fund for the enforcement of any claims against the Fund as
neither the Board, officers, agents or Shareholders assume any personal
liability for obligations entered into on behalf of the Fund.
12.2. Subject to the requirements of legal process and regulatory authority,
each party hereto shall treat as confidential the names and addresses of the
owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information until such time as it may come into
the public domain without the express written consent of the affected party.
12.3. The captions in this Agreement are included for convenience of reference
only And in no way define or delineate any of the provisions hereof or otherwise
affect their construction or effect.
12.4. The Agreement may be executed simultaneously in two or more counterparts,
each of which taken together shall constitute one and the same instrument.
12.5. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement shall
not be affected thereby.
12.6. Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the
Securities and Exchange Commission, the National Association of Securities
Dealers and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish State insurance regulators with any information or reports in
connection with services provided under this Agreement which such regulators may
request in order to ascertain whether the insurance operations of the Company
are being conducted in a manner consistent with applicable law or regulations.
12.7. The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any all rights, remedies and obligations at
law or in equity, which the parties hereto are entitled to under state and
federal laws.
12.8. This Agreement or any of the rights and obligations hereunder may not be
assigned by any party without the prior written consent of all parties hereto;
provided, however, that an Adviser may assign the Agreement or any rights or
obligations hereunder to any affiliate of or company under common control with
the Advisor, if such assignee is duly licensed and registered to perform the
obligations of the Adviser under this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date
specified above.
VALLEY FORGE LIFE INSURANCE COMPANY
By: S/David Stone
- -------------------
Name: David L. Stone
Title: Vice President
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
By: S/Stefanie Y. Chang
- -----------------------
Name: Stefanie Y. Chang
Title: Vice President
MARGAN STANLEY DEAN WITTER
INVESTMENT MANAGEMENT INC.
By: Marna C. Whittington
- --------------------------
Name: Marna C. Whittington
Title: Managing Director
MILLER ANDERSON & SHERRERD,LLP
By: Marna C. Whittington
- --------------------------
Name: Marna C. Whittington
Title: Authorized Signatory
SCHEDULE A
SEPARATE ACCOUNTS AND ASSOCIATED CONTRACTS
<TABLE>
<CAPTION>
<S> <C>
NAME OF SEPARATE ACCOUNT AND FORM NUMBER AND NAME OF
DATE ESTABLISHED BY BOARD OF DIRECTORS CONTRACT FUNDED BY SEPARATE ACCOUNT
Valley Forge Life Insurance Company - CNA Capital Select Variable Annuity
Variable Annuity Separate Account - CNA Capital Select Plus Variable
(Established October 15, 1995) Annuity
Valley Forge Life Insurance Company - CNA Capital Select Variable Universal
Variable Life Separate Account Life
(Established October 15,1995)
</TABLE>
A-1
SCHEDULE B
PORTFOLIOS OF MORGAN STANLEY DEAN WITTER
UNIVERSAL FUNDS, INC. AVAILABLE UNDER THIS AGREEMENT
Emerging Markets Equity Portfolio
International Magnum Portfolio
B-1
SCHEDULE C
PROXY VOTING PROCEDURES
The following is a list of procedures and corresponding responsibilities for the
handling of proxies and voting instructions relating to the Fund. The defined
terms herein shall have the meanings assigned in the Participation Agreement
except that the term "Company" shall also include the department or third party
assigned by the Company to perform the steps delineated below.
o The proxy proposals are given to the Company by the Fund as early as
possible before the date set by the Fund for the shareholder meeting to
enable the Company to consider and prepare for the solicitation of
voting instructions from owners of the Contracts and to facilitate the
establishment of tabulation procedures. At this time the Fund will
inform the Company of the Record, Mailing and Meeting dates. This will
be done verbally approximately two months before meeting.
o Promptly after the Record Date, the Company will perform a "tape run",
or other activity, which will generate the names, addresses and number
of units which are attributed to each Contract owner/policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.
Note: The number of proxy statements is determined by the activities
described in this Step #2. The Company will use its best efforts to
call in the number of Customers to the Fund, as soon as possible, but
no later than two weeks after the Record Date.
o The Fund's Annual Report must be sent to each Customer by the Company
either before or together with the Customers' receipt of voting,
instruction solicitation material. The Fund will provide the last
Annual Report to the Company pursuant to the terms of Section 3.3 of
the Agreement to which this Schedule relates.
o The text and format for the Voting Instruction Cards ("Cards" or
"Card") is provided to the Company by the Fund. The Company, at its
expense, shall produce and personalize the Voting Instruction Cards.
The Fund or its affiliate must approve the Card before it is printed.
Allow approximately 2-4 business days for printing information on the
Cards. Information commonly found on the Cards includes:
- - name (legal name as found on account registration)
- - address
- - fund or account number
C-1
- - coding to state number of units
- - individual Card number for use in tracking and verification of votes
(already on Cards as printed by the Fund).
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
o During this time, the Fund will develop, produce and pay for the Notice of
Proxy and the Proxy Statement (one document). Printed and folded notices
and statements will be sent to Company for insertion into envelopes
(envelopes and return envelopes are provided and paid for by the Company).
Contents of envelope sent to Customers by the Company will include:
- - Voting Instruction Card(s)
- - One proxy notice and statement (one document)
- - return envelope (postage pre-paid by Company) addressed to the Company or
its tabulation agent
- - "urge buckslip" - optional, but recommended. (This is a small, single sheet
of paper that requests Customers to vote as quickly as possible and that
their vote is important. One copy will be supplied by the Fund.)
- - cover letter - optional, supplied by Company and reviewed and approved in
advance by the Fund.
o The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews and
approves the contents of the mailing package to ensure correctness and
completeness. Copy of this approval sent to the Fund.
o Package mailed by the Company.
* The Fund must allow at least a 15-day solicitation time to the Company
as the shareowner. (A 5-week period is recommended.) Solicitation time
is calculated as calendar days from (but not including,) the meeting,
counting backwards.
o Collection and tabulation of Cards begins. Tabulation usually takes place
in another department or another vendor depending on process used. An often
used procedure is to sort Cards on arrival by proposal into vote categories
of all yes, no, or mixed replies, and to begin data entry.
Note: Postmarks are not generally needed. A need for postmark information
would be due to an insurance company's internal procedure and has not been
required by the Fund
C-2
in the past.
o Signatures on Card checked against legal name on account registration which
was printed on the Card.
Note: For Example, if the account registration is under "John A. Smith,
Trustee," then that is the exact legal name to be printed on the Card and
is the signature needed on the Card.
o If Cards are mutilated, or for any reason are illegible or are not signed
properly, they are sent back to Customer with an explanatory letter and a
new Card and return envelope. The mutilated or illegible Card is
disregarded and considered to be not received for purposes of vote
tabulation. Any Cards that have been "kicked out" (e.g. mutilated,
illegible) of the procedure are "hand verified," i.e., examined as to why
they did not complete the system. Any questions on those Cards are usually
remedied individually.
o There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort the
Cards as they first arrive into categories depending upon their vote; an
estimate of how the vote is progressing may then be calculated. If the
initial estimates and the actual vote do not coincide, then an internal
audit of that vote should occur. This may entail a recount.
o The actual tabulation of votes is done in units which is then converted to
shares. (It is very important that the Fund receives the tabulations stated
in terms of a percentage and the number of shares.) The Fund must review
and approve tabulation format.
o Final tabulation in shares is verbally given by the Company to the Fund on
the morning of the meeting not later that 10:00 a.m. Eastern time. The Fund
may request an earlier deadline if reasonable and if required to calculate
the vote in time for the meeting.
o A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
The Fund will provide a standard form for each Certification.
o The Company will be required to box and archive the Cards received from the
Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, the Fund will be
permitted reasonable access to such Cards.
o All approvals and "signing-off" may be done orally, but must always be
followed up in writing.
C-3
April 25, 2000
Securities and Exchange Commission
Division of Investment Management
Office of Insurance Products
450 Fifth St., N.W.
Washington, D.C.20549
Re: Opinion of Counsel-Valley Forge Life Insurance Company Variable Annuity
Separate Account File Nos. 333-1087 and 811-7547
Gentlemen:
This Opinion of Counsel is rendered in connection with the filing with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
amended, of Post Effective Amendment No. 7 to a Registration Statement filed on
Form N-4 for the variable annuity contract to be issued by Valley Forge Life
Insurance Company and its separate account, Valley Forge Life Insurance Company
Variable Annuity Separate Account. I have made such an examination of the law
and have examined such records and documents as, in my judgment, are necessary
or appropriate to enable me to render the opinions expressed below.
I am of the following opinions:
1. Valley Forge Life Insurance Company Variable Annuity Separate Account
is a Unit Investment Trust as that term is defined in Section 4(2) of
the Investment Company Act of 1940 (the "Act"), and is currently
registered with the Securities and Exchange Commission pursuant to
Section 8(a) of the Act.
2. Upon acceptance of the purchase payments paid by an owner pursuant to a
Contract issued in accordance with the Prospectus contained in the
Registration Statement and upon compliance with applicable law, such
owner will have a legally issued, fully paid, non-assessable
contractual interest under such contract.
You may use this opinion letter, or a copy thereof, as an exhibit to the
Registration Statement.
Sincerely,
/s/G. STEPHEN WASTEK
G. Stephen Wastek
Director & Senior Counsel
INDEPENDENT AUDITORS' CONSENT
We consent to the use in the Post-Effective Amendment No. 7 to Registration
Statement No. 333-1087 and in the Amendment No. 12 to Registration Statement
No. 811-7547, both filed on Form N-4 of Valley Forge Life Insurance Company
Variable Annuity Separate Account of our report on the financial statements
of Valley Forge Life Insurance Company, dated February 23, 2000, and our
report on the financial statements of the Valley Forge Life Insurance Company
Variable Annuity Separate Account, dated February 24, 2000, appearing in the
Registration Statement and to the reference to us under the heading "Experts"
in the Registration Statement.
/s/DELOITTE & TOUCHE LLP
Chicago, Illinois
April 24, 2000
April 25, 2000
Board of Directors
Valley Forge Life insurance Company
CNA Plaza- 43 South
Chicago, IL 60685
Gentlemen:
I hereby consent to the reference to my name under the caption "Legal Opinions"
in the Prospectus filed as part of Post-Effective Amendment No. 7 to the
Registration Statement on form N-4 filed by Valley Forge Life Insurance Company
Variable Annuity Separate Account (Reg. File No. 333-01087) with the Securities
and Exchange Commission. In giving this consent, I do not admit that I am in the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933.
Sincerely,
/s/G. STEPHEN WASTEK
G. Stephen Wastek
Director & Senior Counsel
<TABLE>
<CAPTION>
Net Rates of Return
Federated Federated Federated Fidelity Fidelity Fidelity Fidelity Alger Alger
Prime Money Utility Bond Equity Inc. Asset Mgr Index 500 Contrafund Small Cap Growth
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 3.47% 12.32% 1.25% 10.55% 15.74% 26.54% 28.30% 13.92% 46.00%
1999 2.65% 0.27% 0.88% 4.84% 9.54% 18.83% 22.52% 41.41% 31.88%
1 Year 2.65% 0.27% 0.88% 4.84% 9.54% 18.83% 22.52% 41.41% 31.88%
3 Years 3.20% 12.04% 4.66% 14.01% 15.38% 25.39% 24.42% 20.95% 33.66%
5 Years 3.19% 13.62% 8.92% 17.46% 15.01% 26.46% N/A 20.93% 29.14%
10 Years N/A N/A N/A 13.21% 12.16% N/A N/A 16.57% 21.28%
ITD - Fund 3.17% 10.87% 6.70% 12.36% 11.81% 19.44% 26.37% 19.16% 21.42%
ITD - Sub 3.13% 11.95% 4.91% 12.64% 13.99% 23.14% 22.80% 19.52% 30.46%
Valuation Date 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99
Fund Inception 11/21/94 02/10/94 03/01/94 10/09/86 09/06/89 08/27/92 01/03/95 09/21/88 01/09/89
Sub Inception 11/04/96 11/04/96 11/04/96 11/04/96 11/04/96 11/04/96 11/04/96 11/04/96 11/04/96
# of days - Fund 1866.00 2150.00 2131.00 4831.00 3768.00 2682.00 1823.00 4118.00 4008.00
# of days - Sub 1152.00 1152.00 1152.00 1152.00 1152.00 1152.00 1152.00 1152.00 1152.00
Alger MFS MFS MFS MFS MFS SoGen Van Eck Van Eck
MidCap Emerging GrowResearch Growth & IncoLtd. MaturitTotal Return Overseas Hard Assets Emerging Market
28.47% 32.29% 21.68% 20.61% 3.94% 10.69% 0.72% -29.67% -36.18%
30.01% 74.25% 22.32% 5.20% 0.83% 1.64% 43.20% 19.31% 97.49%
30.01% 74.25% 22.32% 5.20% 0.83% 1.64% 43.20% 19.31% 97.49%
23.74% 40.46% 20.85% 17.54% 3.11% 10.40% 11.59% -6.58% 3.18%
24.40% N/A N/A N/A N/A 13.81% N/A 0.77% N/A
N/A N/A N/A N/A N/A N/A N/A 1.98% N/A
23.00% 34.51% 21.16% 19.74% 3.53% 13.83% 11.98% 2.71% 8.21%
21.48% 36.09% 19.04% 16.09% 2.82% 9.50% 10.98% -6.01% 3.35%
12/31/99 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99
05/03/93 07/24/95 07/26/95 10/09/95 07/31/96 01/03/95 02/03/97 09/01/89 12/27/95
11/04/96 11/04/96 11/04/96 11/04/96 11/04/96 11/04/96 11/04/96 11/04/96 11/04/96
2433.00 1621.00 1619.00 1544.00 1248.00 1823.00 1061.00 3773.00 1465.00
1152.00 1152.00 1152.00 1152.00 1152.00 1152.00 1152.00 1152.00 1152.00
Janus Aspen Janus Aspen Janus Aspen Janus Aspen Janus Aspen Janus Aspen AVPSF AVPSF AMCent
Capital Apprec Growth Balanced Flexible IncoInternationaWorldwide GrGrth & Inc Prem. Grth Inc.& Grth
55.91% 33.77% 32.42% 7.59% 15.60% 27.13% 8.06% 45.78% 24.04%
64.67% 41.98% 24.99% 0.19% 79.73% 62.16% -1.62% 28.54% 16.35%
64.67% 41.98% 24.99% 0.19% 79.73% 62.16% -1.62% 28.54% 16.35%
N/A 31.98% 25.84% 5.91% 34.41% 35.41% 8.41% 35.18% N/A
N/A 28.08% 22.95% 9.33% 31.40% 31.74% 11.37% 24.98% N/A
N/A N/A N/A N/A N/A N/A N/A N/A N/A
55.07% 22.53% 18.93% 6.98% 26.39% 27.88% 7.55% 18.76% 22.12%
185.22% 102.26% 56.95% 5.67% 306.79% 200.00% NA NA NA
12/31/99 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99
05/02/97 09/13/93 09/13/93 09/13/93 05/02/94 09/13/93 01/14/91 06/26/92 10/30/97
08/31/99 08/31/99 08/31/99 08/31/99 08/31/99 08/31/99 03/31/99 03/31/99 03/31/99
973.00 2300.00 2300.00 2300.00 2069.00 2300.00 3273.00 2744.00 792.00
122.00 122.00 122.00 122.00 122.00 122.00 275.00 275.00 275.00
AmCent Templeton Templeton Lazard Lazard MSDWUF MSDWUF
Value Dev. Market Asset Alloc Ret. Equity Ret Sm. Cap Emerg. Mrkt Intl. Magnum
-4.24% -23.73% -1.13% NA -4.60% -25.65% 6.68%
-12.82% 49.07% 2.53% 2.89% 1.72% 92.92% 21.97%
-12.82% 49.07% 2.53% 2.89% 1.72% 92.92% 21.97%
0.74% -7.67% 1.91% N/A N/A 10.90% N/A
N/A N/A 6.70% N/A N/A N/A N/A
N/A N/A 5.70% N/A N/A N/A N/A
3.10% -7.78% 6.22% 5.50% -2.68% 9.15% 10.09%
NA NA NA NA NA NA NA
12/31/99 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99
05/01/96 03/01/96 08/24/88 11/04/97 03/19/98 10/01/96 01/02/97
03/31/99 03/31/99 03/31/99 03/31/99 03/31/99 03/31/99 03/31/99
1339.00 1400.00 4146.00 787.00 652.00 1186.00 1093.00
275.00 275.00 275.00 275.00 275.00 275.00 275.00
Capital Select Rates of Return - Assuming no Surrender
Federated Federated Federated Fidelity Fidelity Fidelity Fidelity Alger Alger
Prime Money Utility Bond Equity Inc. Asset Mgr Index 500 Contrafund Small Cap Growth
1998 3.41% 12.26% 1.19% 10.48% 15.67% 26.47% 28.23% 13.85% 45.91%
1999 2.59% 0.21% 0.82% 4.78% 9.48% 18.76% 22.45% 41.33% 31.80%
1 Year 2.59% 0.21% 0.82% 4.78% 9.48% 18.76% 22.45% 41.33% 31.80%
3 Years 3.14% 11.98% 4.60% 13.94% 15.31% 25.32% 24.35% 20.88% 33.58%
5 Years 3.13% 13.56% 8.86% 17.39% 14.94% 26.39% NA 20.86% 29.07%
10 Years NA NA NA 13.14% 12.09% NA NA 16.50% 21.21%
ITD - Fund 3.11% 10.81% 6.64% 12.29% 11.75% 19.37% 26.30% 19.09% 21.35%
ITD - Sub 3.07% 11.88% 4.85% 12.57% 13.93% 23.06% 22.73% 19.46% 30.39%
Alger MFS MFS MFS MFS MFS SoGen Van Eck
MidCap Emerging GrowResearch Growth & IncoLtd. MaturitTotal Return Overseas Hard Assets
28.40% 32.21% 21.60% 20.54% 3.88% 10.62% 0.66% -29.71%
29.93% 74.15% 22.24% 5.14% 0.77% 1.58% 43.12% 19.24%
29.93% 74.15% 22.24% 5.14% 0.77% 1.58% 43.12% 19.24%
23.67% 40.37% 20.78% 17.47% 3.05% 10.34% 11.52% -6.63%
24.32% NA NA NA NA 13.75% NA 0.71%
NA NA NA NA NA NA NA 1.92%
22.92% 34.43% 21.09% 19.67% 3.47% 13.76% 11.92% 2.65%
21.41% 36.01% 18.97% 16.02% 2.76% 9.43% 10.92% -6.07%
Van Eck Janus Aspen Janus Aspen Janus Aspen Janus Aspen Janus Aspen Janus Aspen AVPSF AVPSF AMCent
Emerging MarkeCapital ApprecGrowth Balanced Flexible IncInternationaWorldwide GroGrth & Inc Prem. Grth Inc.& Grth
-36.22% 55.82% 33.69% 32.34% 7.53% 15.54% 27.05% 8.00% 45.69% 23.97%
97.37% 64.57% 41.89% 24.92% 0.13% 79.63% 62.06% -1.67% 28.47% 16.28%
97.37% 64.57% 41.89% 24.92% 0.13% 79.63% 62.06% -1.67% 28.47% 16.28%
3.12% NA 31.90% 25.77% 5.85% 34.33% 35.34% 8.34% 35.10% NA
NA NA 28.00% 22.88% 9.27% 31.32% 31.66% 11.30% 24.90% NA
NA NA NA NA NA NA NA NA NA NA
8.14% 54.98% 22.46% 18.86% 6.92% 26.32% 27.81% 7.49% 18.69% 22.05%
3.29% 185.06% 102.14% 56.86% 5.60% 306.56% 199.82% NA NA NA
AmCent Templeton Templeton Lazard Lazard MSDWUF MSDWUF
Value Dev. Market Asset Alloc Ret. Equity Ret Sm. Cap Emerg. Mrkt Intl. Magnum
-4.29% -23.78% -1.18% NA -4.65% -25.69% 6.62%
-12.87% 48.98% 2.47% 2.83% 1.66% 92.81% 21.89%
-12.87% 48.98% 2.47% 2.83% 1.66% 92.81% 21.89%
0.68% -7.73% 1.85% NA NA 10.83% NA
NA NA 6.63% NA NA NA NA
NA NA 5.64% NA NA NA NA
3.04% -7.84% 6.16% 5.44% -2.74% 9.09% 10.02%
NA NA NA NA NA NA NA
Capital Select Surrender Charge Scale
Federated Federated Federated Fidelity Fidelity Fidelity Fidelity Alger Alger
Prime Money Utility Bond Equity Inc. Asset Mgr Index 500 Contrafund Small Cap Growth
1998 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
1999 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
1 Year 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
3 Years 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%
5 Years 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%
10 Years 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
ITD - Fund 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
ITD - Sub 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
Alger MFS MFS MFS MFS MFS SoGen Van Eck Van Eck Janus Aspen
MidCap Emerging GrowResearch Growth & IncoLtd. MaturitTotal Return Overseas Hard Assets Emerging MarCapital Appreciation
7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%
4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%
0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
Janus Aspen Janus Aspen Janus Aspen Janus Aspen Janus Aspen AVPSF AVPSF AMCent AmCent Templeton
Growth Balanced Flexible IncInternationalWorldwide GrGrth & Inc Prem. Grth Inc.& Grth Value Dev. Market
7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%
4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%
0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
Templeton Lazard Lazard MSDWUF MSDWUF
Asset Alloc Ret. Equity Ret Sm. Cap Emerg. Mrkt Intl. Magnum
7.00% 7.00% 7.00% 7.00% 7.00%
7.00% 7.00% 7.00% 7.00% 7.00%
7.00% 7.00% 7.00% 7.00% 7.00%
6.00% 6.00% 6.00% 6.00% 6.00%
4.00% 4.00% 4.00% 4.00% 4.00%
0.00% 0.00% 0.00% 0.00% 0.00%
7.00% 7.00% 7.00% 7.00% 7.00%
7.00% 7.00% 7.00% 7.00% 7.00%
Capital Select Retuns - Assuming Surrender
Federated Federated Federated Fidelity Fidelity Fidelity Fidelity Alger Alger
Prime Money Utility Bond Equity Inc. Asset Mgr Index 500 Contrafund Small Cap Growth
1998 -3.83% 4.40% -5.89% 2.75% 7.57% 17.61% 19.25% 5.88% 35.70%
1999 -4.60% -6.80% -6.24% -2.55% 1.81% 10.44% 13.88% 31.44% 22.57%
1 Year -4.60% -6.80% -6.24% -2.55% 1.81% 10.44% 13.88% 31.44% 22.57%
3 Years -3.05% 5.26% -1.68% 7.11% 8.39% 17.80% 16.89% 13.63% 25.56%
5 Years -0.99% 9.02% 4.50% 12.70% 10.35% 21.33% NA 16.03% 23.90%
10 Years NA NA NA 13.14% 12.09% NA NA 16.50% 21.21%
ITD - Fund -4.10% 3.05% -0.82% 4.43% 3.93% 11.02% 17.45% 10.76% 12.85%
ITD - Sub -4.14% 4.05% -2.49% 4.69% 5.95% 14.45% 14.14% 11.09% 21.26%
Alger MFS MFS MFS MFS MFS SoGen Van Eck Van Eck Janus Aspen
MidCap Emerging GrowResearch Growth & IncoLtd. MaturitTotal Return Overseas Hard Assets Emerging MarCapital Appreciation
19.41% 22.96% 13.09% 12.10% -3.39% 2.88% -6.39% -34.63% -40.68% 44.91%
20.83% 61.96% 13.69% -2.22% -6.28% -5.53% 33.10% 10.89% 83.56% 53.05%
20.83% 61.96% 13.69% -2.22% -6.28% -5.53% 33.10% 10.89% 83.56% 53.05%
16.25% 31.95% 13.53% 10.42% -3.13% 3.72% 4.83% -12.24% -3.06% NA
19.35% NA NA NA NA 9.20% NA -3.32% NA NA
NA NA NA NA NA NA NA 1.92% NA NA
14.32% 25.02% 12.61% 11.29% -3.78% 5.80% 4.08% -4.53% 0.57% 44.13%
12.91% 26.49% 10.65% 7.90% -4.44% 1.77% 3.16% -12.64% -3.94% 165.10%
Janus Aspen Janus Aspen Janus Aspen Janus Aspen Janus Aspen AVPSF AVPSF AMCent AmCent Templeton
Growth Balanced Flexible IncInternationalWorldwide GrGrth & Inc Prem. Grth Inc.& Grth Value Dev. Market
24.33% 23.08% 0.00% 7.45% 18.16% 0.44% 35.49% 15.29% -10.99% -29.11%
31.96% 16.17% -6.88% 67.05% 50.72% -8.56% 19.48% 8.14% -18.97% 38.55%
31.96% 16.17% -6.88% 67.05% 50.72% -8.56% 19.48% 8.14% -18.97% 38.55%
23.99% 18.22% -0.51% 26.27% 27.22% 1.84% 27.00% NA -5.36% -13.26%
22.88% 17.96% 4.90% 26.07% 26.40% 6.85% 19.91% NA NA NA
NA NA NA NA NA NA NA NA NA NA
13.89% 10.54% -0.56% 17.47% 18.86% -0.03% 10.38% 13.51% -4.18% -14.29%
87.99% 45.88% -1.79% 278.10% 178.83% NA NA NA NA NA
Templeton Lazard Lazard MSDWUF MSDWUF
Asset Alloc Ret. Equity Ret Sm. Cap Emerg. Mrkt Intl. Magnum
-8.10% NA -11.33% -30.90% -0.84%
-4.70% -4.37% -5.46% 79.31% 13.36%
-4.70% -4.37% -5.46% 79.31% 13.36%
-4.26% NA NA 4.18% NA
2.37% NA NA NA NA
5.64% NA NA NA NA
-1.27% -1.94% -9.54% 1.45% 2.32%
NA NA NA NA NA
</TABLE>
