<PAGE> 1
As filed with the Securities and Exchange Commission on April 30, 1999
File No. 333-19583
File No. 811-8015
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Post-Effective Amendment No. 3 [ ]
---
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 5
NATIONAL VARIABLE ANNUITY ACCOUNT II
(Exact Name of Registrant)
NATIONAL LIFE INSURANCE COMPANY
(Name of Depositor)
National Life Drive
Montpelier, Vermont 05604
(Address of Depositor's Principal Executive Offices)
Depositor's Telephone Number: (800) 537-7003
D. Russell Morgan, Esq.
Counsel
National Life Insurance Company
National Life Drive
Montpelier, Vermont 05604
(Name and Address of Agent for Service of Process)
Copy to:
Stephen E. Roth, Esquire
Sutherland, Asbill & Brennan, LLP
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2404
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b) of Rule 485
- ------
X on May 1, 1999 pursuant to paragraph (b) of Rule 485
- ------
60 days after filing pursuant to paragraph (a) of Rule 485
- ------
on May 1, 1999 pursuant to paragraph (a) of Rule 485
- ------
---------------------
<PAGE> 2
<PAGE> 3
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 .................... Definitions
3. Synopsis ....................... Expense Tables;
Introduction
4. Condensed Financial
Information .................. Advertising
5. General
(a) Depositor ................ National Life Insurance
Company
(b) Registrant ............... The Variable Account
(c) Portfolio Company ........ Underlying Fund Options
(d) Fund Prospectus .......... Underlying Fund Options
(e) Voting Rights ............ Voting Rights
(f) Administrators ........... N/A
6. Deductions and Expenses
(a) General .................. Charges and Deductions;
Introduction
(b) Sales Load ............... Charges and Deductions;
Introduction
(c) Special Purchase Plan .... N/A
(d) Commissions .............. Distribution of the
Contracts
(e) Expenses - Registrant .... Charges and Deductions;
Introduction
<PAGE> 4
(f) Fund Expenses ............ Charges and Deductions
(g) Organizational Expenses .. N/A
7. Contracts
(a) Persons with Rights ...... Introduction; Changes to
Variable Account;
Detailed Description of
Contract Provisions;
Contract Rights; Optional
Benefits; Voting Rights
(b) (i) Allocation of
Purchase Payments ... Introduction; Premium
Payments; Free-Look
(ii) Transfers ........... Introduction; Transfers
(iii) Exchanges ........... Transfers; Assignments
(c) Changes .................. Detailed Description of
Contract; Changes to
Variable Account
(d) Inquiries ................ Cover page; Owner
Inquiries
8. Annuity Period ................. Annuity Payment Options
9. Death Benefit .................. Death of Owner; Death of
Annuitant Prior to the
Annuitization Date
10. Purchases and Contract Value
(a) Purchases ................ Introduction; Issuance of
a Contract; Premium
Payments; Free Look;
Transfers
(b) Valuation ................ Definitions; Value of a
Variable Account
Accumulation Unit
(c) Daily Calculation ........ Definitions; Value of a
Variable Account
Accumulation Unit
(d) Underwriter .............. Distribution of the
Contracts
<PAGE> 5
11. Redemptions
(a) - By Owners .............. Transfers; Surrender;
Withdrawals; Payments;
Annuity Payment Options;
Federal Income Tax
Considerations
- By Annuitant ........... Transfers; Surrender;
Withdrawals; Payments;
Annuity Payment Options;
Federal Income Tax
Considerations
(b) Texas ORP ................ N/A
(c) Check Delay .............. N/A
(d) Lapse .................... N/A
(e) Free Look ................ Premium Payments; Free
Look
12. Taxes .......................... Introduction; Required
Distributions for Tax
Sheltered Annuities;
Required Distributions
for Individual Retirement
Annuities; Generation-
Skipping Transfers; Loan
Privilege-Tax Sheltered
Annuities; Surrenders and
Withdrawals under a Tax
Sheltered Annuity
Contact; Federal Income
Tax Considerations.
13. Legal Proceedings .............. Legal Proceedings
14. Table of Contents for the
Statement of Additional
Information ................... Table of Contents of
Statement of Additional
Information
<PAGE> 6
PART A
PROSPECTUS
<PAGE> 7
NATIONAL LIFE INSURANCE COMPANY
HOME 0FFICE:
NATIONAL LIFE DRIVE
MONTPELIER, VERMONT 05604
1-800-537-7003
Sentinel Advantage Variable Annuity
The Sentinel Advantage Contracts described in this prospectus are individual
flexible premium variable annuity contracts supported by National Variable
Annuity Account II (the "Variable Account"), a separate account of National Life
Insurance Company ("National Life, "we, "our, or "us"). We allocate net Premium
Payments to either the Fixed Account or to the Variable Account. The Variable
Account is divided into 27 Subaccounts. Each Subaccount invests in shares of a
corresponding underlying Fund option (each a "Fund") described below:
<TABLE>
<CAPTION>
FUNDS INVESTMENT ADVISOR
- ----- ------------------
<S> <C>
ALGER AMERICAN FUND
Alger American Small Capitalization Portfolio Fred Alger Management, Inc.
Alger American Growth Portfolio Fred Alger Management, Inc.
VARIABLE INSURANCE PRODUCTS FUND
Equity-Income Portfolio Fidelity Investments
Growth Portfolio Fidelity Investments
High Income Portfolio Fidelity Investments
Overseas Portfolio Fidelity Investments
VARIABLE INSURANCE PRODUCTS FUND II
Index 500 Portfolio Fidelity Investments
Contrafund Portfolio Fidelity Investments
THE MARKET STREET FUND
Growth Portfolio Sentinel Advisors Company
Sentinel Growth Portfolio Sentinel Advisors Company
Aggressive Growth Portfolio Sentinel Advisors Company
Bond Portfolio Sentinel Advisors Company
Managed Portfolio Sentinel Advisors Company
Money Market Portfolio Sentinel Advisors Company
International Portfolio Boston Company Asset Management Inc.
STRONG VARIABLE INSURANCE FUNDS, INC.
Mid Cap Growth Fund Strong Capital Management, Inc.
STRONG OPPORTUNITY FUND II, INC. Strong Capital Management, Inc.
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Bond Fund Van Eck Associates Corporation
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
VP Value Portfolio American Century Investment Management, Inc.
VP Income & Growth Portfolio American Century Investment Management, Inc.
GOLDMAN SACHS VARIABLE INSURANCE TRUST
International Equity Goldman Sachs Asset Management International
Global Income Goldman Sachs Asset management International
CORE Small Cap Equity Goldman Sachs Asset Management
Mid Cap Value Goldman Sachs Asset Management
</TABLE>
1
<PAGE> 8
<TABLE>
<S> <C>
J.P. MORGAN SERIES TRUST II
International Opportunities Portfolio J.P. Morgan Asset Management, Inc.
Small Company Portfolio J.P. Morgan Asset Management, Inc.
NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
Partners Portfolio Neuberger Berman Management Incorporated
</TABLE>
This Prospectus provides you with the basic information you should know
before investing. You should read it and keep it for future reference. A
Statement of Additional Information dated May 1, 1999 containing further
information about the Contracts and the Variable Account is filed with the
Securities and Exchange Commission. You can obtain a copy without charge from
National Life Insurance Company by calling 1-800-537-7003, or writing to
National Life at the address above. You may also obtain prospectuses for each of
the underlying Fund options identified above without charge by calling or
writing to the same telephone number or address. This Prospectus must be
accompanied by current prospectuses or profiles for the Funds.
Investments in these contracts are not deposits or obligations of, and
are not guaranteed or endorsed by, the adviser of any of the underlying funds
identified above, the U.S. government, or any bank or bank affiliate.
Investments are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other governmental agency.
It may not be a good decision to purchase a Contract as a replacement for
another type of variable annuity if you already own another flexible premium
deferred variable annuity.
The Securities and Exchange Commission has not approved or disapproved
these securities or passed upon the accuracy or adequacy of the Prospectus. Any
representation to the contrary is a criminal offense.
The Statement of Additional Information, dated May 1, 1999, is
incorporated herein by reference. The Table of Contents for the Statement of
Additional Information appears on page of the prospectus.
The date of this Prospectus is May 1, 1999.
2
<PAGE> 9
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY.....................................................................
SUMMARY OF CONTRACT EXPENSES................................................
UNDERLYING FUND ANNUAL EXPENSES.............................................
ACCUMULATION UNIT VALUES....................................................
NATIONAL LIFE INSURANCE COMPANY, THE VARIABLE ACCOUNT,
AND THE FUNDS.............................................................
National Life Insurance Company.........................................
The Variable Account....................................................
Underlying Fund Options.................................................
DETAILED DESCRIPTION OF CONTRACT PROVISIONS.................................
Issuance of the Contract................................................
Premium Payments........................................................
The Initial Premium Payment.......................................
Subsequent Premium Payments.......................................
Allocation of Net Premium Payments................................
Transfers...............................................................
Value of a Variable Account Accumulation Unit...........................
Net Investment Factor.............................................
Determining the Contract Value..........................................
Annuitization...........................................................
Maturity Date.....................................................
Election of Payment Options.......................................
Frequency and Amount of Annuity Payments..........................
Annuitization - Variable Account........................................
Value of an Annuity Unit..........................................
Assumed Investment Rate...........................................
Annuitization - Fixed Account...........................................
Annuity Payment Options.................................................
Death of Owner..........................................................
Death of Annuitant Prior to the Annuitization Date......................
Generation-Skipping Transfers...........................................
Ownership Provisions....................................................
CHARGES AND DEDUCTIONS......................................................
Deductions from the Variable Account....................................
Contingent Deferred Sales Charge........................................
Annual Contract Fee.....................................................
Transfer Charge.........................................................
Premium Taxes...........................................................
Charge for Optional Enhanced Death Benefit Rider........................
Other Charges...........................................................
CONTRACT RIGHTS AND PRIVILEGES..............................................
Free Look...............................................................
Surrender and Withdrawal................................................
Payments................................................................
Surrenders and Withdrawals Under a Tax-Sheltered Annuity Contract.......
Telephone Transaction Privilege.........................................
Available Automated Fund Management Features............................
Dollar Cost Averaging.............................................
Portfolio Rebalancing.............................................
Systematic Withdrawals............................................
Contract Rights Under Certain Plans.....................................
</TABLE>
3
<PAGE> 10
<TABLE>
<S> <C>
THE FIXED ACCOUNT...........................................................
Minimum Guaranteed and Current Interest Rates.......................
Enhanced Fixed Account..............................................
OPTIONAL ENHANCED DEATH BENEFIT RIDER.......................................
FEDERAL INCOME TAX CONSIDERATIONS...........................................
Taxation of Non-Qualified Contracts.................................
Taxation of Qualified Contracts.....................................
Possible Tax Law Changes............................................
Gender Neutrality...........................................................
VOTING RIGHTS...............................................................
CHANGES TO VARIABLE ACCOUNT.................................................
ADVERTISING.................................................................
Yield...............................................................
Performance.........................................................
DISTRIBUTION OF THE CONTRACTS...............................................
INSURANCE MARKETPLACE STANDARDS ASSOCIATION.................................
FINANCIAL STATEMENTS........................................................
STATEMENTS AND REPORTS......................................................
PREPARING FOR YEAR 2000.....................................................
OWNER INQUIRIES.............................................................
LEGAL PROCEEDINGS...........................................................
GLOSSARY....................................................................
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION....................
</TABLE>
4
<PAGE> 11
* * *
SUMMARY
This summary provides a brief description of some of the features and
charges of the Contract. You will find more detailed information in the rest of
this Prospectus, the Statement of Additional Information and the Contract.
Please keep the Contract and its riders or endorsements, if any, together with
the application. Together they are the entire agreement between you and us.
HOW DO I PURCHASE A CONTRACT?
Generally, you may purchase a Contract if you are age 85 and younger. See
"Issuance of a Contract," page _____. The initial Premium Payment must be at
least $5,000 for Non-Qualified Contracts, and at least $1500 for Qualified
Contracts. We may at our discretion permit initial Premium Payments lower than
these minimums.
CAN I MAKE ADDITIONAL PREMIUM PAYMENTS?
You may make additional Premium Payments at any time (except for Contracts
purchased in Oregon - see page ), but must be at least $100 ($50 for IRA's). We
may accept lower Premium Payments at our discretion if the Premium Payments are
remitted electronically. The total of all Premium Payments under Contracts
issued on the life of any one Owner (or Annuitant if the owner is not a
natural person) may not exceed $1,000,000 without our prior consent (see
"Premium Payments," page _____).
HOW DOES THE "FREE LOOK" RIGHT TO EXAMINE THE CONTRACT WORK?
To be sure that you are satisfied with the Contract, you have a ten day
free look right to examine the Contract. Some states may require a longer
period. Within ten days of the day you receive the Contract, you may return the
Contract to our Home Office at the address shown on the cover page of this
Prospectus. When we receive the Contract, we will void the Contract and refund
the Contract Value plus any charges assessed when the Contract was issued,
unless otherwise required by state and/or federal law.
In the case of IRA's and Contracts issued in states that require the
return of Premium Payments, we will refund the greater of: (i) Premium Payments
or (ii) Contract Value plus any amount deducted for state premium taxes. In
these cases, we may require that all Contract Value allocated to the Variable
Account initially be held in the Market Street Money Market Subaccount (see
"Free Look," page _____). At the end of the free look period, we will allocate
Contract Value among the Subaccounts based on the allocation percentages you
specify in the application. For this purpose, we assume the free look period
ends 20 days after the date the Contract is issued.
WHAT IS THE PURPOSE OF THE VARIABLE ACCOUNT?
The Variable Account is a separate investment account that consists of 27
Subaccounts. Amounts in the Variable Account will vary according to the
investment performance of the Fund(s) in which your elected Subaccounts are
invested. You may allocate Net Premium Payments among the Fixed Account and the
27 Subaccounts of the Variable Account. The assets of each Subaccount are
invested in the corresponding portfolios of the Funds that are listed on the
cover page of this Prospectus (see "The Variable Account" and "Underlying Fund
Options," pages _____).
We cannot give any assurance that any Subaccount will achieve its
investment objectives. You bear the entire investment risk on the value of your
Contract which you allocate to the Variable Account. The value of your Contract
may be more or less than the premiums paid.
HOW DOES THE FIXED ACCOUNT WORK?
You may allocate all or part of your Net Premium Payments or make
transfers from the Variable Account to the Fixed Account. Contract Value held
in the Fixed Account will earn an effective annual interest rate of at least
3.0% (see "The Fixed Account").
7
<PAGE> 12
WHEN WILL I RECEIVE PAYMENTS?
After the Contract Value is transferred to a payment option, we will pay
proceeds according to the Annuity Payment Option you select. If the Contract
Value at the Annuitization Date is less than $3,500, the Contract Value may be
distributed in one lump sum instead of annuity payments. If any annuity payment
would be less than $100, we have the right to change the frequency of payments
to intervals that will result in payments of at least $100. In no event will
annuity payments be less frequent than annually (see "Annuitization - Frequency
and Amount of Annuity Payments," page _____).
WHAT HAPPENS IF THE OWNER DIES BEFORE ANNUITIZATION?
If (1) any Owner dies before the Contract Value is transferred to a
payment option ("Annuitization"); (2) the Enhanced Death Benefit Rider is not
elected; and (3) the Owner has not reached age 81, we will pay the Beneficiary
the greater of (a) the Contract Value, or (b) the Net Premium Payments made to
the Contract (less all withdrawals). The amount paid will be reduced by premium
tax charges, if any. For more information, see "Death of Owner," page .
WHAT HAPPENS IF THE ANNUITANT DIES BEFORE ANNUITIZATION?
If the Annuitant (who is not an Owner) dies before the Contract Value is
transferred to a payment option, we will pay the Beneficiary a Death Benefit
equal to the Cash Surrender Value, unless the Owner selects another available
option (see "Death of Annuitant Prior to the Annuitization Date," page ).
CAN I MAKE A WITHDRAWAL FROM MY CONTRACT?
You may withdraw part or all of the Cash Surrender Value at any time
before the Contract is Annuitized (see "Surrender and Withdrawal," page ). A
Withdrawal or a Surrender may result in federal income tax, including a federal
penalty tax (see "Federal Income Tax Considerations," page ).
WHAT CHARGES WILL I PAY?
Contingent Deferred Sales Charge: We do not deduct a sales charge from
Premium Payments. However, if you surrender the Contract or make a Withdrawal,
we will generally deduct from the Contract Value a Contingent Deferred Sales
Charge not to exceed 7% of the lesser of the total of all Net Premium Payments
made within 84 months prior to the date of the request to surrender or the
amount surrendered (see "Contingent Deferred Sales Charge," page ).
Annual Contract Fee: We deduct an Annual Contract Fee of $30.00 payable on
the Date of Issue and at each Contract Anniversary thereafter as long as the
Contract Value is less than $50,000 (see "Annual Contract Fee," page ).
Administration Charge: We also deduct an Administration Charge each day at
an annual rate of 0.15% from the assets of the Variable Account (see "Deductions
from the Variable Account," page ).
Mortality and Expense Risk Charge: We deduct a mortality and expense risk
charge each day from the assets of the Variable Account at an annual rate of
1.25% (see "Deductions from the Variable Account," page ).
8
<PAGE> 13
Charge for Optional Enhanced Death Benefit Rider: If elected, we deduct an
annual charge of 0.20% of the Contract Value for this option (see "Charge for
Option Enhanced Death Benefit Rider," page ).
Premium Taxes: If a governmental entity imposes premium taxes, we will
make a deduction for premium taxes in a corresponding amount. Certain states
impose a premium tax. Premium taxes may range up to 3.5% (see "Premium
Taxes," page ).
Investment Management Fees: Charges for investment management services and
operating expenses are deducted daily from each portfolio of each Fund (see
"Underlying Fund Annual Expenses," page and the accompanying Fund
prospectuses).
ARE THERE ANY OTHER CONTRACT PROVISIONS?
For information concerning other important Contract provisions, see
"Contract Rights and Privileges," page and the remainder of this Prospectus.
HOW WILL THE CONTRACT BE TAXED?
For a brief discussion of our current understanding of the federal tax
laws concerning us and the Contract, see "Federal Income Tax Considerations,"
page .
WHAT IF I HAVE QUESTIONS?
We will be happy to answer your questions about the Contract or our
procedures. Call or write to us at the phone number or address on the cover
page. All inquiries should include the Contract number and the names of the
Owner and the Annuitant.
If you have questions concerning your investment strategies, please
contact your registered representative.
9
<PAGE> 14
SUMMARY OF CONTRACT EXPENSES
TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Load Imposed on Purchases............................................None
Premium Taxes..............................................................See below(1)
Contingent Deferred Sales Charge (as a percentage of Net Premium Payments
surrendered or withdrawn)(2)
Number of Completed Years from Date of Premium Payment
0........................................................7%
1........................................................6%
2........................................................5%
3........................................................4%
4........................................................3%
5........................................................2%
6........................................................1%
7........................................................0%
</TABLE>
<TABLE>
<CAPTION>
VARIABLE ACCOUNT ANNUAL EXPENSES (DEDUCTED DAILY AS A PERCENTAGE OF VARIABLE ACCOUNT CONTRACT VALUE)
<S> <C>
Mortality and Expense Risk Charge..........................................1.25%
Administration Charge......................................................0.15%
-----
Total Basic Variable Account Annual Percentage Expenses....................1.40%
ANNUAL CONTRACT FEE(3).....................................................$30
CHARGE FOR OPTIONAL ENHANCED DEATH BENEFIT RIDER(4)........................0.20%
</TABLE>
(1) States may assess premium taxes on premiums paid under the Contract. Where
National Life is required to pay this premium tax when a Premium Payment is
made, it may deduct an amount equal to the amount of premium tax paid from
the Premium Payment. National Life currently intends to make this deduction
from Premium Payments only in South Dakota. In the remaining states which
assess premium taxes, a deduction will be made only upon Annuitization,
death of the Owner, or surrender. See "Premium Taxes", page .
(2) Each Contract Year, the Owner may withdraw without a Contingent Deferred
Sales Charge (CDSC) an amount equal to 15% of the Contract Value as of the
most recent Contract Anniversary. In addition, any amount withdrawn in order
for the Contract to meet minimum Distribution requirements under the Code
shall be free of CDSC. Withdrawals may be restricted for Contracts issued
pursuant to the terms of a Tax-Sheltered Annuity. This CDSC-free Withdrawal
privilege does not apply in the case of full surrenders and is
non-cumulative; that is, free amounts not taken during any given Contract
Year cannot be taken as free amounts in a subsequent Contract Year; in
addition, New Jersey and Washington do not permit this CDSC-free Withdrawal
provision, in which case a different CDSC-free Withdrawal provision will
apply (see "Contingent Deferred Sales Charge", page ).
(3) The Annual Contract Fee is assessed only upon Contracts which as of the Date
of Issue or applicable Contract Anniversary, have a Contract Value of less
than $50,000 and is not assessed on Contract Anniversaries after the
Annuitization Date.
(4) This charge, which applies to the Contract Value, is assessed only if the
Owner has elected the Enhanced Death Benefit Rider. See "Optional Enhanced
Death Benefit Rider", page .
10
<PAGE> 15
UNDERLYING FUND ANNUAL EXPENSES(6)(AS A PERCENTAGE OF UNDERLYING FUND AVERAGE
NET ASSETS)
<TABLE>
<CAPTION>
Management Other Total Mutual
Fees, Expenses, Fund Expenses,
after expense after expense after expense
reimbursement reimbursement reimbursement
------------- ------------- -------------
<S> <C> <C> <C>
Alger American Small Capitalization Portfolio 0.85% 0.04% 0.89%
Alger American Growth Portfolio 0.75% 0.04% 0.79%
Fidelity VIP Fund-Equity Income Portfolio 0.49% 0.08% 0.57%
Fidelity VIP Fund-Growth Portfolio 0.59% 0.07% 0.66%
Fidelity VIP Fund-High Income Portfolio 0.58% 0.12% 0.70%
Fidelity VIP Fund-Overseas Portfolio 0.74% 0.15% 0.89%
Fidelity VIP Fund II-Index 500 Portfolio 0.24% 0.04% 0.28%
Fidelity VIP Fund II-Contrafund Portfolio 0.59% 0.07% 0.66%
Market Street Growth Portfolio 0.32% 0.14% 0.46%
Market Street Sentinel Growth Portfolio 0.50% 0.32% 0.82%
Market Street Aggressive Growth Portfolio 0.41% 0.20% 0.61%
Market Street Managed Portfolio 0.40% 0.17% 0.57%
Market Street Bond Portfolio 0.35% 0.18% 0.53%
Market Street International Portfolio 0.75% 0.25% 1.00%
Market Street Money Market Portfolio 0.25% 0.15% 0.40%
Strong Opportunity Fund II, Inc. 1.00% 0.20% 1.20%
Strong Mid Cap Growth Fund 1.00% 0.20% 1.20%
Van Eck Worldwide Bond Fund 1.00% 0.15% 1.15%
American Century VP Value 1.00% 0.00% 1.00%
American Century VP Income & Growth 0.70% 0.00% 0.70%
Goldman Sachs International Equity 1.00% 0.25% 1.25%
Goldman Sachs Global Income 0.90% 0.15% 1.05%
Goldman Sachs CORE Small Cap Equity 0.75% 0.15% 0.90%
Goldman Sachs Mid Cap Value 0.80% 0.15% 0.95%
J.P. Morgan International Opportunities 0.60% 0.60% 1.20%
J.P. Morgan Small Company 0.60% 0.55% 1.15%
Neuberger Berman Partners 0.78% 0.06% 0.84%
</TABLE>
(5) The Fund expenses shown above are assessed at the underlying Fund level and
are not direct charges against Variable Account assets or reductions from
Contract Values. These underlying Fund expenses are taken into consideration in
computing each underlying Fund's net asset value, which is the share price used
to calculate the unit values of the Variable Account. The management fees and
other expenses are more fully described in the prospectuses for each individual
underlying Fund. The information relating to the underlying Fund expenses was
provided by the underlying Fund and was not independently verified by National
Life. In the absence of any voluntary fee waivers or expense reimbursements, the
Management Fees, Other Expenses, and Total Expenses of the Funds listed below
would have been as follows:
11
<PAGE> 16
<TABLE>
<CAPTION>
Management Other Total Mutual
Fees Expenses Fund Expenses
---- -------- -------------
<S> <C> <C> <C>
Fidelity VIP Fund-Equity Income Portfolio 0.49% 0.09% 0.58%
Fidelity VIP Fund-Growth Portfolio 0.59% 0.09% 0.68%
Fidelity VIP Fund-Overseas Portfolio 0.74% 0.17% 0.91%
Fidelity VIP Fund II-Index 500 Portfolio 0.24% 0.11% 0.35%
Fidelity VIP Fund II-Contrafund Portfolio 0.59% 0.11% 0.70%
Market Street Growth Portfolio 0.32% 0.15% 0.47%
Market Street Sentinel Growth Portfolio 0.50% 0.33% 0.83%
Market Street Aggressive Growth Portfolio 0.41% 0.21% 0.62%
Market Street Managed Portfolio 0.40% 0.18% 0.58%
Market Street Bond Portfolio 0.35% 0.20% 0.55%
Market Street Money Market Portfolio 0.25% 0.17% 0.42%
Strong Mid Cap Growth Fund 1.00% 0.60% 1.60%
Goldman Sachs International Equity 1.00% 1.97% 2.97%
Goldman Sachs Global Income 0.90% 2.40% 3.30%
Goldman Sachs CORE Small Cap Equity 0.75% 3.17% 3.92%
Goldman Sachs Mid Cap Value 0.80% 0.57% 1.37%
J.P. Morgan International Opportunities 0.60% 2.66% 3.26%
J.P. Morgan Small Company 0.60% 2.83% 3.43%
</TABLE>
It is anticipated that these reimbursement arrangements will continue, but there
are no legal obligations to continue these arrangements for any particular
period of time; if they are terminated the affected Fund's expenses may
increase.
12
<PAGE> 17
EXAMPLE
The following chart depicts the dollar amount of expenses that would be incurred
under this Contract assuming a $1000 investment and 5% annual return, and no
election of the optional Enhanced Death Benefit Rider. THESE DOLLAR FIGURES ARE
ILLUSTRATIVE ONLY AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN
BELOW.
<TABLE>
<CAPTION>
If you surrender your If you do not surrender
Contract at the end of your Contract at the end of
the applicable time period. the applicable time period.
Subaccount* 1 Yr. 3 Yrs. 5 Yrs. 10 Yrs. 1 Yr. 3 Yrs. 5 Yrs. 10 Yrs.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Alger American Small Capitalization 94 123 155 267 24 73 125 267
Alger American Growth 93 120 150 257 23 70 120 257
Fidelity VIP Fund-Equity Income 91 113 139 234 21 63 109 234
Fidelity VIP Fund-Growth 91 116 143 244 21 66 113 244
Fidelity VIP Fund-High Income 92 117 145 248 22 67 115 248
Fidelity VIP Fund-Overseas 94 123 155 267 24 73 125 267
Fidelity VIP Fund II-Index 500 88 105 124 204 18 55 94 204
Fidelity VIP Fund II-Contrafund 91 116 143 244 21 66 113 244
Market Street Growth 89 110 133 223 19 60 103 223
Market Street Sentinel Growth 93 121 151 260 23 71 121 260
Market Street Aggressive Growth 91 115 141 239 21 65 111 239
Market Street Managed 91 113 139 234 21 63 109 234
Market Street Bond 90 112 137 230 20 62 107 230
Market Street International 95 126 160 278 25 76 130 278
Market Street Money Market 89 108 130 217 19 58 100 217
Strong Opportunity Fund II, Inc. 97 132 170 298 27 82 140 298
Strong Mid Cap Growth Fund 97 132 170 298 27 82 140 298
Van Eck Worldwide Bond Fund 96 131 168 293 26 81 138 293
American Century VP Value 95 126 160 278 25 76 130 278
American Century VP Income & Growth 92 117 145 248 22 67 115 248
Goldman Sachs International Equity 97 134 173 303 27 84 143 303
Goldman Sachs Global Income 95 128 163 283 25 78 133 283
Goldman Sachs CORE Small Cap Equity 94 123 155 268 24 73 125 268
Goldman Sachs Mid Cap Value 94 125 158 273 24 75 128 273
J.P. Morgan International Opportunities 97 132 170 298 27 82 140 298
J.P. Morgan Small Company 96 131 168 293 26 81 138 293
Neuberger Berman Partners 93 121 152 262 23 71 122 262
<CAPTION>
If you annuitize your
Contract at the end of
the applicable time period.
Subaccount* 1 Yr.** 3 Yrs. 5 Yrs. 10 Yrs.
<S> <C> <C> <C> <C>
Alger American Small Capitalization 24 73 125 267
Alger American Growth 23 70 120 257
Fidelity VIP Fund-Equity Income 21 63 109 234
Fidelity VIP Fund-Growth 21 66 113 244
Fidelity VIP Fund-High Income 22 67 115 248
Fidelity VIP Fund-Overseas 24 73 125 267
Fidelity VIP Fund II-Index 500 18 55 94 204
Fidelity VIP Fund II-Contrafund 21 66 113 244
Market Street Growth 19 60 103 223
Market Street Sentinel Growth 23 71 121 260
Market Street Aggressive Growth 21 65 111 239
Market Street Managed 21 63 109 234
Market Street Bond 20 62 107 230
Market Street International 25 76 130 278
Market Street Money Market 19 58 100 217
Strong Opportunity Fund II, Inc. 27 82 140 298
Strong Mid Cap Growth Fund 27 82 140 298
Van Eck Worldwide Bond Fund 26 81 138 293
American Century VP Value 25 76 130 278
American Century VP Income & Growth 22 67 115 248
Goldman Sachs International Equity 27 84 143 303
Goldman Sachs Global Income 25 78 133 283
Goldman Sachs CORE Small Cap Equity 24 73 125 268
Goldman Sachs Mid Cap Value 24 75 128 273
J.P. Morgan International Opportunities 27 82 140 298
J.P. Morgan Small Company 26 81 138 293
Neuberger Berman Partners 23 71 122 262
</TABLE>
*For purposes of computing the Annual Contract Fee, the Annual Contract Fee has
been converted into a per-dollar per-day charge. The per-dollar per-day charge
has been calculated by taking the total Annual Contract Fees received during
1998 and dividing by the average assets in the Variable Account. This works out
to 0.08% per annum. The Annual Contract Fee is waived for Contracts with
Contract Values of $50,000 or more.
**The Contract may not be annuitized in the first two years from the Date of
Issue.
13
<PAGE> 18
For an Owner who has elected the Enhanced Death Benefit Rider (see "Optional
Enhanced Death Benefit Rider", page ), and again assuming a $1000 investment and
5% annual return, the chart below depicts the annual expenses that would be
incurred under this Contract:
<TABLE>
<CAPTION>
If you surrender your If you do not surrender
Contract at the end of your Contract at the end of
the applicable time period. the applicable time period.
Subaccount* 1 Yr. 3 Yrs. 5 Yrs. 10 Yrs. 1 Yr. 3 Yrs. 5 Yrs. 10 Yrs.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Alger American Small Capitalization 96 129 165 287 26 79 135 287
Alger American Growth 95 126 160 277 25 76 130 277
Fidelity VIP Fund-Equity Income 93 119 149 255 23 69 119 255
Fidelity VIP Fund-Growth 93 122 153 264 23 72 123 264
Fidelity VIP Fund-High Income 94 123 155 268 24 73 125 268
Fidelity VIP Fund-Overseas 96 129 165 287 26 79 135 287
Fidelity VIP Fund II-Index 500 90 111 134 225 20 61 104 225
Fidelity VIP Fund II-Contrafund 93 122 153 264 23 72 123 264
Market Street Growth 91 116 143 244 21 66 113 244
Market Street Sentinel Growth 95 127 161 280 25 77 131 280
Market Street Aggressive Growth 93 121 151 259 23 71 121 259
Market Street Managed 93 119 149 255 23 69 119 255
Market Street Bond 92 118 147 251 22 68 117 251
Market Street International 97 132 170 298 27 82 140 298
Market Street Money Market 91 114 140 238 21 64 110 238
Strong Opportunity Fund II, Inc. 99 138 180 317 29 88 150 317
Strong Mid Cap Growth Fund 99 138 180 317 29 88 150 317
Van Eck Worldwide Bond Fund 98 137 178 312 28 87 148 312
American Century VP Value 97 132 170 298 27 82 140 298
American Century VP Income & Growth 94 123 155 268 24 73 125 268
Goldman Sachs International Equity 99 140 183 322 29 90 153 322
Goldman Sachs Global Income 97 134 173 303 27 84 143 303
Goldman Sachs CORE Small Cap Equity 96 129 165 288 26 79 135 288
Goldman Sachs Mid Cap Equity 96 131 168 293 26 81 138 293
J.P. Morgan International Opportunities 99 138 180 317 29 88 150 317
J.P. Morgan Small Company 98 137 178 312 28 87 148 312
Neuberger Berman Partners 95 127 162 282 25 77 132 282
<CAPTION>
If you annuitize your
Contract at the end of
the applicable time period.
Subaccount* 1 Yr.** 3 Yrs. 5 Yrs. 10 Yrs.
<S> <C> <C> <C> <C>
Alger American Small Capitalization 26 79 135 287
Alger American Growth 25 76 130 277
Fidelity VIP Fund-Equity Income 23 69 119 255
Fidelity VIP Fund-Growth 23 72 123 264
Fidelity VIP Fund-High Income 24 73 125 268
Fidelity VIP Fund-Overseas 26 79 135 287
Fidelity VIP Fund II-Index 500 20 61 104 225
Fidelity VIP Fund II-Contrafund 23 72 123 264
Market Street Growth 21 66 113 244
Market Street Sentinel Growth 25 77 131 280
Market Street Aggressive Growth 23 71 121 259
Market Street Managed 23 69 119 255
Market Street Bond 22 68 117 251
Market Street International 27 82 140 298
Market Street Money Market 21 64 110 238
Strong Opportunity Fund II, Inc. 29 88 150 317
Strong Mid Cap Growth Fund 29 88 150 317
Van Eck Worldwide Bond Fund 28 87 148 312
American Century VP Value 27 82 140 298
American Century VP Income & Growth 24 73 125 268
Goldman Sachs International Equity 29 90 153 322
Goldman Sachs Global Income 27 84 143 303
Goldman Sachs CORE Small Cap Equity 26 79 135 288
Goldman Sachs Mid Cap Equity 26 81 138 293
J.P. Morgan International Opportunities 29 88 150 317
J.P. Morgan Small Company 28 87 148 312
Neuberger Berman Partners 25 77 132 282
</TABLE>
*For purposes of computing the Annual Contract Fee, the Annual Contract Fee has
been converted into a per-dollar per-day charge. The per-dollar per-day charge
has been calculated by taking the total Annual Contract Fees received during
1998 and dividing by the average assets in the Variable Account. This works out
to 0.08% per annum. The Annual Contract Fee is waived for Contracts with
Contract Values of $50,000 or more.
**The Contract may not be annuitized in the first two years from the Date of
Issue.
The purpose of the Summary of Contract Expenses and Example is to assist
you in understanding the various costs and expenses that will be borne directly
or indirectly when investing in the Contract. The expenses of the Variable
Account as well as those of the underlying Funds are reflected in the Example.
For more complete descriptions of the expenses of the Variable Account, see
"Charges and Deductions", page . For more complete information regarding
expenses paid out of the assets of the underlying Funds, see the underlying
Fund prospectuses. Deductions for premium taxes may also apply but are not
reflected in the Example shown above (see "Premium Taxes", page ). Certain
states impose a premium tax, currently ranging up to 3.5%.
14
<PAGE> 19
ACCUMULATION UNIT VALUES
The following table sets forth, for each of the Subaccounts which began
operations on June 20, 1997, the accumulation unit value at June 20, 1997 , the
accumulation unit values at December 31, 1997 and 1998, and the number of
accumulation units outstanding at December 31, 1998.
<TABLE>
<CAPTION>
Number of
Accumulation Accumulation Accumulation Accumulation Units
Unit Value at Unit Value at Unit Value at Outstanding at
Subaccount June 20 , 1997 December 31, 1997 December 31, 1998 December 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Alger American Small Capitalization $10.00 11.00 12.53 180,967.55
- -----------------------------------------------------------------------------------------------------------------------------------
Alger American Growth $10.00 10.65 15.55 174,624.86
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Equity Income $10.00 10.84 11.93 446,646.08
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Growth $10.00 10.71 14.74 128,908.47
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-High Income $10.00 10.83 10.22 316,357.63
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Overseas $10.00 9.45 10.51 137,169.62
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund II-Index 500 $10.00 10.88 13.77 644,354.50
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund II-Contrafund $10.00 10.95 14.04 220,659.55
- -----------------------------------------------------------------------------------------------------------------------------------
Market Street Growth $10.00 10.68 11.96 681,315.40
- -----------------------------------------------------------------------------------------------------------------------------------
Market Street Sentinel Growth $10.00 11.16 12.71 167,349.38
- -----------------------------------------------------------------------------------------------------------------------------------
Market Street Aggressive Growth $10.00 10.74 11.43 67,028.38
- -----------------------------------------------------------------------------------------------------------------------------------
Market Street Managed $10.00 10.64 11.80 321,764.26
- -----------------------------------------------------------------------------------------------------------------------------------
Market Street Bond $10.00 10.42 11.12 258,757.60
- -----------------------------------------------------------------------------------------------------------------------------------
Market Street International $10.00 9.52 10.34 117,450.09
- -----------------------------------------------------------------------------------------------------------------------------------
Market Street Money Market $10.00 10.20 10.59 464,682.04
- -----------------------------------------------------------------------------------------------------------------------------------
Strong Opportunity Fund II, Inc. $10.00 11.16 12.50 125,380.26
- -----------------------------------------------------------------------------------------------------------------------------------
Strong Mid Cap Growth Fund $10.00 11.26 14.29 79,046.28
- -----------------------------------------------------------------------------------------------------------------------------------
Van Eck Worldwide Bond $10.00 10.25 11.39 8,968.55
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
The following table sets forth, for each of the Subaccounts which began operations on August 3, 1998, the
accumulation unit value on August 3, 1998, the accumulation unit value on December 31, 1998, and the number of
accumulation units outstanding on December 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Number of
Accumulation Accumulation Accumulation Units
Unit Value at Unit Value at Outstanding at
- -----------------------------------------------------------------------------------------------------------
Subaccount August 3, 1998 December 31, 1998 December 31, 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
American Century VP Value 10.0 10.41 480.38
- -----------------------------------------------------------------------------------------------------------
American Century VP Income & Growth 10.0 10.96 2,561.63
- -----------------------------------------------------------------------------------------------------------
Goldman Sachs International Equity 10.0 10.11 4,779.45
- -----------------------------------------------------------------------------------------------------------
Goldman Sachs Global Income 10.0 10.39 0
- -----------------------------------------------------------------------------------------------------------
Goldman Sachs CORE Small Cap Equity 10.0 9.45 0
- -----------------------------------------------------------------------------------------------------------
Goldman Sachs Mid Cap Value 10.0 9.88 1,009.46
- -----------------------------------------------------------------------------------------------------------
J.P. Morgan International Opportunities 10.0 9.69 0
- -----------------------------------------------------------------------------------------------------------
J.P. Morgan Small Company 10.0 9.98 10,554.25
- -----------------------------------------------------------------------------------------------------------
Neuberger Berman Partners 10.0 10.19 9,444.56
- -----------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 20
NATIONAL LIFE INSURANCE COMPANY,
THE VARIABLE ACCOUNT, AND THE FUNDS
NATIONAL LIFE INSURANCE COMPANY
National Life is authorized to transact life insurance and annuity
business in Vermont and in 50 other jurisdictions. National Life was originally
chartered as a mutual life insurance company in 1848 under Vermont law. It is
now a stock life insurance company, all of the outstanding stock of which is
indirectly owned by National Life Holding Company, a mutual insurance holding
company established under Vermont law on January 1, 1999. All policyholders of
National Life, including all the Owners of the Contracts, are voting members of
National Life Holding Company. National Life assumes all mortality and expense
risks under the Contracts and its assets support the Contract's benefits.
Financial Statements for National Life are contained in the Statement of
Additional Information.
THE VARIABLE ACCOUNT
The Variable Account was established by National Life on November 1, 1996,
pursuant to the provisions of Vermont law. National Life has caused the Variable
Account to be registered with the Securities and Exchange Commission as a unit
investment trust pursuant to the provisions of the Investment Company Act. Such
registration does not involve supervision of the management of the Variable
Account or National Life by the Securities and Exchange Commission.
The Variable Account is a separate investment account of National Life
and, as such, is not chargeable with liabilities arising out of any other
business National Life may conduct. National Life does not guarantee the
investment performance of the Variable Account. Obligations under the Contracts
are obligations of National Life. Income, gains and losses, whether or not
realized, from the assets of the Variable Account are credited to or charged
against the Variable Account without regard to other income, gains, or losses of
National Life.
Net Premium Payments are allocated within the Variable Account among one
or more Subaccounts made up of shares of the Fund options designated by the
Owner. A separate Subaccount is established within the Variable Account for each
of the Fund options.
UNDERLYING FUND OPTIONS
You may choose from among a number of different Subaccount options.
However, National Life reserves the right to limit the number of different
Subaccounts, other than the Market Street Money Market Subaccount, used in any
Contract over its entire life to 16.
Summary information, including the investment objectives for each of the
underlying Funds held in the Subaccounts is set forth below. THERE CAN BE NO
ASSURANCE THAT THE INVESTMENT OBJECTIVES WILL BE ACHIEVED.
The investment objectives and policies of certain Funds are similar to the
investment objectives and policies of other mutual fund portfolios that may be
managed by the same investment adviser or manager. The investment results of the
Funds, however, may be higher or lower than the results of such other
portfolios. There can be no assurance, and no representation is made, that the
investment results of any of the Funds will be comparable to the investment
results of any other portfolios, even if the other portfolio has the same
investment adviser or manager.
THE ALGER AMERICAN FUND
The Alger American Fund is a "series" type Fund registered with the SEC as
a diversified open-end management investment company issuing a number of series
of shares, each of which represents an interest in a Portfolio of the Alger
American Fund. Fred Alger Management, Inc., acts as the Fund's investment
advisor.
16
<PAGE> 21
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO
Investment Objective: To seek long-term capital appreciation by
focusing on small, fast-growing companies that offer innovative
products, services or technologies to a rapidly expanding
marketplace. Under normal circumstances, the portfolio invests
primarily in the equity securities of small capitalization
companies. A small capitalization company is one that has a market
capitalization within the range of the Russell(R) 2000 Growth Index
or the S&P(R) SmallCap 600 Index.
ALGER AMERICAN GROWTH PORTFOLIO
Investment Objective: To seek long-term capital appreciation by
focusing on growing companies that generally have broad product
lines, markets, financial resources and depth of management. Under
normal circumstances, the portfolio invests primarily in the equity
securities of large companies. The portfolio considers a large
company to have a market capitalization of $1 billion or greater.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
The Fund is an open-end, diversified, management investment company.
The Equity-Income, Growth, High Income, and Overseas Portfolios of the VIP Fund
and the Index 500 and Contrafund Portfolios of the VIP Fund II are managed by
Fidelity Management and Research Company ("FMR"). FMR has entered into
sub-advisory agreements with FMR U.K., FMR Far East, and Fidelity International
Investment Advisors for the Overseas Portfolio.
-EQUITY-INCOME PORTFOLIO
Investment Objective: This Portfolio seeks reasonable income. The
Portfolio will also consider the potential for capital
appreciation. The Portfolio seeks a yield which exceeds the
composite yield on the securities comprising the Standard & Poor's
500 Composite Stock Price Index ("S&P 500"). FMR normally invest at
least 65% of the Portfolio's assets in income-producing equity
securities.
-GROWTH PORTFOLIO
Investment Objective: This Portfolio seeks capital appreciation.
FMR normally invests the Portfolio's assets primarily in common
stocks. FMR normally invests the Portfolio's assets in companies
FMR believes have above-average growth potential.
-HIGH INCOME PORTFOLIO
Investment Objective: This Portfolio seeks a high level of current
income while also considering growth of capital. FMR normally
invests at least 65% of the Portfolio's total assets in income
producing debt securities, preferred stocks, and convertible
securities, with an emphasis on lower-quality debt securities. For
a discussion of the risks associated with such investments, please
see the "Risks of Lower Rated Debt Securities" section of the
Portfolio's prospectus.
17
<PAGE> 22
-OVERSEAS PORTFOLIO
Investment Objective: This Portfolio seeks long term growth of
capital. FMR normally invests at least 65% of the Portfolio's total
assets in foreign securities. FMR normally invests the Portfolio's
assets primarily in common stocks.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
The Variable Insurance Products Fund II is an open-end,
diversified, management investment company. FMR is the Fund's manager. Bankers
Trust Company currently serves as sub-advisor to the Index 500 Portfolio.
-INDEX 500 PORTFOLIO
Investment Objective: This Portfolio seeks investment results that
correspond to the total return of common stocks publicly traded in
the United States, as represented by the S&P 500. Bankers Trust
Company normally invests at least 80% of the Portfolio's assets in
common stocks included in the S&P 500.
-CONTRAFUND PORTFOLIO
Investment Objective: This Portfolio seeks capital appreciation.
FMR normally invest the Portfolio's assets primarily in common
stocks. FMR invest the Portfolio's assets in securities of
companies whose value FMR believes is not fully recognized by the
public.
MARKET STREET FUND, INC.
The Market Street Fund, Inc. is a "series" type Fund registered with the
SEC as a diversified open-end management investment company issuing a number of
series or classes of shares, each of which represents an interest in a Portfolio
of the Fund. Sentinel Advisors Company acts as the Fund's investment advisor for
all portfolios except the International Fund, whose investment advisor is
Providentmutual Investment Management Company, and whose subadvisor is The
Boston Company Asset Management, Inc.
GROWTH PORTFOLIO
Investment Objective: To seek intermediate and long-term growth of
capital. A reasonable level of income is an important secondary objective. This
Portfolio pursues its objectives by investing primarily in common stocks of
companies believed to offer above-average growth potential over both the
intermediate and the long term.
SENTINEL GROWTH PORTFOLIO
Investment Objective: To seek long-term growth of capital through equity
participation in companies having growth potential believed by its
investment adviser to be more favorable than the U.S. economy as a whole,
with a focus on relatively well-established companies.
18
<PAGE> 23
AGGRESSIVE GROWTH PORTFOLIO
Investment Objective: To seek to achieve a high level of long-term capital
appreciation by investing in securities of a diverse group of smaller
emerging companies.
BOND PORTFOLIO
Investment Objective: To seek to generate a high level of current income
consistent with prudent investment risk by investing in a diversified
portfolio of marketable debt securities.
MANAGED PORTFOLIO
Investment Objective: To seek to realize as high a level of long-term
total rate of return as is consistent with prudent investment risk by
investing in stocks, bonds, money market instruments or a combination
thereof.
INTERNATIONAL PORTFOLIO
Investment Objective: To seek long-term growth of capital principally
through investments in a diversified portfolio of marketable equity
securities of established non-United States companies.
MONEY MARKET PORTFOLIO
Investment Objective: To seek to provide maximum current income consistent
with capital preservation and liquidity by investing in high-quality money
market instruments. AN INVESTMENT IN THE MONEY MARKET PORTFOLIO IS NEITHER
INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT, AND THERE CAN BE NO ASSURANCE
THAT THE PORTFOLIO WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.
STRONG VARIABLE INSURANCE FUNDS, INC.
Strong Variable Insurance Funds, Inc. is an open-end management investment
company. Strong Capital Management, Inc. is the investment advisor to the Funds.
-MID CAP GROWTH FUND
Investment Objective: To seek capital growth. It invests primarily in
equity securities that the advisor believes have above-average growth
prospects.
STRONG OPPORTUNITY FUND II, INC.
The Strong Opportunity Fund II, Inc. is a diversified, open-end management
company. Strong Capital Management, Inc. is the investment advisor for
the Fund.
Investment Objective: To seek capital appreciation through investments in
a diversified portfolio of equity securities.
VAN ECK WORLDWIDE INSURANCE TRUST
Van Eck Worldwide Insurance Trust is an open-end management investment
company. The investment advisor and manager is Van Eck Associates Corporation.
19
<PAGE> 24
WORLDWIDE BOND FUND
Investment Objective: To seek high total return through a flexible policy
of investing globally, primarily in debt securities.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
American Century Variable Portfolios, Inc. is a "series" type mutual fund
registered with the SEC as a diversified open-end management investment company
issuing a number of series or classes of shares, each of which represents an
interest in a fund of American Century Variable Portfolios, Inc. American
Century Investment Management, Inc. acts as the investment advisor to these
Funds.
VP VALUE
Investment Objective: To seek long-term capital growth. Income is a
secondary objective. The fund will seek to achieve its investment objective by
investing in securities that management believes to be undervalued at the time
of purchase.
VP INCOME & GROWTH
Investment Objective: To seek dividend growth, current income and capital
appreciation. The fund will seek to achieve its investment objective by
investing in common stocks.
GOLDMAN SACHS VARIABLE INSURANCE TRUST
Goldman Sachs Variable Insurance Trust ("Goldman Sachs VIT") is
registered with the SEC as an open-end management investment company that
offers shares in several investment mutual funds ("Funds"). Each Fund, except
the Global Income Fund, is a diversified investment company. Goldman Sachs
Asset Management acts as investment adviser for the Goldman Sachs VIT CORE
Small Cap Equity and Mid Cap Equity Funds. Goldman Sachs Asset Management
International acts as investment adviser for the Goldman Sachs VIT
International Equity and Global Income Funds.
GOLDMAN SACHS VIT INTERNATIONAL EQUITY FUND: Investment Objective.
Seeks long-term capital appreciation through investments in equity securities
of companies that are organized outside the U.S. or whose securities are
principally traded outside the U.S.
GOLDMAN SACHS VIT GLOBAL INCOME FUND: Investment Objective. Seeks
a high-total return, emphasizing current income and, to a lesser extent,
providing opportunities for capital appreciation. The Fund invests primarily
in a portfolio of high quality fixed-income securities of U.S. and foreign
issuers and foreign currencies.
GOLDMAN SACHS VIT CORE SMALL CAP EQUITY FUND: Investment Objective
Seeks long-term growth of capital through a broadly diversified portfolio of
equity securities of U.S. issuers which are included in the Russell 2000 Index
at the time of investment.
20
<PAGE> 25
GOLDMAN SACHS VIT MID CAP VALUE FUND*: Investment Objective. Seeks
long-term capital appreciation primarily through investments in equity
securities of companies with public stock market capitalizations within the
range of the market capitalization of companies constituting the Russell Midcap
Index at the time of investment (currently between $400 million and $16
billion).
*Effective May 1, 1999 the Goldman Sachs VIT Mid Cap Equity Fund will be
renamed the Goldman Sachs VIT Mid Cap Value Fund
J.P. MORGAN SERIES TRUST II
J.P. Morgan Series Trust II is a "series" type mutual fund registered with
the SEC as a diversified open-end management investment company issuing a number
of series or classes of shares, each of which represents an interest in a
Portfolio of J.P. Morgan Series Trust II. J.P. Morgan Asset Management, Inc.
acts as the Fund's investment advisor.
J.P. MORGAN INTERNATIONAL OPPORTUNITIES PORTFOLIO
Investment Objective: Seeks to provide a high total return from a portfolio
comprised of equity securities of foreign corporations. The Portfolio is
designed for investors with a long-term investment horizon who want to diversify
their investments by adding international equities and take advantage of
investment opportunities outside the U.S. As an international investment, the
Portfolio is subject to foreign market, political, and currency risks.
J.P. MORGAN SMALL COMPANY PORTFOLIO
Investment Objective: Seeks to provide a high total return from a portfolio
comprised of equity securities of small companies. The Portfolio invests at
least 65% of the value of its total assets in the common stock of small U.S.
companies primarily with market capitalizations of less than $1 billion. The
Portfolio is designed for investors who are willing to assume the somewhat
higher risk of investing in small companies in order to seek a higher return
over time than might be expected from a portfolio of large companies.
NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
Neuberger Berman Advisers Management Trust ("AMT") is registered with
the SEC as a diversified open-end management investment company. AMT has nine
separate series, which are called Portfolios. Shares of each Portfolio
represent an interest in that Portfolio. Neuberger Berman Management Inc. acts
as the Fund's investment advisor. Neuberger Berman, LLC is the sub-adviser.
PARTNERS PORTFOLIO
Investment Objective: To seek capital growth. This Portfolio invests
mainly in common stock of mid-to large-capitalization companies. Its investment
co-managers seek securities believed to be undervalued based on fundamentals
such as low price-to-earnings ratios, consistent cash flows, and the company's
track record through all points of the market cycle. The Portfolio generally
considers selling a stock when it reaches the managers' target price, when it
fails to perform as expected, or when other opportunities appear more
attractive. The Portfolio has the ability to change its goal without
shareholder approval, although it does not currently intend to do so.
OTHER INFORMATION
Contractual Arrangements. National Life has entered into or may enter into
agreements with Funds pursuant to which the adviser or distributor pays
National Life a fee based upon an annual percentage of the average net asset
amount invested on behalf of the Variable Account and our other separate
accounts. These percentages may differ and we may be paid a greater percentage
by some investment advisers or distributors than other advisers or
distributors. These agreements reflect administrative services we provide.
Conflicts of Interest. The Funds may also be available to registered
separate accounts offering variable annuity and variable life products of other
participating insurance companies, as well as to the Variable Account
21
<PAGE> 26
and other separate accounts of National Life. Although we do not anticipate any
disadvantages to this, there is a possibility that a material conflict may arise
between the interest of the Variable Account and one or more of the other
separate accounts participating in the underlying Funds. A conflict may occur
due to a change in law affecting the operations of variable life and variable
annuity separate accounts, differences in the voting instructions of the Owners
and those of other companies, or some other reason. In the event of conflict, we
will take any steps necessary to protect Owners and variable annuity payees,
including withdrawal of the Variable Account from participation in the
underlying Fund or Funds which are involved in the conflict.
DETAILED DESCRIPTION OF CONTRACT PROVISIONS
ISSUANCE OF A CONTRACT
The Contract is available to Owners up to and including age 85 on the Date
of Issue. If the Contract is issued to Joint Owners, then the oldest Joint Owner
must be 85 years of age or younger on the Date of Issue. If the Owner is not a
natural person, then the age of the Annuitant must meet the requirements for
Owners. At our discretion, we may issue Contracts at ages higher than age 85.
In order to purchase a Contract, an individual must forward an application
to us through a licensed National Life agent who is also a registered
representative of Equity Services, Inc. ("ESI"), the principal underwriter of
the Contracts or another broker/dealer having a Selling Agreement with ESI or a
broker/dealer having a Selling Agreement with such a broker/dealer.
PREMIUM PAYMENTS
The Initial Premium Payment. The initial Premium Payment must be at least
$5,000 for Non-Qualified Contracts, and must be at least $1500 for Qualified
Contracts. We may at our discretion permit initial Premium Payments lower than
these minimums. For Contracts purchased in South Carolina, the initial Premium
Payment for Qualified Contracts must be at least $3000.
Subsequent Premium Payments. Subsequent Premium Payments may be made at
any time, but must be at least $100 ($50 for Individual Retirement Annuities).
We may accept lower Premium Payments at our discretion if the Premium Payments
are remitted electronically. Subsequent Premium Payments to the Variable
Account will purchase Accumulation Units at the price next computed for the
appropriate Subaccount after we receive the additional Premium Payment. For
Contracts purchased in the States of Oregon and Massachusetts we are not
permitted to accept subsequent Premium Payments on or after the third Contract
Anniversary.
The total of all Premium Payments under Contracts issued on the life of
any one Owner (or Annuitant if the owner is not a natural person) Annuitant may
not exceed $1,000,000 without our prior consent.
Transactions will not be processed on the following days: New Year's
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, the day after Thanksgiving and Christmas Day. In addition, Premium
Payments will not be allocated and transactions will not be effected to the
Money Market Subaccount on Columbus Day and Veterans Day.
Allocation of Net Premium Payments. In the application for the Contract,
the Owner will indicate how Net Premium Payments are to be allocated among the
Subaccounts of the Variable Account and/or the Fixed Account. These allocations
may be changed at any time by the Owner by written notice to us at our Home
Office or, if the telephone transaction privilege has been elected, by telephone
instructions (see "Telephone Transaction Privilege", page ).
The percentages of Net Premium Payments that may be allocated to any
Subaccount or the Fixed Account must be in whole numbers of not less than 5%,
and the sum of the allocation percentages must be 100%. We allocate the initial
Net Premium Payment within two business days after receipt, if the application
and all information necessary for processing the order are complete.
22
<PAGE> 27
If the application is not properly completed, we retain the initial
Premium Payment for up to five business days while attempting to complete the
application. If the application is not complete at the end of the five day
period, we inform the applicant of the reason for the delay and the initial
Premium Payment will be returned immediately, unless the applicant specifically
consents to our retaining the initial Premium Payment until the application is
complete. Once the application is complete, we allocate the initial Net Premium
Payment as designated by the Owner within two business days.
Notwithstanding the foregoing, in jurisdictions where we must refund the
greater of: 1) aggregate Premium Payments or 2) Contract Value (plus any amount
deducted for state premium taxes) in the event you exercise the free look right,
any portion of the initial Net Premium Payment to be allocated to the Variable
Account will be allocated to the Market Street Money Market Subaccount during
the free look period. At the end of that period, the amount in the Market Street
Money Market Subaccount will be allocated to the Subaccounts as designated by
you in proportion to the allocation percentage for each Subaccount set forth in
the Net Premium Payment allocation schedule then in effect. We assume the free
look period ends 20 days after the date the Contract is issued.
We allocate subsequent Net Premium Payments as of the Valuation Date we
receive Net Premium Payments, based on your allocation percentages then in
effect. At the time of allocation, we apply Net Premium Payments to the purchase
of Fund shares. The net asset value of the shares purchased are converted into
Accumulation units.
We reserve the right to limit the number of Variable Account Subaccounts
other than the Market Street Money Market Subaccount used in a single Contract
over the entire life of the Contract to 16.
The Subaccount values will vary with their investment experience, and you
bear the entire investment risk. You should periodically review your allocation
percentages in light of market conditions and your overall financial objectives.
TRANSFERS
You may transfer the Contract Value among the Subaccounts of the Variable
Account and between the Variable Account and the Fixed Account (subject to the
limitations set forth below) by making a written transfer request. If you elect
the telephone transaction privilege, you may make transfers by telephone. See
"Telephone Transaction Privilege", page . Transfers are made as of the Valuation
Day that the request for transfer is received at the Home Office. Transfers to
or from the Subaccounts may be postponed under certain circumstances. See
"Payments," page .
We currently allow transfers to the Fixed Account of all or any part of
the Variable Account Contract Value, without charge or penalty. We reserve the
right to restrict transfers to the Fixed Account to 25% of the Variable Account
Contract Value during any Contract Year.
You may, (only one each year and within 45 days after the end of the
calendar year) transfer a portion of the value in the Fixed Account to the
Variable Account. Prior to the end of the calendar year, we determine the
maximum percentage that may be transferred from the Fixed Account. This
percentage will be at least 10% of the Contract Value in the Fixed Account (25%
in New York). After a transfer from the Fixed Account to the Variable Account,
we reserve the right to require that the value transferred remain in the
Variable Account for at least one year before it may be transferred back to the
Fixed Account.
We do not permit transfers between the Variable Account and the Fixed
Account after the Annuitization Date.
We have no current intention to impose a transfer charge in the
foreseeable future. However, we reserve the right, upon prior notice, to impose
a transfer charge of $25 for each transfer in excess of twelve transfers in any
one Contract Year. See "Transfer Charge", page .
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VALUE OF A VARIABLE ACCOUNT ACCUMULATION UNIT
We set the value of a Variable Account Accumulation Unit for each
Subaccount at $10 when the Subaccounts commenced operations. We determine the
value for any subsequent Valuation Period by multiplying the value of an
Accumulation Unit for each Subaccount for the immediately preceding Valuation
Period by the Net Investment Factor for the Subaccount during the subsequent
Valuation Period. The value of an Accumulation Unit may increase or decrease
from Valuation Period to Valuation Period. No minimum value of an Accumulation
Unit is guaranteed. The number of Accumulation Units will not change as a
result of investment experience.
Net Investment Factor. Each Subaccount of the Variable Account has its
own Net Investment Factor.
- The Net Investment Factor measures the daily investment performance of
that Subaccount.
- The Net Investment Factor may be greater or less than one; therefore,
the value of an Accumulation Unit may increase or decrease.
- Changes in the Net Investment Factor may not be directly proportional
to changes in the net asset value of Fund shares, because of the
deduction for the Mortality and Expense Risk Charge and Administration
Charge.
Fund shares are valued at their net asset value. The Net Investment Factor
allows for the monthly reinvestment of daily dividends that are credited by some
Funds (the Market Street Money Market Portfolio).
DETERMINING THE CONTRACT VALUE
The Contract Value is the sum of:
1) the value of all Variable Account Accumulation Units, and
2) amounts allocated and credited to the Fixed Account.
When charges or deductions are made against the Contract Value, we deduct
an appropriate number of Accumulation Units from the Subaccounts and an
appropriate amount from the unloaned value in the Fixed Account in the same
proportion that the your interest in the Subaccounts and in the Fixed Account
bears to the total Contract Value. Value held in the Fixed Account is not
subject to Variable Account charges (Mortality and Expense Risk and
Administration Charges), but may be subject to Contingent Deferred Sales
Charges, the Annual Contract Fee, optional Enhanced Death Benefit Rider charge,
and premium taxes, if applicable.
ANNUITIZATION
Maturity Date. The Maturity Date is the date on which annuity payments
are scheduled to begin. You select the Maturity Date on the application. The
earliest Maturity Date must be at least 2 years after the Date of Issue, unless
otherwise approved (10 years after the Date of Issue in the States of Oregon
and Massachusetts). If no specific Maturity Date is selected, the Maturity Date
will be the date you reach age 90 (the Annuitant's age 90 if the Owner is not a
natural person); or, if later, 10 years after the Date of Issue. You may elect
a single payment equal to the cash Surrender Value on the Maturity Date, rather
than annuity payments.
If you request in writing (see "Ownership Provisions", page ), and we
approve the request, the Maturity Date may be accelerated or deferred.
Election of Payment Options. You may, with prior written notice and, at
any time prior to the Annuitization Date, elect one of the Annuity Payment
Options. We apply the Contract Value in each Subaccount (less any premium tax
previously unpaid) to provide a Variable Annuity payment. We apply the Contract
Value in the Fixed Account (less any premium tax previously unpaid) to provide
a Fixed Annuity payment.
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<PAGE> 29
If an election of an Annuity Payment Option is not on file with National
Life on the Annuitization Date, we will pay the proceeds as Option 3 - Payments
for Life with 120 months certain. You may elect, revoke or change an Annuity
Payment Option at any time before the Annuitization Date within 30 days prior
written notice. The Annuity Payment Options available are described below.
Frequency and Amount of Annuity Payments. We pay annuity payments as
monthly installments, unless you select annual, semi-annual or quarterly
installments. If the amount to be applied under any Annuity Payment Option is
less than $3,500, we have the right to pay such amount in one lump sum in lieu
of the payments otherwise selected. In addition, if the payments selected would
be or become less than $100, we have the right to change the frequency of
payments that will result in payments of at least $100. In no event will we make
payments under an annuity option less frequently than annually.
ANNUITIZATION - VARIABLE ACCOUNT
We will determine the dollar amount of the first Variable Annuity payment
by dividing the Variable Account Contract Value on the Annuitization Date by
1,000 and applying the result as set forth in the applicable Annuity Table. The
amount of each Variable Annuity payment depends on the age of the Chosen Human
Being on his or her birthday nearest the Annuitization Date, and the sex of the
Chosen Human Being, if applicable, unless otherwise required by law.
- Variable Annuity payments vary in amount in accordance with the
investment performance of the Variable Account;
- To establish the number of Annuity Units representing each monthly
annuity payment, the dollar amount of the first annuity payment as
determined above is divided by the value of an Annuity Unit on the
Annuitization Date;
- The number of Annuity Units remains fixed during the annuity payment
period;
- The dollar amount of the second and subsequent payments is not
predetermined and may change from payment to payment; and
- The dollar amount of each subsequent payment is determined by
multiplying the fixed number of Annuity Units by the value of an
Annuity Unit for the Valuation Period in which the payment is due.
Once payments have begun, future payments will not reflect any changes in
mortality experience.
Value of an Annuity Unit. The value of an Annuity Unit for a Subaccount is
set at $10 when the first Fund shares are purchased. The value of an Annuity
Unit for a Subaccount for any subsequent Valuation Period is determined by
multiplying the value of an Annuity Unit for the immediately preceding Valuation
Period by the applicable Net Investment Factor for the Valuation Period for
which the value of an Annuity Unit is being calculated and multiplying the
result by an interest factor to neutralize the assumed investment rate of 3.5%
per annum (see "Net Investment Factor", page ).
Assumed Investment Rate. A 3.5% Assumed Investment Rate is built into the
Annuity Tables contained in the Contracts. We may make assumed investment rates
available at rates other than 3.5%. A higher assumption would mean a higher
initial payment but more slowly rising or more rapidly falling subsequent
payments. A lower assumption would have the opposite effect. If the actual
investment return, as measured by the Net Investment Factor, is at a constant
annual rate of 3.5%, the annuity payments will be level.
ANNUITIZATION - FIXED ACCOUNT
A Fixed Annuity is an annuity with payments which are guaranteed as to
dollar amount during the annuity payment period. We determine the amount of the
periodic Fixed Annuity payments by
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applying the Fixed Account Contract Value to the applicable Annuity Table in
accordance with the Annuity Payment Option elected. This is done at the
Annuitization Date using the age of the Chosen Human Being on his or her
nearest birthday, and the sex of the Chosen Human Being, if applicable. The
applicable Annuity Table will be based on our expectation of investment
earnings, expenses and mortality (if payments depend on whether the Chosen
Human Being is alive) on the Annuitization Date. The applicable Annuity Table
will provide a periodic Fixed Annuity payment at least as great as the
guarantee described in your Contract.
We do not credit discretionary interest to Fixed Annuity payments during
the annuity payment period for annuity options based on life contingencies. The
Annuitant must rely on the Annuity Tables applicable to the Contracts to
determine the amount of Fixed Annuity payments.
ANNUITY PAYMENT OPTIONS
Any of the following Annuity Payment Options may be elected:
Option 1-Payments for a Stated Time. We will make monthly payments for the
number of years selected, which may range from 5 years to 30 years.
Option 2-Payments for Life-An annuity payable monthly during the lifetime
of an Chosen Human Being (who may be named at the time of election of the
Payment Option), ceasing with the last payment due prior to the death of
the Chosen Human Being. It would be possible under this option for the
payee to receive only one annuity payment if the annuitant dies before
the second annuity payment date, two annuity payments if the Annuitant
dies before the third annuity payment date, and so on.
Option 3-Payments for Life with Period Certain-Guaranteed - An annuity
that if at the death of the Chosen Human Being payments have been made
for less than 10 or 20 years, as selected, we guarantee to continue
annuity payments during the remainder of the selected period.
We may allow other Annuity Payment Options.
Some of the stated Annuity Payment Options may not be available in all
states. You may request an alternative non-guaranteed option by giving notice in
writing prior to Annuitization. If a request is approved by us, it will be
permitted under the Contract.
IRA's and Tax-Sheltered Annuities are subject to the minimum Distribution
requirements set forth in the Code.
Under Payment Option 1, you may change to any other Payment Option at any
time. At the time of the change, remaining value will be applied to the new
Payment Option to determine the amount of the new payments. Under Payment
Option 1, you may also fully surrender the Contract at any time. A surrender
is subject to any applicable Contingent Deferred Sales Charge at the time of
the surrender.
DEATH OF OWNER
If you or a Joint Owner dies prior to the Annuitization Date, then, we
will pay (unless the Enhanced Death Benefit Rider has been elected) a Death
Benefit to the Beneficiary.
If you or a Joint Owner dies prior to attaining age 81, the Death Benefit
will be equal to the greater of:
(a) the Contract Value, or
(b) the Net Premium Payments made to the Contract,
minus all Withdrawals (including any CDSC deducted in connection with
such Withdrawals), and,
in each case,
minus any applicable premium tax charge to be assessed upon in each case
distribution.
If you or a Joint Owner dies after attaining age 81, then the Death
Benefit shall be equal to the Contract Value, minus any applicable premium tax
charge.
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Unless the Beneficiary is the deceased Owner's (or Joint Owner's) spouse,
the Death Benefit must be distributed within five years of such Owner's death.
The Beneficiary may, elect to receive Distribution in the form of a life annuity
or an annuity for a period not exceeding his or her life expectancy. Such
annuity must begin within one year following the date of the Owner's death and
is currently available only as a Fixed Annuity. If the Beneficiary is the spouse
of the deceased Owner (or Joint Owner), then the Contract may be continued
without any required Distribution. If the deceased Owner (or Joint Owner) and
the Annuitant are the same person, the death of that person will be treated as
the death of the Owner for purposes of determining the Death Benefit payable.
Qualified Contracts may be subject to specific rules set forth in the
Plan, Contract, or Code concerning Distributions upon the death of the Owner.
DEATH OF ANNUITANT PRIOR TO THE ANNUITIZATION DATE
If an Annuitant who is not an Owner dies prior to the Annuitization Date,
a Death Benefit equal to the Cash Surrender Value of the Contract will be
payable to the Beneficiary. If the Owner is a natural person and a contingent
Annuitant has been named or the Owner names a contingent Annuitant within 90
days of the Annuitant's death, the Contract may be continued without any
required Distribution. If no Beneficiary is named (or if the Beneficiary
predeceases the Annuitant), then the Death Benefit will be paid to the Owner.
If the Owner is not a natural person, then the death of the Annuitant will be
treated as if it were the death of the Owner, and the disposition of the
Contract will follow the death of the Owner provisions set forth above.
In any case where a Death Benefit is paid, the value of the Death Benefit
will be determined as of the Valuation Day coinciding with or next following the
date we receive in writing:
(1) due proof of the Annuitant's or an Owner's (or Joint Owner's) death;
(2) an election for either a single sum payment or an Annuity Payment
Option (currently only Fixed Annuities are available in these
circumstances); and
(3) any form required by state insurance laws.
If a single sum payment is requested, we will make payment in accordance
with any applicable laws and regulations governing the payment of Death
Benefits. If an Annuity Payment Option is requested, the Beneficiary must make
an election during the 90-day period commencing with the date we receive
written notice and as otherwise required by law. If no election has been made
by the end of such 90-day period commencing with the date we receive written
notice or as otherwise required by law the Death Benefit will be paid in a
single sum payment.
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GENERATION-SKIPPING TRANSFERS
We may determine whether the Death Benefit or any other payment
constitutes a direct skip as defined in Section 2612 of the Code, and the amount
of the tax on the generation-skipping transfer resulting from such direct skip.
If applicable, the payment will be reduced by any tax National Life is required
to pay by Section 2603 of the Code.
A direct skip may occur when property is transferred to or a Death Benefit
is paid to an individual two or more generations younger than the Owner.
OWNERSHIP PROVISIONS
Unless otherwise provided, the Owner has all rights under the Contract. If
the purchaser names someone other than himself or herself as owner, the
purchaser will have no rights under the contract. If Joint Owners are named,
each Joint Owner possesses an undivided interest in the Contract. The death of
any Joint Owner triggers the provisions of the Contract relating to the death of
the Owner. Unless otherwise provided, when Joint Owners are named, the exercise
of any ownership right in the Contract (including the right to surrender the
Contract or make a Withdrawal, to change the Owner, the Annuitant, a Contingent
Annuitant, the Beneficiary, the Annuity Payment Option or the Maturity Date)
requires a written indication of an intent to exercise that right, signed by all
Joint Owners.
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Prior to the Annuitization Date, the Owner may name a new Owner. Such
change may be subject to state and federal gift taxes, and may also result in
current federal income taxation (see "Federal Income Tax Considerations", page
"). Any change of Owner will automatically revoke any prior Owner designation.
Any request for change of Owner must be (1) made by proper written application,
(2) received and recorded by National Life at its Home Office, and (3) may
include a signature guarantee as specified in the "Surrender and Withdrawal"
provision on page . The change is effective on the date the written request is
signed. A new choice of Owner will not apply to any payment made or action we
take prior to the time it was received and recorded.
The Owner may request a change in the Annuitant or contingent Annuitant
before the Annuitization Date. Such a request must be made in writing on a form
acceptable to us and must be signed by the Owner, and the person to be named as
Annuitant or contingent Annuitant. Any such change is subject to underwriting
and approval by us.
CHARGES AND DEDUCTIONS
All of the charges described in this section apply to Variable Account
allocations. Allocations to the Fixed Account are subject to Contingent Deferred
Sales Charges, the Annual Contract Fee and Premium Tax deductions and the charge
for the Enhanced Death Benefit Rider, if applicable. The Fixed Account is not
subject to the Mortality and Expense Risk Charge and the Administration Charge.
We may realize a profit from any of these charges. Any such profit may be used
for any purpose, including payment of distribution expenses.
We deduct the charges described below to cover our costs and expenses,
services provided and risks assumed under the Contracts. We incur certain costs
and expenses for the distribution and administration of the Contracts and for
providing the benefits payable thereunder. More particularly, the administrative
services include:
- processing applications for and issuing the Contracts;
- processing purchases and redemptions of Fund shares as required (including
automatic withdrawal services);
- maintaining records;
- administering annuity payouts;
- furnishing accounting and valuation services (including the calculation
and monitoring of daily Subaccount values);
- reconciling and depositing cash receipts;
- providing Contract confirmations;
- providing toll-free inquiry services; and
- furnishing telephone transaction privileges.
The risks we assume include:
(1) the risk that the actual life-span of persons receiving annuity payments
under Contract guarantees will exceed the assumptions reflected in our
guaranteed rates (these rates are incorporated in the Contract and
cannot be changed);
(2) the risk that Death Benefits, or the Enhanced Death Benefit under the
optional Enhanced Death Benefit Rider, will exceed the actual Contract
Value;
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(3) the risk that more Owners than expected will qualify for and exercise
waivers of the Contingent Deferred Sales Charge; and
(4) the risk that our costs in providing the services will exceed our
revenues from the Contract charges (which we cannot change).
The amount of a charge will not necessarily correspond to the costs
associated with providing the services or benefits indicated by the designation
of the charge. For example, the Contingent Deferred Sales Charge collected may
not fully cover all of the distribution expenses we incur.
DEDUCTIONS FROM THE VARIABLE ACCOUNT
We deduct from the Variable Account an amount, computed daily, which is
equal to an annual rate of 1.40% of the daily net asset value. The charge
consists of a 0.15% Administration Charge and a 1.25% Mortality and Expense Risk
Charge. We may make a profit from these deductions. Any profit may be used to
finance distribution expenses.
CONTINGENT DEFERRED SALES CHARGE
We may pay a commission up to 6.5% (7% during certain promotional periods)
for the sale of a Contract; however, we make no deduction for a sales charge
from the Premium Payments for these Contracts. However, if a Withdrawal is made
or a Contract is surrendered, we will with certain exceptions, deduct a
Contingent Deferred Sales Charge ("CDSC") not to exceed 7% of the lesser of the
total of all Net Premium Payments made within 84 months prior to the date of
the request to surrender or the amount withdrawn.
The CDSC is calculated by multiplying the applicable CDSC percentages
noted below by the Net Premium Payments that are withdrawn or surrendered. For
purposes of calculating the CDSC Withdrawals or surrenders are considered to
come first from the oldest Net Premium Payment made to the Contract, then the
next oldest Net Premium Payment and so forth and last from earnings on Net
Premium Payments. No CDSC is ever assessed with respect to a Withdrawal or
surrender of earnings on Net Premium Payments. For tax purposes, a surrender is
usually treated as a withdrawal of earnings first. This charge will apply in
the amounts set forth below to Net Premium Payments within the time periods set
forth.
The CDSC applies to Net Premium Payments as follows:
<TABLE>
<CAPTION>
NUMBER OF COMPLETED CONTINGENT DEFERRED NUMBER OF COMPLETED CONTINGENT DEFERRED
YEARS FROM DATE OF SALES CHARGE YEARS FROM DATE OF SALES CHARGE
NET PREMIUM PAYMENT PERCENTAGE NET PREMIUM PAYMENT PERCENTAGE
- ------------------- ---------- ------------------- ----------
<S> <C> <C> <C>
0 7% 4 3%
1 6% 5 2%
2 5% 6 1%
3 4% 7 0%
</TABLE>
In any Contract Year after the first Contract Year (except in the states
referred to in the last sentence of this paragraph) you may make Withdrawals
without a CDSC of an aggregate amount equal to 15% of the Contract Value as of
the most recent Contract Anniversary. This CDSC-free Withdrawal privilege does
not apply to full surrenders of the Contract, and if a full surrender is made
within one year of exercising a CDSC-free Withdrawal, then the CDSC which would
have been assessed at the time of the Withdrawal will be assessed at the time of
surrender. The CDSC-free feature is also non-cumulative. This means that free
amounts not taken during any given Contract Year cannot be taken as free amounts
in a subsequent Contract Year. In addition, any amount withdrawn in order to
meet minimum Distribution requirements under the Code shall be free of CDSC. In
the first Contract Year a CDSC-free Withdrawal is available only by setting up a
monthly systematic Withdrawal program for an amount not exceeding the annual
CDSC-free Withdrawal amount (see "Available Automated Fund Management
Features-Systematic Withdrawals", page ). You may be subject to a tax penalty if
you take Withdrawals prior to age 59 1/2 (see "Federal Income Tax
Considerations", page ). In New Jersey and Washington
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the CDSC-free provision will apply to full surrenders and Withdrawals but
will be limited to 10% of the Contract Value as of the most recent Contract
Anniversary for both Withdrawals and full surrenders.
In addition, no CDSC will be deducted:
(1) upon the Annuitization of Contracts,
(2) upon payment of a death benefit pursuant to the death of the Owner, or
(3) from any values which have been held under a Contract for at least 84
months.
No CDSC applies upon the transfer of value among the Subaccounts or
between the Fixed Account and the Variable Account.
When a Contract is held by a charitable remainder trust, the amount which
may be withdrawn from this Contract without application of a CDSC after the
first Contract Year, shall be the larger of (a) or (b), where
(a) is the amount which would otherwise be available for Withdrawal
without application of a CDSC; and where
(b) is the difference between the Contract Value as of the last Contract
Anniversary and the Net Premium Payments made to the Contract, less
all Withdrawals as of the last Contract Anniversary.
We will waive the CDSC if the Owner dies or if the Owner annuitizes.
However, if the Owner elects a settlement Payment Option 1, and subsequently
surrenders the Contract prior to seven years after the date of the last
Premium Payment, the surrender will be subject to a CDSC.
We will also waive the CDSC if, following the first Contract Anniversary,
you are confined to an eligible nursing home for at least the 90 consecutive
days ending on the date of the Withdrawal request. This waiver is not available
in the States of New Jersey and New York.
ANNUAL CONTRACT FEE
For Contracts with a Contract Value of less than $50,000 as of the Date of
Issue or any subsequent Contract Anniversary prior to the Annuitization Date, we
will assess an Annual Contract Fee of $30.00. This fee will be assessed annually
in advance on the Date of Issue and thereafter on each Contract Anniversary on
which the Contract Value is less than $50,000. No Annual Contract Fee will be
assessed after the Annuitization Date. This fee will be taken pro rata from all
Subaccounts of the Variable Account and the Fixed Account.
TRANSFER CHARGE
Currently, unlimited free transfers are permitted among the Subaccounts, and
transfers between the Fixed Account and the Variable Account are permitted free
of charge within the limits described on page . We have no present intention to
impose a transfer charge in the foreseeable future. However, we reserve the
right to impose in the future a transfer charge of $25 on each transfer in
excess of twelve transfers in any Contract Year.
If imposed, we will deduct the transfer charge from the amount being
transferred. All transfers requested on the same Valuation Day are treated as
one transfer transaction. Any future transfer charge will not apply to transfers
made pursuant to the Dollar Cost Averaging and Portfolio Rebalancing features,
or if there has been a material change in the investment policy of the Fund
from which the transfer is being made. These transfers will not count against
the twelve free transfers in any Contract Year.
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PREMIUM TAXES
If a governmental entity imposes premium taxes, we make a deduction for
premium taxes in a corresponding amount. Certain states impose a premium tax,
currently ranging up to 3.5%. We will pay premium taxes at the time imposed
under applicable law. Where we are required to pay this premium tax, we may
deduct an amount equal to premium taxes from the Premium Payment. We currently
intend to make this deduction from Premium Payments only in South Dakota. In the
remaining states which assess premium taxes, we currently expect to make
deductions for premium taxes at the time of Annuitization, death of the Owner,
or surrender, although we also reserve the right to make such a deduction at the
time we pay premium taxes to the applicable taxing authority.
CHARGE FOR OPTIONAL ENHANCED DEATH BENEFIT RIDER
Annual charges are made if you elect the optional Enhanced Death Benefit
Rider. See "Optional Enhanced Death Benefit Rider," page . The annual charge for
the Enhanced Death Benefit Rider is 0.20% of Contract Value as of the date the
charge is deducted. The annual charge will be deducted at issue (or at the time
of election, if elected after issue), and then on each Contract Anniversary
thereafter, up to and including age 80 on an age-nearest-birthday basis as of
the relevant Contract Anniversary. After age 80, we will discontinue the charge.
We will make the charge pro rata from the Subaccounts of the Variable Account
and the Fixed Account.
OTHER CHARGES
The Variable Account purchases shares of the Funds at net asset value. The
net asset value of those shares reflect management fees and expenses already
deducted from the assets of the Funds. Information on the fees and expenses for
the Funds is set forth in "Underlying Fund Annual Expenses" on page .
More detailed information is contained in the Funds' prospectuses which
accompany this prospectus.
CONTRACT RIGHTS AND PRIVILEGES
FREE LOOK
You may revoke the Contract at any time between the Date of Issue and the
date 10 days after receipt of the Contract and receive a refund of the Contract
Value plus any charges assessed at issue, including the Annual Contract Fee,
charge for the optional Enhanced Death Benefit Rider, and any premium tax,
unless otherwise required by state and/or federal law. Some states may require a
longer free look period. Where the Contract Value is refunded, you will have
borne the investment risk and been entitled to the benefit of the investment
performance of the chosen Subaccounts during the time the Contract was in force.
In the case of IRA's and states that require the return of Premium
Payments, we will refund the greater of: (i) Premium Payments or (ii) Contract
Value plus any amount we have deducted for state premium taxes. In such cases,
we may require that all Contract Value allocated to the Variable Account
initially be held in the Market Street Money Market Subaccount. At the end of
the free look period, we will allocate Contract Value among the Subaccounts
based on the allocation percentages specified in the application. For this
purpose, we assume the free look period ends 20 days after the date the
Contract is issued.
In order to revoke the Contract, it must be mailed or delivered to our
Home Office. Mailing or delivery must occur on or before 10 days after receipt
of the Contract for revocation to be effective. In order to revoke the
Contract, if it has not been received, written notice must be mailed or
delivered to the Home Office.
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The liability of the Variable Account under this provision is limited to
the Contract Value in each Subaccount on the date of revocation. Any additional
amounts refunded to you will be paid by us.
SURRENDER AND WITHDRAWAL
At any time prior to the Annuitization Date (or thereafter if Payment
Option 1 has been elected) you may, upon proper written application deemed by us
to be in good order, surrender the Contract. "Proper written application" means
that you must request the surrender in writing and include the Contract. We may
require that the signature(s) be guaranteed by a member firm of a major stock
exchange or other depository institution qualified to give such a guaranty.
We will, upon receipt of any such written request, pay to you the Cash
Surrender Value. The Cash Surrender Value will reflect any applicable CDSC (see
"Contingent Deferred Sales Charge", page ) and, in certain states, a premium tax
charge (see "Premium Taxes", page ). The Cash Surrender Value may be more or
less than the total of Premium Payments you made depending on the market value
of the underlying Fund shares, the amount of any applicable CDSC, and other
factors.
We will normally not permit Withdrawal or Surrender of Premium Payments
made by check within the 15 calendar days prior to the date the request for
Withdrawal or Surrender is received.
At any time before the death of the Owner and after 30 days from the Date
of Issue, the Owner may make a Withdrawal of a portion of the Contract Value.
The minimum Withdrawal is $500. At least $3500 in Contract Value must remain
after any Withdrawal.
Generally, Withdrawals in the first Contract Year and Withdrawals in
excess of 15% (10% in New Jersey and Washington) of Contract Value as of the
most recent Contract Anniversary in any Contract Year are subject to the CDSC.
See "Contingent Deferred Sales Charge", page . However, see "Available
Automated Fund Management Features-Systematic Withdrawals" page , for
information on a limited means of making systematic Withdrawals in the first
year free of the CDSC. Withdrawals will be deemed to be taken from Net Premium
Payments in chronological order, with the oldest Net Premium Payment being
withdrawn first. This method will tend to minimize the amount of the CDSD.
The Withdrawal will be taken from the Subaccounts based on your
instructions at the time of the Withdrawal. If you provide specific
instructions, amounts must be deducted first from the Variable Account and may
only be deducted from the Fixed Account to the extent that the Contract Value
in the Variable Account is insufficient to accomplish the Withdrawal. If
specific allocation instructions are not provided, the Withdrawal will be
deducted pro rata from the Subaccounts and from the Fixed Account. Any CDSC
associated with a Withdrawal will be deducted from the Subaccounts and from the
Fixed Account based on the allocation percentages of the Withdrawal. Any amount
of CDSFC that we deduct from a Subaccount which is in excess of the available
value in that Subaccount will be deducted pro rata among the remaining
Subaccounts and the Fixed Account. If the Withdrawal cannot be processed in
accordance with your instructions, then we will not process it until we
receive further instructions.
A Surrender or a Withdrawal may have tax consequences. See "Federal Income
Tax Considerations", page .
PAYMENTS
We will pay any funds surrendered or withdrawn from the Variable Account
within 7 days of receipt of such request. However, we reserve the right to
suspend or postpone the date of any payment or transfer of any benefit or values
for any Valuation Period:
(1) when the New York Stock Exchange ("Exchange") is closed,
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(2) when trading on the Exchange is restricted,
(3) when an emergency exists as a result of which disposal of securities
held in the Variable Account is not reasonably practicable or it is
not reasonably practicable to determine the value of the Variable
Account's net assets, or
(4) during any other period when the Securities and Exchange Commission,
by order, so permits for the protection of security holders, provided
that applicable rules and regulations of the Securities and Exchange
Commission shall govern as to whether the conditions prescribed in (2)
and (3) exist.
The rules and regulations of the Securities and Exchange Commission shall
govern as to whether the conditions prescribed in (2) and (3) exist.
We reserve the right to delay payment of any amounts allocated to the
Fixed Account which are payable as a result of a Surrender or Withdrawal for up
to six months after we receive a written request in a form satisfactory to us.
SURRENDERS AND WITHDRAWALS UNDER A TAX-SHELTERED ANNUITY CONTRACT
Where the Contract has been issued as a Tax-Sheltered Annuity, the Owner
may surrender or make a Withdrawal of part or all of the Contract Value at any
time this Contract is in force prior to the earlier of the Annuitization Date or
the death of the Designated Annuitant except as provided below:
(a) The surrender or Withdrawal of Contract Value attributable to
contributions made pursuant to a salary reduction agreement (within
the meaning of Code Section 402(g)(3)(A) or (C)), or transfers from
a Custodial Account described in Section 403(b)(7) of the Code, may
be executed only:
1. when the Owner attains age 59 1/2, separates from service,
dies, or becomes disabled (within the meaning of Code Section
72(m)(7)); or
2. in the case of hardship (as defined for purposes of Code
Section 401 (k)), provided that any surrender of Contract
Value in the case of hardship may not include any income
attributable to salary reduction contributions.
(b) The surrender and Withdrawal limitations described in (a) above for
Tax-Sheltered Annuities apply to:
1. salary reduction contributions to Tax-Sheltered Annuities made
for plan years beginning after December 31, 1988;
2. earnings credited to such contracts after the last plan year
beginning before January 1, 1989, on amounts attributable to
salary reduction contributions; and
3. all amounts transferred from 403(b)(7) Custodial Accounts
(except that earnings, and employer contributions as of
December 31, 1988 in such Custodial Accounts may be withdrawn
in the case of hardship).
(c) Any Distribution other than the above, including exercise of a
contractual ten-day free look provision (when available) may result
in the immediate application of taxes and penalties and/or
retroactive disqualification of a Qualified Contract or
Tax-Sheltered Annuity.
A premature Distribution may not be eligible for rollover treatment. To
assist in preventing disqualification in the event of a ten-day free look,
National Life will agree to transfer the proceeds to another contract which
meets the requirements of Section 403(b) of the Code, upon proper direction by
the Owner. The foregoing is National Life's understanding of the withdrawal
restrictions which are currently applicable under Section 403(b)(11) and Revenue
Ruling 90-24. Such restrictions are
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subject to legislative change and/or reinterpretation from time to time.
Distributions pursuant to Qualified Domestic Relations Orders will not be
considered to be a violation of the restrictions stated in this provision.
The Contract surrender and Withdrawal provisions may also be modified
pursuant to the plan terms and Code tax provisions for Qualified Contracts.
TELEPHONE TRANSACTION PRIVILEGE
If you elect the telephone transaction privilege, you may make changes in
Net Premium Payment allocations, transfers, or initiate dollar costs averaging
or portfolio rebalancing, by providing instructions to us at our Home Office
over the telephone. You can make the election either on the application for the
Contract or by providing a proper written authorization to us. We reserve the
right to suspend telephone transaction privileges at any time and for any
reason. You may, on the application or by a written authorization, authorize
your National Life agent to provide telephone instructions on your behalf.
We employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. If we follow these procedures we will not be liable for
any losses due to unauthorized or fraudulent instructions. We may be liable for
any such losses if those reasonable procedures are not followed. The procedures
followed for telephone transfers will include one or more of the following:
(1) requiring some form of personal identification prior to acting on
instructions received by telephone,
(2) providing written confirmation of the transaction, and
(3) making a tape recording of the instructions given by telephone.
AVAILABLE AUTOMATED FUND MANAGEMENT FEATURES
We currently offer the following free automated fund management features.
However, we are not legally obligated to continue to offer these features and we
may cease offering one or more of such features at any time, after providing 60
days prior written notice to all Owners who are currently utilizing the features
being discontinued. Only one automated fund management feature is available
under any single Contract at one time.
Dollar Cost Averaging. This feature permits you to automatically transfer
funds from the Money Market Subaccount to any other Subaccounts on a monthly
basis. You may elect it at issue by marking the appropriate box on the initial
application and completing the appropriate instruction or after issue by filling
out similar information on a change request form and sending it to us.
If you elect this feature, each month on the Monthly Contract Date we will
take the amount to be transferred from the Money Market Subaccount and transfer
it to the Subaccount or Subaccounts designated to receive the funds. This
procedure starts with the Monthly Contract Date next succeeding the Date of
Issue or next succeeding the date of an election subsequent to purchase and
stops when the amount in the Money Market Subaccount is depleted. The minimum
monthly transfer by Dollar Cost Averaging is $100, except for the transfer which
reduces the amount in the Money Market Subaccount to zero. You may discontinue
Dollar Cost Averaging at any time by sending an appropriate change request form
to us.
This feature allows you to move funds into the various investment classes on
a more gradual and systematic basis than the frequency on which Premium Payments
ordinarily are made. The periodic investment of the same amount will result in
higher numbers of units being purchased when unit prices are lower and lower
numbers of units being purchased when unit prices are higher. Over time, this
will result, in a lower cost per unit than the average of the unit costs on the
days on which the automated purchases are made. This technique will not assure a
profit or protect against a loss in declining markets. For the dollar cost
averaging technique to be effective, amounts should be available for allocation
from the Money Market Subaccount through periods of low price levels as well as
higher price levels.
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Portfolio Rebalancing. This feature permits you to automatically rebalance
the value in the Subaccounts on a quarterly, semi-annual or annual basis, based
on the premium allocation percentages in effect at the time of the rebalancing.
You may elect it at issue by marking the appropriate box on the initial
application or after issue by completing a change request form and sending it to
us.
In Contracts utilizing Portfolio Rebalancing from the Date of Issue, an
automatic transfer takes place which causes the percentages of the current
values in each Subaccount to match the current premium allocation percentages.
This procedure starts with the Monthly Contract Date three, six or twelve months
after the Date of Issue and continues on each Monthly Contract Date three, six
or twelve months thereafter. Contracts electing Portfolio Rebalancing after
issue will have the first automated transfer occur as of the Monthly Contract
Date on or next following the date that the election is received. Subsequent
rebalancing transfers occur every three, six or twelve months thereafter. You
may discontinue Portfolio Rebalancing at any time by submitting an appropriate
change request form.
If you change the Contract's premium allocation percentages, Portfolio
Rebalancing will automatically be discontinued unless you specifically direct
otherwise.
Portfolio Rebalancing results in periodic transfers out of Subaccounts that
have had relatively favorable investment performance and into Subaccounts which
have had relatively unfavorable investment performance.
Systematic Withdrawals. At any time after one year from the Date of Issue,
if the Contract Value at the time of initiation of the program is at least
$15,000, you may elect in writing to take systematic Withdrawals of a specified
dollar amount (of at least $100) on a monthly, quarterly, semi-annual or annual
basis. You may provide specific instructions as to how the systematic
Withdrawals are to be taken, but the Withdrawals must be taken first from the
Subaccounts and may only be taken from the Fixed Account to the extent that the
Contract Value in the Variable Account is insufficient to accomplish the
Withdrawal. If you have not provided specific instructions or if specific
instructions cannot be carried out, we process the Withdrawals by taking
Accumulation Units from all of the Subaccounts in which you have an interest
and the Fixed Account on a pro rata basis. Each systematic Withdrawal is
subject to federal income taxes. In addition, a 10% federal penalty tax may be
assessed on systematic Withdrawals if you are under age 59 1/2. If you direct,
we will withhold federal income taxes from each systematic Withdrawal. A
systematic Withdrawal program terminates automatically when a systematic
Withdrawal would cause the remaining Contract Value to be $3,500 or less. If
this happens, then the systematic Withdrawal transaction causing the Contract
value to fall below $3500 will not be processed. You may discontinue systematic
Withdrawals at any time by notifying us in writing.
A CDSC may apply to systematic Withdrawals in accordance with the
considerations set forth in "Contingent Deferred Sales Charge", page . If you
withdraw amounts pursuant to a systematic Withdrawal program, then, in most
states, you may withdraw in each Contract Year after the first Contract Year
without a CDSC an amount up to 15% of the Contract Value as of the most recent
Contract Anniversary (a 10% CDSC-free Withdrawal provision applies in New
Jersey and Washington - see "Contingent Deferred Sales Charge," page ). Both
Withdrawals you request and Withdrawals pursuant to a systematic Withdrawal
program will count toward the limit of the amount that may be withdrawn in any
Contract Year free of the CDSC. In addition, any amount withdrawn in order to
meet minimum Distribution requirements under the Code shall be free of CDSC.
Limited systematic Withdrawals are also available in the first Contract
Year (but after 30 days from issue). These systematic Withdrawals are limited to
monthly systematic Withdrawal programs only. The maximum aggregate amount for
the remaining months of the first Contract Year is the annual amount that may be
withdrawn in Contract Years after the first Contract Year free of a CDSC (i.e.,
either 15% or 10% of the Contract Value, depending on the state). These
systematic Withdrawals will not be subject to a CDSC. The other rules for
systematic Withdrawals made after the first Contract Year, including the $15,000
minimum Contract Value, minimum $100 payment, and allocation rules, will apply
to these systematic Withdrawals.
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CONTRACT RIGHTS UNDER CERTAIN PLANS
Contracts may be purchased in connection with a plan sponsored by an
employer. In such cases, all rights under the Contract rest with the Owner,
which may be the employer or other obligor under the plan, and benefits
available to participants under the plan are governed solely by the provisions
of the plan. Accordingly, some of the options and elections under the Contract
may not be available to participants under the provisions of the plan. In such
cases, participants should contact their employers for information regarding the
specifics of the plan.
THE FIXED ACCOUNT
Net Premium Payments under the Fixed Account portion of the Contract and
transfers to the Fixed Account portion are part of our general account, which
supports insurance and annuity obligations. Because of exemptive and
exclusionary provisions, interests in the general account are not registered
under the Securities Act of 1933 ("Securities Act"), nor is the general account
registered as an investment company under the Investment Company Act.
Accordingly, neither the general account nor any interest therein are generally
subject to the provisions of the Securities Act or Investment Company Act, and
we have been advised that the staff of the Securities and Exchange Commission
has not reviewed the disclosures in this prospectus which relate to the
guaranteed interest portion. Disclosures regarding the Fixed Account portion of
the Contract and the general account, however, may be subject to certain
generally applicable provisions of the federal securities laws relating to the
accuracy and completeness of statements made in prospectuses.
The Fixed Account is made up of all our general assets, other than those
in the Variable Account and any other segregated asset account. Fixed Account
Net Premium Payments will be allocated to the Fixed Account by election of the
Owner at the time of purchase or by a later change in allocation of Net Premium
Payments. We will invest the assets of the Fixed Account in those assets we
choose and allowed by applicable law.
MINIMUM GUARANTEED AND CURRENT INTEREST RATES
The Contract Value held in the Fixed Account is guaranteed to accumulate
at a minimum effective annual interest rate of 3.0%. We may credit the Contract
Value in the Fixed Account with current rates in excess of the minimum guarantee
but we are not obligated to do so. We have no specific formula for determining
current interest rates. Since we, in our sole discretion, anticipate changing
the current interest rate from time to time, allocations to the Fixed Account
made at different times are likely to be credited with different current
interest rates. We declare an interest rate each month to apply to amounts
allocated or transferred to the Fixed Account in that month. The rate declared
on such amounts remains in effect for twelve months. At the end of the 12-month
period, we reserve the right to declare a new current interest rate on such
amounts and accrued interest thereon (which may be a different current interest
rate than the current interest rate on new allocations to the Fixed Account on
that date). We determine any interest credited on the amounts in the Fixed
Account in excess of the minimum guaranteed rate of 3.0% per year in our
discretion. You assume the risk that interest credited may not exceed the
guaranteed minimum rate. Amounts allocated to the Fixed Account do not share in
the investment performance of our general account or any portion thereof.
Amounts deducted from the Fixed Account for the charge for the optional
Enhanced Death Benefit Rider, the Annual Contract Fee or transfers to the
Variable Account are, for the purpose of crediting interest, accounted for on a
last in, first out basis. Amounts deducted from the Fixed Account for
Withdrawals are accounted for on a first in, first out basis for such purpose.
National Life reserves the right to change the method of crediting
interest from time to time, provided that such changes do not have the effect of
reducing the guaranteed rate of interest below 3.0% per annum or shorten the
period for which the interest rate applies to less than 12 months.
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For Contracts purchased in the State of Washington, no Premium Payments or
Contract Value may be allocated to the Fixed Account.
ENHANCED FIXED ACCOUNT
During special promotional periods (the "offer period"), we may make
available to the Contracts a special Fixed Account Option, called the "Enhanced
Fixed Account". The Enhanced Fixed Account, when available, allows you to move
value into the Variable Account on a gradual and systematic basis, while
earning interest at a higher fixed rate that that otherwise offered on the
Fixed Account on your value while it awaits transfer into the Variable Account.
During an offer period (which will be from time to time at our
discretion), the Enhanced Fixed Account will be available to new and existing
Contract Owners who make a one-time new Premium Payment of at least a minimum
dollar amount we specify at the time of the offer. Contract Value in the
Enhanced Fixed Account will accumulate at an effective annual interest rate in
excess of the current rates then being credited to Contract Value in the Fixed
Account. We will declare the interest rate for the Enhanced Fixed Account at
the time of the offer in our discretion, and this interest rate will apply for
the entire offer period. When we set an offer period, we will announce all the
terms of the Enhanced Fixed Account, and post this information on our web site
at www.nlv.com.
We will require that the Contract Value in the Enhanced Fixed Account
be systematically transferred on a monthly basis from the Enhanced Fixed
Account to the Subaccounts. The required monthly transfer amount will be a
percentage of the Premium Payment allocated to the Enhanced Fixed Account. We
will declare this percentage at the time of the offer, in our discretion. Each
month on the Monthly Contract Date, the monthly transfer amount will be
transferred from the Enhanced Fixed Account to the Subaccounts and in the
percentage amounts selected by the Owner (other than the Money Market
Subaccount), until the Contract Value in the Enhanced Fixed Account is
exhausted.
The Enhanced Fixed Account will be part of the Fixed Account
described above.
Transfers into the Enhanced Fixed Account will not be allowed. The
Owner may transfer Contract Value out of the Enhanced Fixed Account at any
time, by making a transfer request. If the entire Contract Value in the
Enhanced Fixed Account is transferred out, the program ends. If less than the
entire Contract Value in the Enhanced Fixed Account is transferred out, the
scheduled monthly transfers will continue until the Enhanced Fixed Account is
exhausted.
Withdrawals from the Enhanced Fixed Account will be allowed, in the
same manner as for other Withdrawals, but will be subject to any applicable
CDSC.
For Contracts utilizing the Enhanced Fixed Account, National Life
reserves the right to reduce the number of different Subaccounts, other than
the Money Market Subaccount, that may be used by the Contract over its entire
lifetime from 16 to 15. There is no charge for participating in an offer
period.
This program is not available simultaneously with Dollar Cost
Averaging, Portfolio Rebalancing or Systematic Withdrawals. If you elect
Systematic Withdrawals while you have Contract Value in the Enhanced Fixed
Account, your Contract Value in the Enhanced Fixed Account will immediately be
transferred to your selected Subaccounts.
During the offer period we may permit, in our discretion, additional
Premium Payments on the same Contract to be allocated to the Enhanced Fixed
Account. If we do so, we will add a declared percentage of the new Premium
Payment to the original monthly transfer amount, the same instructions for
allocating to the Subaccounts will apply, and the program will continue to
operate until the Contract Value in the Enhanced Fixed Account is exhausted.
We may need to refund Premium Payments intended for the Enhanced
Fixed Account if they are less than the minimum required, if they are received
after the end of the offer period, or if, for any other reason, the written
instructions of the Owner cannot be carried out. We may hold these Premium
Payments for up to 20 days before refunding them. Any amounts refunded will be
credited with interest at 5%.
This program will not be available in the State of Washington.
OPTIONAL ENHANCED DEATH BENEFIT RIDER
You may choose to include the Enhanced Death Benefit Rider in your
Contract. The Rider is subject to the restrictions and limitations set forth in
it. Election of this optional benefit involves an additional cost. This Rider
is not available in Texas. If you elected the Enhanced Death Benefit Rider,
then the following enhanced death benefit will be payable to the Beneficiary if
you (or the first of Joint Owners, or the Annuitant if the Owner is not a
natural person) die prior to reaching age 81 (on an age nearest birthday
basis) the highest of:
(a) Contract Value;
(b) the total of all Net Premium Payments, less all Withdrawals
(including any CDSC deducted in connection with such Withdrawals), and
(c) the largest Contract Value as of any prior Contract Anniversary after
the Enhanced Death Benefit Rider was applicable to the Contract,
plus Net Premium Payments and minus any Withdrawals (including any
CDSC deducted in connection with such Withdrawals), since such
Contract Anniversary.
We calculate this as of the date we receive due proof of death. Any applicable
premium tax charge payable on your death will be applied to reduce the value of
the determined enhanced death benefit (see "Premium Taxes, page ).
If you (or the first of Joint Owners, or the Annuitant if the Owner is
not a natural person) die at age 81 or later, the death benefit will not be
enhanced and will be an amount equal to Contract Value, less any applicable
premium tax charge.
The Enhanced Death Benefit Rider is available at issue if you are age 75
or younger. It is available after issue if you are age 75 or younger only on a
Contract Anniversary and only if at the time of the Rider is requested the
Contract Value is greater than the total of all Net Premium Payments less all
Withdrawals.
The annual charge for this Rider is 0.20% of Contract Value. After you
reach ago 80, on an age nearest birthday basis, we discontinue the charge. See
"Charge for Optional Enhanced Death Benefit Rider", page .
We distribute the Enhanced Death Benefit in the same manner as the normal
Death Benefit. See "Death of Owner", page .
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FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is general in nature and is not intended as tax
advice. Each person concerned should consult a competent tax advisor. No attempt
is made to consider any applicable state tax or other tax laws.
If you invest in a variable annuity as part of a pension plan or
employer-sponsored retirement program, your contract is called a Qualified
Contract. If your annuity is independent of any formal retirement or pension
plan, it is termed a Non-Qualified Contract. The tax rules applicable to
Qualified Contracts vary according to the type of retirement plan and the terms
and conditions of the plan.
TAXATION OF NON-QUALIFIED CONTRACTS
Non-Natural Person. If a non-natural person (e.g., a corporation or a
trust) owns a Non-Qualified Contract, the taxpayer generally must include in
income any increase in the excess of the account 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 should 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 account value immediately before the
distribution over the Owner's investment in the Contract (generally, the
premiums or other consideration paid for the Contract, reduced by any amount
previously distributed from the Contract that was not subject to tax) 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.
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Other exceptions may be applicable under certain circumstances and special rules
may be applicable in connection with the exceptions enumerated above. You should
consult a tax adviser with regard to exceptions from the penalty tax.
Annuity Payments. Although tax consequences may vary depending on the
payout 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 you to recover your investment in the contract
ratably on a tax-free basis over the expected stream of annuity payments, as
determined when annuity payments start. Once your 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 your death or the death of the Annuitant. Generally, such
amounts are includible in the income of the recipient as follows: (i) if
distributed in a lump sum, they are taxed in the same manner as a surrender of
the Contract, or (ii) if distributed under a payout 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 maturity dates, or the exchange of a Contract may result in
certain tax consequences to you 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 us (or our
affiliates) to the same owner during any calendar year are treated as one
annuity contract for purposes of determining the amount includible in such
owner's income when a taxable distribution occurs.
TAXATION OF QUALIFIED CONTRACTS
The tax rules applicable to Qualified Contracts vary according to the type
of retirement plan and the terms and conditions of the plan. Your rights under a
Qualified Contract may be subject to the terms of the retirement plan itself,
regardless of the terms of the Qualified Contract. Adverse tax consequences may
result if you do not ensure that contributions, distributions and other
transactions with respect to the Contract comply with the law.
Individual Retirement Accounts (IRAs), as defined in Section 408 of the
Internal Revenue Code (Code), permit individuals to make annual contributions of
up to the lesser of $2,000 or 100% of adjusted gross income. The contributions
may be deductible in
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whole or in part, depending on the individual's income. Distributions from
certain pension plans may be "rolled over" into an IRA on a tax-deferred basis
without regard to these limits. Amounts in the IRA (other than nondeductible
contributions) are taxed when distributed from the IRA. A 10% penalty tax
generally applies to distributions made before age 59 1/2, unless certain
exceptions apply. The Internal Revenue Service has not reviewed the Contract for
qualification as an IRA, and has not addressed in a ruling of general
applicability whether a death benefit provision such as the optional Enhanced
Death Benefit provision in the Contract comports with IRA qualification
requirements.
SIMPLE IRAs permit certain small employers to establish SIMPLE plans as
provided by Section 408(p) of the Code, under which employees may elect to defer
to a SIMPLE IRA a percentage of compensation up to $6,000 (as increased for cost
of living adjustments). The sponsoring employer is required to make matching or
non-elective contributions on behalf of employees. Distributions from SIMPLE
IRAs are subject to the same restrictions that apply to IRA distributions and
are taxed as ordinary income. Subject to certain exceptions, premature
distributions prior to age 59 1/2 are subject to a 10 percent penalty tax, which
is increased to 25 percent if the distribution occurs within the first two years
after the commencement of the employee's participation in the plan.
Roth IRAs, as described in Code section 408A, permit certain eligible
individuals to contribute to make non-deductible contributions to a Roth IRA 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 is generally subject to tax and other
special rules apply. The Owner may wish to consult a tax adviser before
combining any converted amounts with any other Roth IRA contributions, including
any other conversion amounts from other tax years. 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 any Roth IRA. A 10% penalty tax may apply to amounts
attributable to a conversion from an IRA if they are distributed during the five
taxable years beginning with the year in which the conversion was made.
Corporate pension and profit-sharing plans under Section 401(a) of the
Code allow corporate employers to establish various types of retirement plans
for employees, and self-employed individuals to establish qualified plans for
themselves and their employees. Adverse tax consequences to the retirement plan,
the participant or both may result if the Contract is transferred to any
individual as a means to provide benefit payments, unless the plan complies with
all the requirements applicable to such benefits prior to transferring the
Contract. The Contract includes an Enhanced Death Benefit that in some cases may
exceed the greater of the premium payments or the account value. The Death
Benefit could be characterized as an incidental benefit, the amount of which is
limited in any pension or profit-sharing plan. Because the Death Benefit may
exceed this limitation, employers using the Contract in connection with such
plans should consult their tax adviser.
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Tax Sheltered Annuities under section 403(b) of the Code allow 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.
Distributions of (1) salary reduction contributions made in years beginning
after December 31, 1988; (2) earnings on those contributions; and (3) earnings
on amounts held as of the last year beginning before January 1, 1989, are not
allowed prior to age 59 1/2, separation from service, death or disability.
Salary reduction contributions may also be distributed upon hardship, but would
generally be subject to penalties.
Section 457 Plans, while not actually providing for a qualified plan as
that term is normally used, provides for certain deferred compensation plans
with respect to service for state governments, local governments, political
subdivisions, agencies, instrumentalities and certain affiliates of such
entities, and tax exempt organizations. The Contract can be used with such
plans. Under such plans a participant may specify the form of investment in
which his or her participation will be made. All such investments, however, are
owned by and are subject to, the claims of the general creditors of the
sponsoring employer. In general, all amounts received under a section 457 plan
are taxable and are subject to federal income tax withholding as wages.
Other Tax Issues. Qualified Contracts have minimum distribution rules that
govern the timing and amount of distributions. You should refer to your
retirement plan, adoption agreement, or consult a tax advisor for more
information about these distribution rules.
Distributions from Qualified 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 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 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 TAX LAW CHANGES
Although the likelihood of legislative changes is uncertain, there is
always the possibility that the tax treatment of the Contract could change by
legislation or otherwise. Consult a tax adviser with respect to legislative
developments and their effect on the Contract.
We have the right to modify the contract in response to legislative
changes that could otherwise diminish the favorable tax treatment that annuity
contract owners currently receive. We make no guarantee regarding the tax status
of any contact and do not intend the above discussion as tax advice.
43
<PAGE> 47
GENDER NEUTRALITY
In 1983, the United States Supreme Court held that optional annuity
benefits provided under an employee's deferred compensation plan could not,
under Title VII of the Civil Rights Act of 1964 vary between men and women on
the basis of sex. The Court applied its decision to benefits derived from
contributions made on or after August 1, 1983. Lower federal courts have since
held that the Title VII prohibition of sex-distinct benefits may apply at an
earlier date. In addition, some states prohibit using sex-distinct mortality
tables.
The Contract uses sex-distinct actuarial tables, unless state law requires
the use of sex-neutral actuarial tables. As a result, the Contract generally
provides different benefits to men and women of the same age. Employers and
employee organizations which may consider buying Contracts in connection with
any employment-related insurance or benefits program should consult their legal
advisors to determine whether the Contract is appropriate for this purpose.
VOTING RIGHTS
Voting rights under the Contracts apply only with respect to Net Premium
Payments or accumulated amounts allocated to the Variable Account.
In accordance with our view of present applicable law, we vote the shares
of the Funds held in the Variable Account at regular and special meetings of the
shareholders of the Funds. These shares are voted in accordance with
instructions received from you if you have an interest in the Variable
Account. If the Investment Company Act or any regulation thereunder should be
amended or if the present interpretation thereof should change, and as a result
we determine that we are permitted to vote the shares of the Funds in our own
right, we may elect to do so.
The person having the voting interest under a Contract is the Owner. The
number of Fund shares attributable to each Owner is determined by dividing the
Owner's interest in each Subaccount by the net asset value of the Fund
corresponding to the Subaccount.
We determine the number of shares which a person has the right to vote on
a date we choose not more than 90 days prior to the meeting of the Fund. We
solicit voting instructions by written communication at least 21 days prior to
such meeting.
We vote Fund shares held in the Variable Account as to which no timely
instructions are received in the same proportions as to the voting instructions
we receive with respect to all contracts participating in the Variable Account.
Each person having a voting interest will receive periodic reports
relating to the Funds, proxy material and a form with which to give such voting
instructions.
CHANGES TO VARIABLE ACCOUNT
We reserve the right to create one or more new separate accounts, combine
or substitute separate accounts, or to add new investment Funds for use in the
Contracts at any time. In addition, if the shares of the Funds described in this
Prospectus should no longer be available for investment by the Variable Account
or, if in our judgment further investment in such Fund shares should become
inappropriate, we may eliminate Subaccounts, combine two or more Subaccounts or
substitute one or more Funds for other Fund shares already purchased or to be
purchased in the future under the Contract. No substitution of securities in the
Variable Account may take place without prior approval of the Securities and
Exchange Commission and under such requirements as it may impose. We may also
operate the Variable Account as a management investment company under the
Investment Company Act, deregister the Variable Account under the Investment
Company Act (if such registration is no longer required), transfer all or part
of the assets of the Variable Account to another
45
<PAGE> 48
separate account or to the Fixed Account (subject to obtaining all necessary
regulatory approvals), and make any other changes reasonably necessary under the
Investment Company Act or applicable state law.
ADVERTISING
YIELD
A "yield" and "effective yield" may be advertised for the Market Street
Money Market Portfolio Subaccount. "Yield" is a measure of the net dividend and
interest income earned over a specific seven-day period (which period will be
stated in the advertisement) expressed as a percentage of the offering price of
the Subaccount's units. Yield is an annualized figure, which means that it is
assumed that the Subaccount generates the same level of net income over a
52-week period. The "effective yield" is calculated similarly but includes the
effect of assumed compounding, calculated under rules prescribed by the
Securities and Exchange Commission. The effective yield will be slightly higher
than yield due to this compounding effect.
PERFORMANCE
We may also from time to time advertise the performance of the
Subaccounts of the Variable Account relative to the performance of other
variable annuity subaccounts or funds with similar or different objectives, or
the investment industry as a whole. Other investments to which the Subaccounts
may be compared include, but are not limited to: precious metals; real estate;
stocks and bonds; closed-end funds; CDs; bank money market deposit accounts and
passbook savings; and the Consumer Price Index.
Market Comparisons. The Subaccounts of the Variable Account may also be
compared to certain market indexes, which may include, but are not limited to:
S&P 500; Shearson/Lehman Intermediate Government/Corporate Bond Index;
Shearson/Lehman Long-Term Government/Corporate Bond Index; Donoghue Money Fund
Average; U.S. Treasury Note Index; Bank Rate Monitor National Index of 2 Year CD
Rates; and Dow Jones Industrial Average.
Normally these rankings and ratings are published by independent tracking
services and publications of general interest including, but not limited to:
Lipper Analytical Services, Inc., CDA/ Wiesenberger, Morningstar, Donoghue's;
magazines such as Money, Forbes, Kiplinger's Personal Finance Magazine,
Financial World, Consumer Reports, Business Week, Time, Newsweek, National
Underwriter, U.S. News and World Report; rating services such as LIMRA, Value,
Best's Agent Guide, Western Annuity Guide, Comparative Annuity Reports; and
other publications such as the Wall Street Journal, Barron's, Investor's Daily,
and Standard & Poor's Outlook. In addition, Variable Annuity Research & Data
Service (The VARDS Report) is an independent rating service that ranks over 500
variable annuity funds based upon total return performance. These rating
services and publications rank the performance of the Funds against all funds
over specified periods and against funds in specified categories. The rankings
may or may not include the effects of sales or other charges.
Rating Services. We are also ranked and rated by independent financial
rating services, among which are Moody's, Standard & Poor's and A.M. Best. The
purpose of these ratings is to reflect our financial strength or claims-paying
ability. The ratings are not intended to reflect the investment experience or
financial strength of the Variable Account. We may advertise these ratings from
time to time. In addition, we may include in certain advertisements,
endorsements in the form of a list of organizations, individuals or other
parties which recommend us or the Contracts. Furthermore, we may occasionally
include in advertisements comparisons of currently taxable and tax deferred
investment programs, based on selected tax brackets, or discussions of
alternative investment vehicles and general economic conditions.
46
<PAGE> 49
Historical Performance. We may from time to time advertise several types
of historical performance for the Subaccounts of the Variable Account. We may
advertise for the Subaccounts standardized "average annual total return,"
calculated in a manner prescribed by the Securities and Exchange Commission, and
nonstandardized "total return."
Standardized Average Annual Total Return.. "Standardized Average Annual
Total Return" will show the percentage rate of return of a hypothetical
initial investment of $1,000 for at least the most recent one, five and
ten year period, or for a period covering the time the Subaccount has
been in existence, if the Subaccount has not been in existence for one of
the prescribed periods. This calculation reflects the deduction of all
applicable charges made to the Contracts except for premium taxes, which
may be imposed by certain states.
The charts below show Standardized Average Annual Total Return for
the Subaccounts for the indicated periods. For the purposes of
calculating Standardized Average Annual Total Return, the Mortality and
Expense Risk Charge of 1.25%, the Administration Charge of 0.15%, the
Annual Contract Fee of $30.00, the applicable CDSC and the optional
Enhanced Death Benefit Charge of 0.20% were deducted. For purposes of
computing the Annual Contract Fee, the Annual Contract Fee has been
converted into a per-dollar per-day charge. The per-dollar per-day charge
has been converted based on the actual average Accumulated Value of the
Contracts as of December 31, 1998. The charge works out to 0.05% per
annum.
Based on the method of calculation described above, the Standardized
Average Annual Total Returns for the Subaccounts for the periods ending
December 31, 1998 were:
<TABLE>
<CAPTION>
Standardized Average Annual Total Return
(Assuming the Enhanced Death Benefit Rider Is Elected)
1 Year to 5 Years to 10 Years to Life of Subaccount Date Subaccount
12/31/98 12/31/98 12/31/98 to 12/31/98* Effective
-------- -------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Alger American Small Capitalization 6.70% N/A N/A 12.20% 7/2/97
Alger American Growth 38.70% N/A N/A 31.30% 7/2/97
Fidelity VIP Fund-Equity Income 2.80% N/A N/A 9.10% 7/2/97
Fidelity VIP Fund-Growth 30.20% N/A N/A 26.20% 7/2/97
Fidelity VIP Fund-High Income -12.90% N/A N/A -2.70% 7/2/97
Fidelity VIP Fund-Overseas 3.90% N/A N/A -0.40% 7/2/97
Fidelity VIP Fund II-Index 500 19.20% N/A N/A 20.50% 7/2/97
Fidelity VIP Fund II-Contrafund 20.90% N/A N/A 22.20% 7/2/97
Market Street Growth 4.70% N/A N/A 10.10% 7/2/97
Market Street Sentinel Growth 6.60% N/A N/A 14.20% 7/2/97
Market Street Aggressive Growth -0.90% N/A N/A 5.50% 7/2/97
Market Street Managed 3.70% N/A N/A 8.80% 7/2/97
Market Street Bond -0.50% N/A N/A 4.50% 7/2/97
Market Street International 1.40% N/A N/A -1.70% 7/2/97
Market Street Money Market -3.40% N/A N/A -0.30% 7/2/97
Strong Opportunity Fund II, Inc. 4.70% N/A N/A 12.50% 7/2/97
Strong Mid Cap Growth Fund 19.60% N/A N/A 23.60% 7/2/97
Van Eck Worldwide Bond 3.90% N/A N/A 5.00% 7/2/97
American Century VP Value N/A N/A N/A -4.00% 8/3/98
American Century VP Income & Growth N/A N/A N/A 1.80% 8/3/98
Goldman Sachs International Equity N/A N/A N/A -7.50% 8/3/98
Goldman Sachs Global Income N/A N/A N/A -3.00% 8/3/98
Goldman Sachs CORE Small Cap Equity N/A N/A N/A -13.70% 8/3/98
Goldman Sachs Mid Cap Value N/A N/A N/A -9.00% 8/3/98
J.P. Morgan International Opportunities N/A N/A N/A -11.90% 8/3/98
J.P. Morgan Small Company N/A N/A N/A -8.90% 8/3/98
Neuberger Berman Partners N/A N/A N/A -5.90% 8/3/98
</TABLE>
*The returns shown in the "Life of Subaccount to 12/31/98" column, where the
life of the Subaccount is less than 1 year, are not annualized.
The chart below shows Standardized Average Annual Total Returns for a Contract
which does not elect the optional Enhanced Death Benefit Rider.
<TABLE>
<CAPTION>
Standardized Average Annual Total Return
(Assuming the Enhanced Death Benefit Rider Is Not Elected)
1 Year to 5 Years to 10 Years to Life of Subaccount Date Subaccount
12/31/98 12/31/98 12/31/98 to 12/31/98* Effective
<S> <C> <C> <C> <C> <C>
Alger American Small Capitalization 6.90% N/A N/A 12.40% 7/2/97
Alger American Growth 39.00% N/A N/A 31.50% 7/2/97
Fidelity VIP Fund-Equity Income 3.00% N/A N/A 9.30% 7/2/97
Fidelity VIP Fund-Growth 30.50% N/A N/A 26.40% 7/2/97
Fidelity VIP Fund-High Income -12.70% N/A N/A -2.50% 7/2/97
Fidelity VIP Fund-Overseas 4.10% N/A N/A -0.20% 7/2/97
Fidelity VIP Fund II-Index 500 19.50% N/A N/A 20.80% 7/2/97
Fidelity VIP Fund II-Contrafund 21.10% N/A N/A 22.50% 7/2/97
Market Street Growth 4.90% N/A N/A 10.40% 7/2/97
Market Street Sentinel Growth 6.80% N/A N/A 14.40% 7/2/97
Market Street Aggressive Growth -0.70% N/A N/A 5.70% 7/2/97
Market Street Managed 3.90% N/A N/A 9.00% 7/2/97
Market Street Bond -0.30% N/A N/A 4.70% 7/2/97
Market Street International 1.60% N/A N/A -1.40% 7/2/97
Market Street Money Market -3.20% N/A N/A -0.10% 7/2/97
Strong Opportunity Fund II, Inc. 4.90% N/A N/A 12.80% 7/2/97
Strong Mid Cap Growth Fund 19.80% N/A N/A 23.80% 7/2/97
Van Eck Worldwide Bond 4.10% N/A N/A 5.30% 7/2/97
American Century VP Value N/A N/A N/A -3.90% 8/3/98
American Century VP Income & Growth N/A N/A N/A 1.90% 8/3/98
Goldman Sachs International Equity N/A N/A N/A -7.40% 8/3/98
Goldman Sachs Global Income N/A N/A N/A -2.90% 8/3/98
Goldman Sachs CORE Small Cap Equity N/A N/A N/A -13.60% 8/3/98
Goldman Sachs Mid Cap Value N/A N/A N/A -8.90% 8/3/98
J.P. Morgan International Opportunities N/A N/A N/A -11.80% 8/3/98
J.P. Morgan Small Company N/A N/A N/A -8.90% 8/3/98
Neuberger Berman Partners N/A N/A N/A -5.80% 8/3/98
</TABLE>
*The returns shown in the "Life of Subaccount to 12/31/98" column, where the
life of the Subaccount is less than 1 year, are not annualized.
47
<PAGE> 50
Other Total Returns. Other "total returns" include nonstandardized
Subaccount average annual total returns and adjusted historic fund
performance data.
Nonstandardized Average Annual Total Return.
"Nonstandardized Average Annual Total Return" will be calculated
in a similar manner and for the same time periods as the standardized
average annual total return but will assume an initial investment of
$10,000 and will not reflect the deduction of any applicable
CDSC which, if reflected, would decrease the level of performance shown.
The Contingent Deferred Sales Charge is not reflected because the
Contracts are designed for long term investment. An assumed initial
investment of $10,000 will be used because that figure more closely
approximates the size of a typical Contract than does the $1,000 figure
used in calculating the Standardized Average Annual Total Return
quotations. Nonstandardized performance data will only be disclosed if
standardized average annual total return for the Subaccounts for the
required periods is also disclosed.
The charts below show Nonstandardized Average Annual Total Return
for the Subaccounts for the indicated periods. For the purposes of
calculating Nonstandardized Average Annual Total Return, the Mortality and
Expense Risk Charge of 1.25%, the Administration Charge of 0.15%, the
Annual Contract Fee of $30.00, and the optional Enhanced Death Benefit
Rider Charge of 0.20% were deducted. For purposes of computing the Annual
Contract Fee, the Annual Contract Fee has been converted into a per-dollar
per-day charge. The per-dollar per-day charge has been converted based on
the actual average Accumulated Value of the Contracts as of December 31,
1998. The charge works out to 0.05% per annum.
Based on the method of calculation described above, the
Nonstandardized Subaccount Average Annual Total Returns for the
Subaccounts for the period ending December 31, 1998, were:
<TABLE>
<CAPTION>
Nonstandardized Average Annual Total Return
(Assuming the Enhanced Death Benefit Rider Is Elected)
1 Year to 5 Years to 10 Years to Life of Subaccount Date Subaccount
12/31/98 12/31/98 12/31/98 to 12/31/98* Effective
-------- -------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Alger American Small Capitalization 13.70% N/A N/A 15.90% 7/2/97
Alger American Growth 45.70% N/A N/A 34.70% 7/2/97
Fidelity VIP Fund-Equity Income 9.80% N/A N/A 12.90% 7/2/97
Fidelity VIP Fund-Growth 37.20% N/A N/A 29.70% 7/2/97
Fidelity VIP Fund-High Income -5.90% N/A N/A 1.30% 7/2/97
Fidelity VIP Fund-Overseas 10.90% N/A N/A 3.60% 7/2/97
Fidelity VIP Fund II-Index 500 26.20% N/A N/A 24.10% 7/2/97
Fidelity VIP Fund II-Contrafund 27.90% N/A N/A 25.80% 7/2/97
Market Street Growth 11.70% N/A N/A 13.90% 7/2/97
Market Street Sentinel Growth 13.60% N/A N/A 17.90% 7/2/97
Market Street Aggressive Growth 6.10% N/A N/A 9.40% 7/2/97
Market Street Managed 10.70% N/A N/A 12.60% 7/2/97
Market Street Bond 6.50% N/A N/A 8.40% 7/2/97
Market Street International 8.40% N/A N/A 2.30% 7/2/97
Market Street Money Market 3.60% N/A N/A 3.70% 7/2/97
Strong Opportunity Fund II, Inc. 11.70% N/A N/A 16.30% 7/2/97
Strong Mid Cap Growth Fund 26.60% N/A N/A 27.10% 7/2/97
Van Eck Worldwide Bond 10.90% N/A N/A 8.90% 7/2/97
American Century VP Value N/A N/A N/A 3.00% 8/3/98
American Century VP Income & Growth N/A N/A N/A 8.80% 8/3/98
Goldman Sachs International Equity N/A N/A N/A -0.50% 8/3/98
Goldman Sachs Global Income N/A N/A N/A 4.00% 8/3/98
Goldman Sachs CORE Small Cap Equity N/A N/A N/A -6.70% 8/3/98
Goldman Sachs Mid Cap Value N/A N/A N/A -2.00% 8/3/98
J.P. Morgan International Opportunities N/A N/A N/A -4.90% 8/3/98
J.P. Morgan Small Company N/A N/A N/A -1.90% 8/3/98
Neuberger Berman Partners N/A N/A N/A 1.10% 8/3/98
</TABLE>
*The returns shown in the "Life of Subaccount to 12/31/98" column, where the
life of the Subaccount is less than 1 year, are not annualized.
The chart below shows the Nonstandardized Average Annual Total Returns for a
Contract which does not elect the optional Enhanced Death Benefit Rider.
<TABLE>
<CAPTION>
Nonstandardized Average Annual Total Return
(Assuming the Enhanced Death Benefit Rider Is Not Elected)
1 Year to 5 Years to 10 Years to Life of Subaccount Date Subaccount
12/31/98 12/31/98 12/31/98 to 12/31/98* Effective
-------- -------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Alger American Small Capitalization 13.90% N/A N/A 16.20% 7/2/97
Alger American Growth 46.00% N/A N/A 35.00% 7/2/97
Fidelity VIP Fund-Equity Income 10.00% N/A N/A 13.10% 7/2/97
Fidelity VIP Fund-Growth 37.50% N/A N/A 30.00% 7/2/97
Fidelity VIP Fund-High Income -5.70% N/A N/A 1.50% 7/2/97
Fidelity VIP Fund-Overseas 11.10% N/A N/A 3.80% 7/2/97
Fidelity VIP Fund II-Index 500 26.50% N/A N/A 24.40% 7/2/97
Fidelity VIP Fund II-Contrafund 28.10% N/A N/A 26.10% 7/2/97
Market Street Growth 11.90% N/A N/A 14.10% 7/2/97
Market Street Sentinel Growth 13.80% N/A N/A 18.10% 7/2/97
Market Street Aggressive Growth 6.30% N/A N/A 9.60% 7/2/97
Market Street Managed 10.90% N/A N/A 12.80% 7/2/97
Market Street Bond 6.70% N/A N/A 8.60% 7/2/97
Market Street International 8.60% N/A N/A 2.50% 7/2/97
Market Street Money Market 3.80% N/A N/A 3.90% 7/2/97
Strong Opportunity Fund II, Inc. 11.90% N/A N/A 16.50% 7/2/97
Strong Mid Cap Growth Fund 26.80% N/A N/A 27.40% 7/2/97
Van Eck Worldwide Bond 11.10% N/A N/A 9.10% 7/2/97
American Century VP Value N/A N/A N/A 3.10% 8/3/98
American Century VP Income & Growth N/A N/A N/A 8.90% 8/3/98
Goldman Sachs International Equity N/A N/A N/A -0.40% 8/3/98
Goldman Sachs Global Income N/A N/A N/A 4.10% 8/3/98
Goldman Sachs CORE Small Cap Equity N/A N/A N/A -6.60% 8/3/98
Goldman Sachs Mid Cap Value N/A N/A N/A -1.90% 8/3/98
J.P. Morgan International Opportunities N/A N/A N/A -4.80% 8/3/98
J.P. Morgan Small Company N/A N/A N/A -1.90% 8/3/98
Neuberger Berman Partners N/A N/A N/A 1.20% 8/3/98
</TABLE>
*The returns shown in the "Life of Subaccount to 12/31/98" column, where the
life of the Subaccount is less than 1 year, are not annualized.
Adjusted Historic Average Annual Total Return. In addition, historic
performance data may be presented for the Funds since their inception,
reduced by some or all of the fees and charges under the Contracts. Such
adjusted historic Fund performance includes data that precedes the
inception date of the Subaccounts. This data is designed to show
performance
<PAGE> 51
that would have resulted if the Contract had been in existence
during that time. Adjusted historic Fund performance data will be shown
only if standard performance data for the Subaccounts is also shown.
The charts below show adjusted historic total return for the Funds
for the indicated periods. For the purposes of calculating Adjusted
Historic Fund Average Annual Total Return, the Mortality and Expense Risk
Charge of 1.25%, the Administration Charge of 0.15%, the Annual Contract
Fee of $30.00, and (if so indicated) the applicable CDSC and/or the
optional Enhanced Death Benefit Rider Charge of 0.20% were deducted. For
purposes of computing the Annual Contract Fee, the Annual Contract Fee has
been converted into a per-dollar per-day charge. The per-dollar per-day
charge has been converted based on the actual average Accumulated Value of
the Contracts as of December 31, 1998. The charge works out to 0.05% per
annum.
Based on the method of calculation described above, the Adjusted
Historic Average Annual Total Returns for the Funds for the periods ending
December 31, 1998 were:
<TABLE>
<CAPTION>
Adjusted Historic Average Annual Total Return
(Assuming the Enhanced Death Benefit Rider is Not Elected and
the Contingent Deferred Sales Charge Is Not Deducted)
1 Year to 5 Years to 10 Years to Life of Fund Date Fund
12/31/98 12/31/98 12/31/98 to 12/31/98* Effective
-------- -------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Alger American Small Capitalization 13.90% 11.50% 18.10% 17.20% 9/21/88
Alger American Growth 46.00% 22.10% N/A 20.30% 1/9/89
Fidelity VIP Fund-Equity Income 10.00% 17.10% 14.00% 12.80% 10/9/86
Fidelity VIP Fund-Growth 37.50% 20.00% 17.70% 15.70% 10/9/86
Fidelity VIP Fund-High Income -5.70% 7.20% 9.50% 9.50% 9/19/85
Fidelity VIP Fund-Overseas 11.10% 8.10% 8.50% 7.00% 1/28/87
Fidelity VIP Fund II-Index 500 26.50% 22.00% N/A 19.50% 8/27/92
Fidelity VIP Fund II-Contrafund 28.10% N/A N/A 26.80% 1/3/95
Market Street Growth 11.90% 16.00% 13.60% 12.70% 2/24/84
Market Street Sentinel Growth 13.80% N/A N/A 19.10% 3/18/96
Market Street Aggressive Growth 6.30% 10.80% N/A 12.10% 5/1/89
Market Street Managed 10.90% 11.50% 9.70% 8.70% 12/12/85
Market Street Bond 6.70% 4.90% 6.50% 7.20% 2/24/84
Market Street International 8.60% 7.40% N/A 7.80% 11/1/91
Market Street Money Market 3.80% 3.50% 3.90% 4.50% 2/24/84
Strong Opportunity Fund II, Inc. 11.90% 15.30% N/A 17.40% 5/8/92
Strong Mid Cap Growth Fund 26.80% N/A N/A 27.40% 12/31/96
Van Eck Worldwide Bond 11.10% 5.00% N/A 5.30% 9/1/89
American Century VP Value 3.30% N/A N/A 14.30% 5/1/96
American Century VP Income & Growth 25.00% N/A N/A 28.80% 10/30/97
Goldman Sachs International Equity N/A N/A N/A 18.40% 1/12/98
Goldman Sachs Global Income N/A N/A N/A 6.80% 1/12/98
Goldman Sachs CORE Small Cap Equity N/A N/A N/A -10.50% 2/13/98
Goldman Sachs Mid Cap Value N/A N/A N/A -14.40% 5/1/98
J.P. Morgan International Opportunities 3.20% N/A N/A 7.30% 1/3/95
J.P. Morgan Small Company -6.90% N/A N/A 15.30% 1/3/95
</TABLE>
*The returns shown in the "Life of Subaccount to 12/31/98" column, where the
life of the Subaccount is less than 1 year, are not annualized.
48
<PAGE> 52
<TABLE>
<CAPTION>
Adjusted Historic Average Annual Total Return
(Assuming the Enhanced Death Benefit Rider is Not Elected and
the Contingent Deferred Sales Charge Is Deducted)
1 Year to 5 Years to 10 Years to Life of Fund Date Fund
12/31/98 12/31/98 12/31/98 to 12/31/98* Effective
-------- -------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Alger American Small Capitalization 6.90% 11.10% 18.10% 17.20% 9/21/88
Alger American Growth 39.00% 21.90% N/A 20.30% 1/9/89
Fidelity VIP Fund-Equity Income 3.00% 16.80% 14.00% 12.80% 10/9/86
Fidelity VIP Fund-Growth 30.50% 19.70% 17.70% 15.70% 10/9/86
Fidelity VIP Fund-High Income -12.70% 6.80% 9.50% 9.50% 9/19/85
Fidelity VIP Fund-Overseas 4.10% 7.70% 8.50% 7.00% 1/28/87
Fidelity VIP Fund II-Index 500 19.50% 21.70% N/A 19.40% 8/27/92
Fidelity VIP Fund II-Contrafund 21.10% N/A N/A 26.30% 1/3/95
Market Street Growth 4.90% 15.60% 13.60% 12.70% 2/24/84
Market Street Sentinel Growth 6.80% N/A N/A 17.70% 3/18/96
Market Street Aggressive Growth -0.70% 10.40% N/A 12.10% 5/1/89
Market Street Managed 3.90% 11.10% 9.70% 8.70% 12/12/85
Market Street Bond -0.30% 4.40% 6.50% 7.20% 2/24/84
Market Street International 1.60% 6.90% N/A 7.80% 11/1/91
Market Street Money Market -3.20% 3.00% 3.90% 4.50% 2/24/84
Strong Opportunity Fund II, Inc. 4.90% 15.00% N/A 17.30% 5/8/92
Strong Mid Cap Growth Fund 19.80% N/A N/A 25.40% 12/31/96
Van Eck Worldwide Bond 4.10% 4.50% N/A 5.30% 9/1/89
American Century VP Value -3.70% N/A N/A 12.80% 5/1/96
American Century VP Income & Growth 18.00% N/A N/A 23.90% 10/30/97
Goldman Sachs International Equity N/A N/A N/A 11.40% 1/12/98
Goldman Sachs Global Income N/A N/A N/A -0.20% 1/12/98
Goldman Sachs CORE Small Cap Equity N/A N/A N/A -17.50% 2/13/98
Goldman Sachs Mid Cap Value N/A N/A N/A -21.40% 5/1/98
J.P. Morgan International Opportunities -3.80% N/A N/A 6.50% 1/3/95
J.P. Morgan Small Company -13.90% N/A N/A 14.70% 1/3/95
Neuberger Berman Partners -4.30% N/A N/A 17.70% 3/22/94
</TABLE>
*The returns shown in the "Life of Subaccount to 12/31/98" column, where the
life of the Subaccount is less than 1 year, are not annualized.
<TABLE>
<CAPTION>
Adjusted Historic Average Annual Total Return
(Assuming the Enhanced Death Benefit Rider is Elected and
the Contingent Deferred Sales Charge Is Not Deducted)
1 Year to 5 Years to 10 Years to Life of Fund Date Fund
12/31/98 12/31/98 12/31/98 to 12/31/98* Effective
-------- -------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Alger American Small Capitalization 13.70% 11.30% 17.90% 16.90% 9/21/88
Alger American Growth 45.70% 21.90% N/A 20.10% 1/9/89
Fidelity VIP Fund-Equity Income 9.80% 16.90% 13.70% 12.60% 10/9/86
Fidelity VIP Fund-Growth 37.20% 19.80% 17.50% 15.50% 10/9/86
Fidelity VIP Fund-High Income -5.90% 7.00% 9.30% 9.30% 9/19/85
Fidelity VIP Fund-Overseas 10.90% 7.90% 8.30% 6.80% 1/28/87
Fidelity VIP Fund II-Index 500 26.20% 21.70% N/A 19.20% 8/27/92
Fidelity VIP Fund II-Contrafund 27.90% N/A N/A 26.60% 1/3/95
Market Street Growth 11.70% 15.70% 13.30% 12.50% 2/24/84
Market Street Sentinel Growth 13.60% N/A N/A 18.80% 3/18/96
Market Street Aggressive Growth 6.10% 10.60% N/A 11.90% 5/1/89
Market Street Managed 10.70% 11.20% 9.50% 8.50% 12/12/85
</TABLE>
49
<PAGE> 53
<TABLE>
<S> <C> <C> <C> <C> <C>
Market Street Bond 6.50% 4.70% 6.30% 7.00% 2/24/84
Market Street International 8.40% 7.20% N/A 7.60% 11/1/91
Market Street Money Market 3.60% 3.30% 3.60% 4.30% 2/24/84
Strong Opportunity Fund II, Inc. 11.70% 15.10% N/A 17.10% 5/8/92
Strong Mid Cap Growth Fund 26.60% N/A N/A 27.10% 12/31/96
Van Eck Worldwide Bond 10.90% 4.80% N/A 5.10% 9/1/89
American Century VP Value 3.10% N/A N/A 14.10% 5/1/96
American Century VP Income & Growth 24.80% N/A N/A 28.60% 10/30/97
Goldman Sachs International Equity N/A N/A N/A 18.20% 1/12/98
Goldman Sachs Global Income N/A N/A N/A 6.60% 1/12/98
Goldman Sachs CORE Small Cap Equity N/A N/A N/A -10.60% 2/13/98
Goldman Sachs Mid Cap Value N/A N/A N/A -14.50% 5/1/98
J.P. Morgan International Opportunities 3.00% N/A N/A 7.10% 1/3/95
J.P. Morgan Small Company -7.10% N/A N/A 15.10% 1/3/95
Neuberger Berman Partners 2.50% N/A N/A 17.80% 3/22/94
</TABLE>
*The returns shown in the "Life of Subaccount to 12/31/98" column, where the
life of the Subaccount is less than 1 year, are not annualized.
<TABLE>
<CAPTION>
Adjusted Historic Average Annual Total Return
(Assuming the Enhanced Death Benefit Rider is Elected and
the Contingent Deferred Sales Charge Is Deducted)
1 Year to 5 Years to 10 Years to Life of Fund Date Fund
12/31/98 12/31/98 12/31/98 to 12/31/98* Effective
-------- -------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Alger American Small Capitalization 6.70% 10.90% 17.90% 16.90% 9/21/88
Alger American Growth 38.70% 21.60% N/A 20.10% 1/9/89
Fidelity VIP Fund-Equity Income 2.80% 16.50% 13.70% 12.60% 10/9/86
Fidelity VIP Fund-Growth 30.20% 19.50% 17.50% 15.50% 10/9/86
Fidelity VIP Fund-High Income -12.90% 6.60% 9.30% 9.30% 9/19/85
Fidelity VIP Fund-Overseas 3.90% 7.50% 8.30% 6.80% 1/28/87
Fidelity VIP Fund II-Index 500 19.20% 21.50% N/A 19.20% 8/27/92
Fidelity VIP Fund II-Contrafund 20.90% N/A N/A 26.10% 1/3/95
Market Street Growth 4.70% 15.40% 13.30% 12.50% 2/24/84
Market Street Sentinel Growth 6.60% N/A N/A 17.50% 3/18/96
Market Street Aggressive Growth -0.90% 10.20% N/A 11.90% 5/1/89
Market Street Managed 3.70% 10.80% 9.50% 8.50% 12/12/85
Market Street Bond -0.50% 4.20% 6.30% 7.00% 2/24/84
Market Street International 1.40% 6.70% N/A 7.60% 11/1/91
Market Street Money Market -3.40% 2.80% 3.60% 4.30% 2/24/84
Strong Opportunity Fund II, Inc. 4.70% 14.80% N/A 17.10% 5/8/92
Strong Mid Cap Growth Fund 19.60% N/A N/A 25.20% 12/31/96
Van Eck Worldwide Bond 3.90% 4.30% N/A 5.10% 9/1/89
American Century VP Value -3.90% N/A N/A 12.50% 5/1/96
American Century VP Income & Growth 17.80% N/A N/A 23.60% 10/30/97
Goldman Sachs International Equity N/A N/A N/A 11.20% 1/12/98
Goldman Sachs Global Income N/A N/A N/A -0.40% 1/12/98
Goldman Sachs CORE Small Cap Equity N/A N/A N/A -17.60% 2/13/98
Goldman Sachs Mid Cap Value N/A N/A N/A -21.50% 5/1/98
J.P. Morgan International Opportunities -4.00% N/A N/A 6.30% 1/3/95
J.P. Morgan Small Company -14.10% N/A N/A 14.50% 1/3/95
Neuberger Berman Partners -4.50% N/A N/A 17.40% 3/22/94
</TABLE>
*The returns shown in the "Life of Subaccount to 12/31/98" column, where the
life of the Subaccount is less than 1 year, are not annualized.
50
<PAGE> 54
All performance information and comparative material advertised by
National Life is historical in nature and is not intended to represent or
guarantee future results. An Owner's Contract Value at redemption may be more or
less than original cost.
DISTRIBUTION OF THE CONTRACTS
The principal underwriter for the contracts is ESI, which is an
SEC-registered broker-dealer firm and is a member of the National Association
of Securities Dealers, Inc. ESI is a wholly-owned subsidiary of National Life.
It distributes a full line of securities products, including mutual funds, unit
investment trusts, and variable insurance contracts, and provides individual
securities brokerage services. The maximum commission payable for selling the
Contracts will generally be 6.5%, however, during certain promotional periods
the commission may vary. These promotional periods will be determined by
National Life and the maximum commission paid during these periods will not
exceed 7.0%.
INSURANCE MARKETPLACE STANDARDS ASSOCIATION
National Life Insurance Company is a member of the Insurance Marketplace
Standards Association ("IMSA"), and as such may include the IMSA logo and
information about IMSA membership in its advertisements. Companies that belong
to IMSA subscribe to a set of ethical standards covering the various aspects of
sales and service for individually sold life insurance and annuities.
FINANCIAL STATEMENTS
National Life's financial statements as of and for the years ended
December 31, 1998 and 1997, which are included in the Statement of Additional
Information, should be considered only as bearing on National Life's ability to
meet its obligations under the Contracts. They should not be considered as
bearing on the investment performance of the assets held in the Variable
Account.
STATEMENTS AND REPORTS
National Life will mail to Owners, at their last known address of record,
any statements and reports required by applicable laws or regulations. Owners
should therefore give National Life prompt notice of any address change.
National Life will send a confirmation statement to Owners each time a
transaction is made affecting the Owner's Variable Account Contract Value, such
as making additional Premium Payments, transfers, exchanges or Withdrawals.
Quarterly statements are also mailed detailing the Contract activity during the
calendar quarter. Instead of receiving an immediate confirmation of transactions
made pursuant to some types of periodic payment plans (such as a dollar cost
averaging program) or salary reduction arrangement, the Owner may receive
confirmation of such transactions in their quarterly statements. The Owner
should review the information in these statements carefully. All errors or
corrections must be reported to National Life immediately to assure proper
crediting to the Owner's Contract. National Life will assume all transactions
are accurately reported on quarterly statements or confirmation statements
unless the Owner notifies National Life otherwise within 30 days after receipt
of the statement. National Life will also send to Owners each year an annual
report and a semi-annual report containing financial statements for the Variable
Account, as of December 31 and June 30, respectively.
PREPARING FOR YEAR 2000
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the year 2000 from the year
1900. Like all financial services providers, National Life utilizes computer
systems that may be effected by Year 2000 transition issues, and National Life
relies on service providers, including the Funds, that also may be affected.
National Life has developed, and is in the process of implementing, a Year 2000
transition plan, and is confirming that its service providers are also so
engaged. The resources that are being devoted to this effort are substantial. It
is difficult to predict with precision whether the amount of resources
ultimately devoted, or the outcome of these efforts, will have any negative
impact on National Life. However, as of the date of this prospectus, it is not
anticipated that any Policy Owners will experience negative effects on their
investment, or on the services provided in connection therewith, as a result of
Year 2000 transition implementation. National Life currently anticipates that
its computer systems will be
51
<PAGE> 55
Year 2000 compliant on or about June 1, 1999, but there can be no assurance
that National Life will be successful, or that interaction with other service
providers will not impair National Life's services at that time.
OWNER INQUIRIES
Owner inquiries may be directed to National Life Insurance Company by
writing to us at National Life Drive, Montpelier, Vermont 05604, or calling
1-800-537-7003.
LEGAL PROCEEDINGS
In recent years life insurance companies have been named as defendants in
class action lawsuits relating to life insurance pricing and sales practices.
During 1998, National Life settled a group of class action lawsuits of this
nature. While the ultimate cost of the settlement is not yet known, National
Life set aside a reserve during 1998 of $40.6 million to account for the cost of
the settlement of these cases. National Life is a party to ordinary routine
litigation incidental to the business, none of which is expected to have a
material adverse effect upon its ability to meet its obligations under the
Contracts. ESI is not engaged in any litigation of any material nature.
52
<PAGE> 56
GLOSSARY
ACCUMULATION UNIT - An accounting unit of measure used to calculate the Variable
Account Contract Value prior to the Annuitization Date.
ANNUITANT - A person named in the Contract who is expected to become, at
Annuitization, the person upon whose continuation of life any annuity payments
involving life contingencies depends. Unless the Owner is a different individual
who is age 85 or younger, this person must be age 85 or younger at the time of
Contract issuance unless National Life has approved a request for an Annuitant
of greater age. The Owner may change the Annuitant prior to the Annuitization
Date, as set forth in the Contract.
ANNUITIZATION - The period during which annuity payments are actually received.
ANNUITIZATION DATE - The date on which annuity payments actually commence.
ANNUITY PAYMENT OPTION - The chosen form of annuity payments. Several options
are available under the Contract.
ANNUITY UNIT - An accounting unit of measure used to calculate the value of
Variable Annuity payments.
BENEFICIARY - The Beneficiary is the person designated to receive certain
benefits under the Contract upon the death of the Owner or Annuitant prior to
the Annuitization Date. The Beneficiary can be changed by the Owner as set forth
in the Contract.
CASH SURRENDER VALUE - An amount equal to Contract Value, minus any applicable
Contingent Deferred Sales Charge, minus any applicable premium tax charge.
CHOSEN HUMAN BEING - An individual named at the time of Annuitization upon
whose continuance of life any annuity payments involving life contingencies
depends.
CODE - The Internal Revenue Code of 1986, as amended.
CONTRACT ANNIVERSARY - An anniversary of the Date of Issue of the Contract.
CONTRACT VALUE - The sum of the value of all Variable Account Accumulation Units
attributable to the Contract, plus any amount held under the Contract in the
Fixed Account.
CONTRACT YEAR - Each year the Contract remains in force commencing with the Date
of Issue.
DATE OF ISSUE - The date shown as the Date of Issue on the Data Page of the
Contract.
DEATH BENEFIT - The benefit payable to the Beneficiary upon the death of the
Owner or the Annuitant.
DISTRIBUTION - Any payment of part or all of the Contract Value.
FIXED ACCOUNT - The Fixed Account is made up of all assets of National Life
other than those in the Variable Account or any other segregated asset account
of National Life.
FIXED ANNUITY - An annuity providing for payments which are guaranteed by
National Life as to dollar amount during Annuitization.
FUND - A registered management investment company in which the assets of a
Subaccount of the Variable Account will be invested.
INDIVIDUAL RETIREMENT ANNUITY (IRA) - An annuity which qualifies for favorable
tax treatment under Section 408 of the Code.
INVESTMENT COMPANY ACT - The Investment Company Act of 1940, as amended from
time to time.
5
<PAGE> 57
JOINT OWNERS - Two or more persons who own the Contract as tenants in common or
as joint tenants. If joint owners are named, references to "Owner" in this
prospectus will apply to both of the Joint Owners.
MATURITY DATE - The date on which annuity payments are scheduled to commence.
The Maturity Date is shown on the Data Page of the Contract, and is subject to
change by the Owner, within any applicable legal limits, subject to National
Life's approval.
MONTHLY CONTRACT DATE - The day in each calendar month which is the same day of
the month as the Date of Issue, or the last day of any month having no such
date, except that whenever the Monthly Contract Date would otherwise fall on a
date other than a Valuation Day, the Monthly Contract Date will be deemed to be
the next Valuation Day.
NON-QUALIFIED CONTRACT - A Contract which does not qualify for favorable tax
treatment under the provisions of Sections 401 or 403(a) (Qualified Plans),
408(IRAs) or 403(b) (Tax-Sheltered Annuities) under the Code.
OWNER ("YOU") - The Owner is the person who possesses all rights under the
Contract, including the right to designate and change any designations of the
Owner, Annuitant, Beneficiary, Annuity Payment Option, and the Maturity Date.
PAYEE - The person who is designated at the time of Annuitization to receive the
proceeds of the Contract upon Annuitization.
PREMIUM PAYMENT - A deposit of new value into the Contract. The term "Premium
Payment" does not include transfers between the Variable Account and Fixed
Account or among the Subaccounts.
NET PREMIUM PAYMENTS - The total of all Premium Payments made under the
Contract, less any premium tax deducted from premiums.
QUALIFIED CONTRACT - A Contract which qualifies for favorable tax treatment
under the provisions of Sections 401 or 403(a) (Qualified Plans), 408 (IRAs),
403(b) (Tax-Sheltered Annuities) or 457 of the Code.
QUALIFIED PLANS - Retirement plans which receive favorable tax treatment under
Section 401 or 403(a) of the Code.
SUBACCOUNTS - Separate and distinct divisions of the Variable Account that
purchase shares of underlying Funds shares. Separate Accumulation Units and
Annuity Units are maintained for each Subaccount.
TAX-SHELTERED ANNUITY - An annuity which qualifies for favorable tax treatment.
VALUATION DAY - Each day the New York Stock Exchange is open for business other
than the day after Thanksgiving and any day on which trading is restricted.
Unless otherwise indicated, when an event occurs or a transaction is to be
effected on a day that is not a Valuation Day, it will be effected on the next
Valuation Day.
VALUATION PERIOD - The time between two successive Valuation Days.
VARIABLE ACCOUNT -The National Variable Annuity Account II, a separate
investment account of National Life into which Net Premium Payments under the
Contracts are allocated. The Variable Account is divided into Subaccounts, each
of which invests in the shares of a separate underlying Fund.
VARIABLE ANNUITY - An annuity the accumulated value of which varies with the
investment experience of a separate account.
WITHDRAWAL - A payment made at the request of the Owner pursuant to the right to
withdraw a portion of the Contract Value of the Contract.
* * *
6
<PAGE> 58
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<S> <C>
National Life Insurance Company.............................
Additional Contract Provisions..............................
The Contract..........................................
Misstatement of Age or Sex............................
Dividends.............................................
Assignment............................................
Calculation of Yields and Total Returns.....................
Money Market Subaccount Yields........................
Other Subaccount Yields...............................
Average Annual Total Returns..........................
Other Total Returns...................................
Effect of the Annual Contract Fee on Performance Data.
Tax Status of the Policy....................................
Distribution of the Contracts...............................
Safekeeping of Account Assets...............................
State Regulation............................................
Records and Reports.........................................
Legal Matters...............................................
Experts.....................................................
Other Information...........................................
Financial Statements:
National Life:
1998-1997 Financial Statements.....................F-1
National Variable Annuity Account II:
1998-1997 Financial Statements.....................F-22
</TABLE>
53
<PAGE> 59
PART B
STATEMENT OF ADDITIONAL INFORMATION
<PAGE> 60
PART B
ITEM OF FORM N-4 PART B CAPTION
15. Cover Page ......................Cover Page
16. Table of Contents ...............Table of Contents
17. General Information and
History ........................NATIONAL LIFE INSURANCE
COMPANY
18. Services
(a) Fees and Expenses of
Registrant ................Charges and Deductions
(prospectus)
(b) Management Contracts ......N/A
(c) Custodian .................Safekeeping of Account
Assets
Independent Public
Accountant ................Experts
(d) Assets of Registrant ......The Variable Account
(prospectus)
(e) Affiliated Persons ........N/A
(f) Principal Underwriter .....Distribution of the
Contracts
19. Purchase of Securities
Being Offered ..................Distribution of the
Contracts
Offering Sales Load ............N/A
20. Underwriters ....................Distribution of the
Contracts
21. Calculation of Performance
Data ............................Calculation of Yields and
Total Returns
22. Annuity Payments ................Annuity Payment Options
(prospectus)
23. Financial Statements ............Financial Statements
<PAGE> 61
PART C -- OTHER INFORMATION
ITEM OF FORM N-4 PART C CAPTION
24. Financial Statements
and Exhibits ...................Financial Statements and
Exhibits
(a) Financial Statements .......(a) Financial Statements
(b) Exhibits ...................(b) Exhibits
25. Directors and Officers
of the Depositor ................Directors and Officers of
the Depositor
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 Contract Owners
28. Indemnification .................Indemnification
29. Principal Underwriters ..........Principal Underwriter
30. Location of Accounts
and Records .....................Location of Books and
Records
31. Management Services .............Management Services
32. Undertakings ....................Undertakings and
Representations
Signature Page ..................Signatures
<PAGE> 62
NATIONAL LIFE INSURANCE COMPANY
STATEMENT OF ADDITIONAL INFORMATION
NATIONAL VARIABLE ANNUITY ACCOUNT II
THE SENTINEL ADVANTAGE VARIABLE ANNUITY CONTRACT
OFFERED BY
NATIONAL LIFE INSURANCE COMPANY
National Life Drive
Montpelier, Vermont 05604
This Statement of Additional Information expands upon subjects
discussed in the current Prospectus for the Sentinel Advantage Variable Annuity
Contract ("Contract") offered by National Life Insurance Company. You may obtain
a copy of the Prospectus dated May 1, 1999 by calling 1-800-537-7003, or writing
to National Life Insurance Company, One National Life Drive, Montpelier, Vermont
05604. Definitions of terms used in the current Prospectus for the Contract are
incorporated in this Statement of Additional Information.
This statement of additional information is
not a prospectus and should be read only in
conjunction with the prospectus for the contract.
Dated May 1, 1999
1
<PAGE> 63
TABLE OF CONTENTS
<TABLE>
<S> <C>
National Life Insurance Company.................................................
Additional Contract Provisions..................................................
The Contract...........................................................
Misstatement of Age or Sex.............................................
Dividends..............................................................
Assignment.............................................................
Calculation of Yields and Total Returns.........................................
Money Market Subaccount Yields.........................................
Other Subaccount Yields................................................
Average Annual Total Returns...........................................
Other Total Returns....................................................
Effect of the Annual Contract Fee on Performance Data..................
Tax Status of the Policy........................................................
Distribution of the Contracts ..................................................
Safekeeping of Account Assets...................................................
State Regulation................................................................
Records and Reports.............................................................
Legal Matters...................................................................
Experts
Other Information...............................................................
Financial Statements
National Life:
1998-1997 Financial Statements................................................F-1
National Variable Annuity Account II:
1998-1997 Financial Statements................................................F-22
</TABLE>
2
<PAGE> 64
NATIONAL LIFE INSURANCE COMPANY
National Life Insurance Company ("National Life") has operated as a
mutual life insurance company since 1848 under a charter granted by the State of
Vermont, and has done business continuously as "National Life Insurance
Company."
ADDITIONAL CONTRACT PROVISIONS
The Contract
The entire contract is made up of the Contract and the application. The
statements made in the application are deemed representations and not
warranties. National Life cannot use any statement in defense of a claim or to
void the Contract unless it is contained in the application and a copy of the
application is attached to the Contract at issue.
Misstatement of Age or Sex
If the age or sex of the Chosen Human Being has been misstated, the
amount which will be paid is that which is appropriate to the correct age
and sex.
Dividends
The Contract is participating; however, no dividends are expected to be
paid on the Contract. If dividends are ever declared, they will be paid in cash.
Assignment
Where permitted, the Owner may assign some or all of the rights under
the Contract at any time during the lifetime of the Annuitant prior to the
Annuitization Date. Such assignment will take effect upon receipt and recording
by National Life at its Home Office of a written notice executed by the Owner.
National Life assumes no responsibility for the validity or tax consequences of
any assignment. National Life shall not be liable as to any payment or other
settlement made by National Life before recording of the assignment. Where
necessary for the proper administration of the terms of the Contract, an
assignment will not be recorded until National Life has received sufficient
direction from the Owner and assignee as to the proper allocation of Contract
rights under the assignment.
Any portion of Contract Value which is pledged or assigned shall be
treated as a Distribution and shall be included in gross income to the extent
that the cash value exceeds the investment in the Contract for the taxable year
in which assigned or pledged. In addition, any Contract Values assigned may,
under certain conditions, be subject to a tax penalty equal to 10% of the amount
which is included in gross income.
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<PAGE> 65
entire Contract Value may cause the portion of the Contract Value which exceeds
the total investment in the Contract and previously taxed amounts to be included
in gross income for federal income tax purposes each year that the assignment is
in effect. Qualified Contracts are not eligible for assignment.
CALCULATION OF YIELDS AND TOTAL RETURNS
From time to time, National Life may disclose yields, total returns,
and other performance data pertaining to the Contracts or a Subaccount. Such
performance data will be computed, or accompanied by performance data computed,
in accordance with the standards defined by the Securities and Exchange
Commission.
Because of the charges and deductions imposed under a Contract, the
yield for the Subaccounts will be lower than the yield for their respective
Portfolios. The calculations 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 rate from 0% to 3.5% of premium
based on the state in which the Contract is sold.
Money Market Subaccount Yields
From time to time, advertisements and sales literature may quote the
current annualized yield of the Money Market Subaccount for a seven-day period
in a manner which does not take into consideration any realized or unrealized
gains or losses, or income other than investment income, on shares of the Market
Street Money Market Portfolio or on its 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), and exclusive of income other than investment
income at the end of the seven-day period in the value of a hypothetical account
under a Contract having a balance of 1 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 Portfolio
attributable to the hypothetical account; and 2) charges and deductions imposed
under the Contract which are attributable to the hypothetical account. The
charges and deductions include the per unit charges for the hypothetical account
for: 1) the Annual Contract Fee; 2) Administration Charge; and 3) the Mortality
and Expense Risk Charge. For purposes of calculating current yields for a
Contract, an average per unit Annual Contract Fee is used based on the $30
Annual Contract Fee deducted at the beginning of each Contract Year. For the
class of Contracts with the Enhanced Death Benefit Rider, the charge for that
optional benefit will be included. Current Yield will be calculated according to
the following formula:
Current Yield = ((NCS - ES) /UV) x (365/7)
Where:
NCS = the net change in the value of the Portfolio
(exclusive of realized gains or losses on the sale of
securities and unrealized appreciation and
4
<PAGE> 66
depreciation, and exclusive of income other than
investment income) 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 on the first day of the seven-day period.
The effective yield of the Money Market Subaccount determined on a
compounded basis for the same seven-day period may also be quoted.
The effective yield is calculated by compounding the unannualized base
period return according to the following formula:
365/7
Effective Yield = (1 + (NCS - ES)/UV)) - 1
Where:
NCS = the net change in the value of the Portfolio (exclusive
of realized gains or losses on the sale of securities and
unrealized appreciation and depreciation, and exclusive
of income other than investment income) 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 on the first day of the seven-day period.
Because of the charges and deductions imposed under the Contract, the
yield for the Money Market Subaccount will be lower than the yield for the
Market Street Money Market Portfolio.
The current yield for the Money Market Subaccount as of December 31,
1998 was 3.40% the effective yield for that Subaccount as of the same date
was 3.46%. These yields were calculated based on the performance of the Market
Street Money Market Portfolio for the seven days ended December 31, 1998, and
the assumption that the Money Market Subaccount was in existence for this
period with the level of Contract charges that was in effect at the inception
of the Money Market Subaccount.
The current and effective yields on amounts held in the Money Market
Subaccount normally will 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 Market Street Money Market Portfolio, the types of
quality of portfolio securities held by the Market Street Money Market Portfolio
and the Market Street Money Market Portfolio's operating expenses. Yields on
amounts held in the Money Market Subaccount may also be presented for periods
other than a seven-day period.
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
over a specific 30-day or one-month period. Because the yield is annualized, the
yield generated by a Subaccount during a 30-day or one-month period is assumed
to be generated each period over a 12-month period.
5
<PAGE> 67
The yield is computed by: 1) dividing the net investment income of the
Portfolio 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 Contract Fee,
the Administration Charge and the Mortality and Expense Risk Charge. For the
class of Contracts with the Enhanced Death Benefit Rider, the charge for that
optional benefit will be included. For purposes of calculating the 30-day or
one -month yield, an average Annual Contract Fee per dollar of Contract Value
in the Variable Account 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:
6
Yield = 2 x (((NI - ES)/(U x UV)) + 1) -1)
Where:
NI = net income of the Portfolio 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.
Because of the charges and deductions imposed under the Contracts, the
yield for the Subaccount will be lower than the yield for the corresponding
Fund.
The yield on the amounts held in the Subaccounts normally will
fluctuate over time. Therefore, the disclosed yield for any given past period is
not an indication or representation of future yields or rates of return. The
Subaccount's actual yield is affected by the types and quality of portfolio
securities held by the Portfolio and its operating expenses.
Yield calculations do not take into account the Surrender Charge under
the Contract equal to from 1% to 7% of premiums paid during the seven years
prior to the surrender or Withdrawal (including the year in which the surrender
is made) on amounts surrendered or withdrawn under the Contract. A Surrender
Charge will not be imposed on Withdrawals in any Contract Year on an amount up
to 15% of the Contract Value as of the most recent Contract Anniversary.
However, if a Contract is subsequently surrendered within a year after taking a
Withdrawal that benefits from the CDSC-free provision, then a CDSC will be
assessed at the time of the surrender as if the surrender had been taken as a
single step.
Total Returns
6
<PAGE> 68
From time to time, sales literature or advertisements may also quote
total returns for periods after or prior to the date the Variable Account
commenced operations. For periods prior to the date the Variable Account
commenced operations, performance information for the Contracts will be
calculated based on the performance of the Fund Portfolios and the assumption
that the Subaccounts were in existence for the same periods with the level of
Contract charges that were in effect at the inception of the Subaccounts.
A. Standardized Average Annual Total Returns
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 month-end practicable,
considering the type and media of the communication and will be stated in the
communication.
Standardized Average Annual Total Return is calculated using
Subaccount unit values which we calculate on each Valuation Day based on the
performance of the Subaccount's underlying fund, the deductions for the
Mortality and Expense Risk Charge, the deductions for the asset-based
Administration Charge and the policy fee. For purposes of calculating average
annual total return, an average per dollar Annual Contract 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.
Standardized Average Annual Total Returns will therefore reflect a deduction of
the CDSC for any period less than seven years. The Standardized average annual
total return will then be calculated according to the following formula:
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.
Standardized Average annual total return may be calculated either
taking into account or not taking into account the impact of the Enhanced Death
Benefit Rider.
7
<PAGE> 69
Such standardized average annual total return information for the
Subaccounts is set forth in the Prospectus.
B. Other Total Returns
Nonstandardized Average Annual Total Return. From time to time, sales
literature or advertisements may also quote nonstandardized average annual
total returns for the Subaccounts that do not reflect the CDSC. These are
calculated in exactly the same way as standardized 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, and
that the initial investment is assumed to be $10,000 rather than $1,000. Such
information is also set forth in the Prospectus.
Cumulative Subaccount Total Return. National Life may disclose
Cumulative Total Returns in conjunction with the standard formats described
above. The Cumulative Total Returns will be calculated using the following
formula:
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.
Adjusted Historic Average Annual Total Return. Sales literature or
advertisements may quote nonstandardized "adjusted" total returns for the Funds
since their inception reduced by some or all of the fees and charges under the
Policy. Such adjusted historic average annual total return includes data that
precedes the inception dates of the Subaccounts. This data is designed to show
the performance that would have resulted if the Policy had been in existence
during that time.
When the standard performance data for the Subaccounts is available,
nonstandardized Subaccount and adjusted historic Average Annual Total Return
data will be disclosed together with the standardized average annual total
returns for the required periods.
The Funds have provided the total return information, which includes
the adjusted historic average annual total return information used to calculate
the adjusted historic average annual total returns of the Funds Subaccounts for
periods prior to the inception of the Subaccounts. The Alger American Fund,
Variable Insurance Products Fund, Variable Insurance Product Fund II, Strong
Special Fund II, Inc., Strong Variable Insurance Funds, Inc. , American Century
Investment Management, Inc., Neuberger Berman Advisers Management Trust, J. P.
Morgan Series Trust II and Goldman Sachs Variable Insurance Trust, are not
affiliated with us.
Such adjusted historic total return information for the Funds is set
forth in the Prospectus.
Effect of the Annual Contract Fee on Performance Data
The Contract provides, for all Contracts with a Contract Value of less
than $50,000 on the Date of Issue or any subsequent Contract Anniversary, for a
$30 Annual Contract Fee to be deducted annually at the beginning of each
Contract Year, from the Subaccounts and the unloaned portion of the Fixed
Account based on the proportion that the value of each such account bears to
the total Contract Value. For purposes of reflecting the Annual Contract Fee in
the yield and total return quotations, the Annual Contract Fee is converted
into a per-dollar per-day charge. The per-dollar per-day charge has been
converted based on the actual average Accumulated Value in the Contracts as of
December 31, 1998. The charge works out to be 0.05% per annum.
8
<PAGE> 70
The per-dollar per-day average charge will then be adjusted to reflect the
basis upon which the particular quotation is calculated.
TAX STATUS OF THE CONTRACTS
Tax law imposes several requirements that variable annuities must
satisfy in order to receive the tax treatment normally accorded to annuity
contracts.
Diversification Requirements. The Internal Revenue Code (Code)
requires that the investments of each investment division of the separate
account underlying the Contracts be "adequately diversified" in order for the
Contracts to be treated as annuity contracts for Federal income tax purposes.
It is intended that each investment division, through the fund in which it
invests, 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 separate 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 our Contracts, such as the flexibility of an owner
to allocate premium payments and transfer amounts among the investment
divisions of the separate account, have not been explicitly addressed in
published rulings. While we believe that the Contracts do not give Owners
investment control over separate account assets, we reserve the right to modify
the Contracts as necessary to prevent an Owner from being treated as the Owner
of the separate account assets supporting the Contract.
Required Distributions. In order to be treated as an annuity
contract for Federal income tax purposes, Section 72(s) of 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 the death of an
owner of the Contract. Specifically, section 72(s) requires that (a) if any
owner dies on or after the annuity starting date, but prior to the time the
entire interest in the contract has been distributed, the entire interest in
the contract will be distributed at least as rapidly as under the method of
distribution being used as of the date of such owner's death; and (b) if any
owner dies prior to the annuity starting date, the entire interest in the
contract will be distributed within five years after the date of such owner's
death. These requirements will be considered satisfied as to any portion of a
owner's interest which is payable to or for the benefit of a designated
beneficiary and which is distributed over the life of such designated
beneficiary or over a period not extending beyond the life expectancy of that
beneficiary, provided that such distributions begin within one year of the
owner's death. The designated beneficiary refers to a natural person designated
by the owner as a beneficiary and to whom ownership of the contract passes by
reason of death. However, if the designated beneficiary is the surviving spouse
of the deceased owner, the contract may be continued with the surviving spouse
as the new owner.
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.
DISTRIBUTION OF THE CONTRACTS
The principal underwriter for the Contracts is Equity Services, Inc.
ESI, a wholly-owned subsidiary of the Company and a member of the National
Association Securities, Inc. ESI also serves as principal underwriter of the
National Variable Life Insurance Account and the Life of the Southwest LSW
Variable Annuity Account I, which are unit investment trusts registered under
the Investment Company Act of 1940. The Contracts will be offered on a
continuous basis and will be sold by licensed insurance agents in the states
where the Contracts may lawfully be sold. Such agents will be representatives of
broker-dealers registered under the Securities Exchange Act of 1934 who are
members of the National Association of Securities Dealers, Inc. Broker-dealers
other than ESI will have executed Selling Agreements with ESI. As principal
underwriter of the Variable Accounts, ESI received and retained underwriting
commissions of $295,011.19 in 1998 and 68,981.63 in 1997.
SAFEKEEPING OF ACCOUNT ASSETS
National Life holds the title to the assets of the Variable Account. The
assets are kept physically segregated and held separate and apart from the
Company's General Account assets and from the assets in any other separate
account.
Records are maintained of all purchases and redemptions of Fund shares
held by each of the Subaccounts.
STATE REGULATION
National Life is subject to regulation and supervision by the Insurance
Department of the State of Vermont which periodically examines its affairs. It
is also subject to the insurance laws and regulations of all jurisdictions where
it is authorized to do business. A copy of the Contract form has been filed
with, and where required approved by, insurance officials in each jurisdiction
where the Contracts are sold. National Life is required to submit annual
statements of its operations, including financial statements, to the insurance
departments of the various jurisdictions in which it does business for the
purposes of determining solvency and compliance with local insurance laws and
regulations.
RECORDS AND REPORTS
National Life will maintain all records and accounts relating to the
Variable Account. As presently required by the Investment Company Act of 1940
and regulations promulgated thereunder, reports containing such information as
may be required under the Act or by any other applicable law or regulation will
be sent to Contract Owners semi-annually at the last address known to the
Company.
LEGAL MATTERS
All matters relating to Vermont law pertaining to the Contracts,
including the validity of the Contracts and National Life's authority to issue
the Contracts, have been passed upon by Michele S. Gatto, Senior Vice President
& General Counsel of National Life. Sutherland, Asbill & Brennan LLP
9
<PAGE> 71
of Washington, D.C. has provided advice on certain matters relating to the
Federal securities laws.
EXPERTS
The financial statements of National Life as of and for the years
ended December 31, 1998 and 1997, and the financial statements of the
Variable Account as of and for the years ended December 31, 1998 and 1997, which
are included in this Statement of Additional Information and in the registration
statement, have been audited by PricewaterhouseCoopers LLP, independent
auditors, of National Life Building - 2nd Floor, One National Life Drive,
Montpelier, Vermont 05602, as set forth in their report included herein, and are
included herein in reliance upon such report and upon the authority of such firm
as experts in accounting and auditing.
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 intended to be summaries. For a complete statement of the
terms of these documents, reference should be made to the instruments filed with
the SEC at 450 Fifth Street, N.W., Washington, DC 20549.
FINANCIAL STATEMENTS
The financial statements of National Life and of the relevant
Subaccounts of the Separate Account appear on the following pages. The
financial statements of National Life should be distinguished from the
financial statements of the Separate Account and should be considered only as
bearing upon National Life's ability to meet its obligations under the
Policies.
10
<PAGE> 72
NATIONAL LIFE INSURANCE COMPANY
* * * * *
FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1998 AND 1997
F-1
<PAGE> 73
Report of Independent Accountants
To the Board of Directors and Policyholders
of National Life Insurance Company
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations and comprehensive income, changes in
equity, and cash flows present fairly, in all material respects, the financial
position of National Life Insurance Company and its subsidiaries (the Company)
at December 31, 1998 and 1997, and the results of their operations and their
cash flows for the years then ended in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in Note 10 to the financial statements, the Company changed its
method of accounting in 1998 for the cost of computer software developed or
obtained for internal use.
As discussed in Note 11 to the financial statements, on January 1, 1999,
National Life Insurance Company converted from a mutual to a stock insurance
company as part of a reorganization into a mutual holding company corporate
structure.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 2, 1999
F-2
<PAGE> 74
<TABLE>
<CAPTION>
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------
(In Thousands) 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 347,949 $ 372,180
Available-for-sale debt and equity securities, at fair value 5,438,784 5,317,427
Mortgage loans 1,098,504 992,170
Policy loans 776,363 791,753
Real estate investments 75,566 95,926
Other invested assets 113,696 90,520
- -------------------------------------------------------------------------------------------------------------------
Total cash and invested assets 7,850,862 7,659,976
Deferred policy acquisition costs 416,733 392,014
Accrued investment income 119,249 125,790
Premiums and fees receivable 21,044 23,458
Deferred income taxes 21,541 17,517
Amounts recoverable from reinsurers 253,651 234,280
Present value of future profits of insurance acquired 45,539 54,444
Property and equipment, net 59,503 59,188
Other assets 133,702 66,259
Separate account assets 283,948 207,425
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 9,205,772 $ 8,840,351
===================================================================================================================
LIABILITIES:
Policy benefit liabilities $ 3,907,114 $ 3,814,213
Policyholders' accounts 3,348,132 3,236,710
Policyholders' deposits 38,520 40,836
Policy claims payable 31,900 26,968
Policyholders' dividends 54,757 53,395
Amounts payable to reinsurers 35,481 24,260
Other liabilities and accrued expenses 500,527 481,775
Debt 78,088 80,085
Separate account liabilities 264,421 187,998
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 8,258,940 7,946,240
- -------------------------------------------------------------------------------------------------------------------
MINORITY INTERESTS 64,529 53,222
EQUITY:
Retained earnings 776,060 755,872
Accumulated other comprehensive income 106,243 85,017
- -------------------------------------------------------------------------------------------------------------------
Total equity 882,303 840,889
- -------------------------------------------------------------------------------------------------------------------
Total liabilities, minority interests and equity $ 9,205,772 $ 8,840,351
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 75
<TABLE>
<CAPTION>
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------
(In Thousands) 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Insurance premiums $ 386,260 $ 399,017
Policy and contract charges 48,463 45,397
Net investment income 550,339 528,197
Net realized investment gains 8,450 11,887
Mutual fund commission and fee income 49,670 42,609
Other income 17,271 17,524
- ----------------------------------------------------------------------------------------------------
Total revenue 1,060,453 1,044,631
- ----------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Increase in policy liabilities 98,252 118,134
Policy benefits 346,779 313,819
Policyholders' dividends 107,102 106,312
Interest credited to policyholders' accounts 208,505 185,379
Operating expenses 141,242 158,900
Commissions and expense allowances 97,903 100,430
Sales practice remediation costs 40,575 11,900
Net deferral of policy acquisition costs (7,580) (14,617)
- ----------------------------------------------------------------------------------------------------
Total benefits and expenses 1,032,778 980,257
- ----------------------------------------------------------------------------------------------------
Income before income taxes and minority interests 27,675 64,374
Income tax (benefit) expense (1,020) 20,907
- ----------------------------------------------------------------------------------------------------
Income before minority interests 28,695 43,467
Minority interests 8,507 7,636
- ----------------------------------------------------------------------------------------------------
NET INCOME 20,188 35,831
OTHER COMPREHENSIVE INCOME, NET
Unrealized gains on securities, net 21,226 56,150
- ----------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME $ 41,414 $ 91,981
====================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 76
<TABLE>
<CAPTION>
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------
(In Thousands) 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
RETAINED EARNINGS:
Balance at January 1 $ 755,872 $ 720,041
Net income 20,188 35,831
- ---------------------------------------------------------------------------------------------------------------
Balance at December 31 $ 776,060 $ 755,872
===============================================================================================================
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance at January 1 $ 85,017 $ 28,867
Unrealized gains on securities, net 21,226 56,150
- ---------------------------------------------------------------------------------------------------------------
Balance at December 31 $ 106,243 $ 85,017
===============================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 77
<TABLE>
<CAPTION>
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------------
(In Thousands) 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 20,188 $ 35,831
Adjustments to reconcile net income to net cash provided by operations:
Change in:
Accrued investment income 6,541 (5,037)
Policy liabilities 87,367 74,693
Deferred policy acquisition costs (7,580) (14,617)
Policyholders' dividends 1,362 1,603
Deferred income taxes (13,330) (20,747)
Net realized investment gains (8,450) (11,887)
Depreciation 6,977 3,715
Other 12,714 15,774
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 105,789 79,328
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales, maturities and repayments of investments 2,020,526 2,385,471
Cost of investments acquired (2,236,001) (2,647,628)
Other 14,656 7,091
- -------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (200,819) (255,066)
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' deposits, including interest credited 563,606 670,780
Policyholders' withdrawals, including policy charges (452,184) (495,076)
Net (decrease) increase in borrowings under repurchase agreements (234,570) 234,570
Net increase (decrease) in securities lending liabilities 173,726 (139,652)
Other 20,221 9,061
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 70,799 279,683
- -------------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (24,231) 103,945
CASH AND CASH EQUIVALENTS:
Beginning of year 372,180 268,235
- -------------------------------------------------------------------------------------------------------------------------
End of year $ 347,949 $ 372,180
=========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 78
NATIONAL LIFE INSURANCE COMPANY and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
National Life Insurance Company (National Life) was chartered in 1848. National
Life is also known by its registered trade name "National Life of Vermont".
National Life employs about 750 people in its home office in Montpelier,
Vermont. With its affiliates and subsidiaries, National Life offers a broad
range of financial products and services, including life insurance, annuities,
disability income insurance, mutual funds, investment advisory and
administration services.
National Life primarily develops and distributes individual life insurance and
annuity products. National Life markets its products primarily to small business
owners, professionals and high net worth individuals by providing financial
solutions in the form of estate, business succession and retirement planning,
deferred compensation and other key executive fringe benefit plans. Insurance
and annuity products are primarily distributed through about 40 general agencies
in major metropolitan areas throughout the United States. National Life also
distributes its products through brokers and banks. National Life has about
224,000 policyholders and is licensed to do business in all 50 states and the
District of Columbia. About 23% of National Life's total collected premiums are
from residents of New York and California.
Through affiliates National Life also distributes and provides investment
advisory and administrative services to the Sentinel Group Funds, Inc. The
Sentinel Funds' $3.1 billion of net assets represent thirteen mutual funds
managed on behalf of about 116,000 individual, corporate and institutional
shareholders worldwide.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements of National Life and
subsidiaries have been prepared in conformity with generally accepted accounting
principles (GAAP).
The consolidated financial statements include the accounts of National Life
Insurance Company and its subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. Certain
reclassifications have been made to conform prior periods presented to the
current year's presentation.
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.
INVESTMENTS
Cash and cash equivalents include highly liquid debt instruments purchased with
remaining maturities of three months or less.
Available-for-sale debt securities and equity securities are reported at
estimated fair value. Debt and equity securities that experience declines in
value that are other than temporary are written down with a corresponding charge
to realized losses.
F-7
<PAGE> 79
Mortgage loans are reported at amortized cost, less valuation allowances for the
excess, if any, of the amortized cost of impaired loans over the estimated fair
value of the related collateral. Changes in valuation allowances are included in
net realized gains and losses.
Policy loans are reported at their unpaid balance and are fully collateralized
by related cash surrender values.
Real estate investments are reported at depreciated cost. Real estate acquired
in satisfaction of debt is transferred to real estate at estimated fair value.
Net realized investment gains and losses are recognized using the specific
identification method and include changes in valuation allowances. Changes in
the estimated fair values of available-for-sale debt and equity securities are
reflected in comprehensive income after adjustments for related deferred policy
acquisition costs, present value of future profits of insurance acquired, income
taxes and minority interests.
DEFERRED POLICY ACQUISITION COSTS
Commissions and other costs of acquiring business that vary with and are
primarily related to the production of new business are generally deferred.
Deferred policy acquisition costs for participating life insurance, universal
life insurance and investment-type annuities are amortized in relation to
estimated gross margins or profits. Amortization is adjusted retrospectively for
actual experience and when estimates of future gross margins or profits are
revised. Balances of deferred policy acquisition costs for these products are
adjusted for related unrealized gains and losses on available-for-sale debt and
equity securities through comprehensive income, net of related income taxes.
Deferred policy acquisition costs for non-participating term life insurance and
disability income insurance is amortized in relation to premium income using
assumptions consistent with those used in computing policy benefit liabilities.
Balances of deferred policy acquisition costs are regularly evaluated for
recoverability from product margins or profits.
PRESENT VALUE OF FUTURE PROFITS OF INSURANCE ACQUIRED
Present value of future profits of insurance acquired is the
actuarially-determined present value of future projected profits from policies
in force at the date of their acquisition, and is amortized in relation to gross
profits of those policies. Amortization is adjusted retrospectively for actual
experience and when estimates of future profits are revised.
PROPERTY AND EQUIPMENT
Property and equipment is reported at depreciated cost. Real property is
depreciated over 40 years using the straight-line method. Furniture and
equipment is depreciated using accelerated depreciation methods over 7 years and
5 years, respectively.
SEPARATE ACCOUNTS
Separate accounts are segregated funds relating to certain variable annuity and
variable life policies, and National Life's pension plans. Separate account
assets are primarily common stocks, bonds, mortgage loans, and real estate and
are carried at estimated fair value. Separate account liabilities reflect
separate account policyholders' interests in separate account assets, include
the actual investment performance of the respective accounts and are not
guaranteed. Separate account results relating to these policyholders' interests
are excluded from revenues and expenses.
F-8
<PAGE> 80
POLICY LIABILITIES
Policy benefit liabilities for participating life insurance are developed using
the net level premium method, with interest and mortality assumptions used in
calculating policy cash surrender values. Participating life insurance terminal
dividends are accrued in relation to gross margins.
Policy benefit liabilities for non-participating life insurance, disability
income insurance and certain annuities are developed using the net level premium
method, with assumptions for interest, mortality, morbidity, withdrawals and
expenses based principally on company experience.
Policyholders' account balances for universal life insurance and investment-type
annuities represent amounts that inure to the benefit of the policyholders
(before surrender charges).
POLICYHOLDERS' DIVIDENDS
Policyholders' dividends are the pro-rata amount of dividends earned that will
be paid or credited at the next policy anniversary. Dividends are based on a
scale that seeks to reflect the relative contribution of each group of policies
to National Life's overall operating results. The dividend scale is approved
annually by National Life's Board of Directors.
RECOGNITION OF INSURANCE INCOME AND RELATED EXPENSES
Premiums from traditional life and certain annuities are recognized as revenue
when due from the policyholder. Benefits and expenses are matched with income by
providing for policy benefit liabilities and the deferral and amortization of
policy acquisition costs so as to recognize profits over the life of the
policies.
Premiums from universal life and investment-type annuities are reported as
increases in policyholders' accounts. Revenues for these policies consist of
mortality charges, policy administration fees and surrender charges deducted
from policyholders' accounts. Policy benefits charged to expense include benefit
claims in excess of related policyholders' account balances.
Premiums from disability income policies are recognized as revenue over the
period to which the premiums relate.
FEDERAL INCOME TAXES
National Life files a consolidated federal income tax return that includes all
of its wholly-owned subsidiaries. Current federal income taxes are charged or
credited to operations based upon amounts estimated to be payable or recoverable
as a result of taxable operations for the current year. Deferred income tax
assets and liabilities are recognized based on temporary differences between
financial statement carrying amounts and income tax bases of assets and
liabilities using enacted income tax rates and laws.
F-9
<PAGE> 81
NOTE 3 - INVESTMENTS
DEBT AND EQUITY SECURITIES
The amortized cost and estimated fair values of debt and equity securities at
December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated Fair
1998 Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale (AFS):
U.S. government obligations $ 315,567 $ 17,710 $ 1,024 $ 332,253
Government agencies, authorities
and subdivisions 124,411 13,626 29 138,008
Public utilities 392,211 21,944 678 413,477
Corporate 2,368,814 152,991 18,249 2,503,556
Private placements 670,467 36,929 10,501 696,895
Mortgage-backed securities 1,137,465 41,131 3,359 1,175,237
- -------------------------------------------------------------------------------------------------------------------------------
Total AFS debt securities 5,008,935 284,331 33,840 5,259,426
Preferred stocks 140,932 2,567 3,538 139,961
Common stocks 37,847 2,373 823 39,397
- ------------------------------------------------------------------------------------------------------------------------------
Total AFS debt and equity securities $ 5,187,714 $ 289,271 $ 38,201 $ 5,438,784
==============================================================================================================================
1997
- ------------------------------------------------------------------------------------------------------------------------------
Available-for-sale (AFS):
U.S. government obligations $ 284,039 $ 13,515 $ 612 $ 296,942
Government agencies, authorities
and subdivisions 178,986 11,649 793 189,842
Public utilities 389,744 19,246 6,314 402,676
Corporate 2,403,091 133,881 7,069 2,529,903
Private placements 598,144 29,576 2,170 625,550
Mortgage-backed securities 1,196,369 35,308 1,275 1,230,402
- ------------------------------------------------------------------------------------------------------------------------------
Total AFS debt securities 5,050,373 243,175 18,233 5,275,315
Preferred stocks 6,482 803 259 7,026
Common stocks 29,638 5,511 63 35,086
- ------------------------------------------------------------------------------------------------------------------------------
Total AFS debt and equity securities $ 5,086,493 $ 249,489 $ 18,555 $ 5,317,427
==============================================================================================================================
</TABLE>
F-10
<PAGE> 82
Unrealized gains and losses on available-for-sale debt and equity securities
included as a component of accumulated other comprehensive income and changes
therein for the years ended December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net unrealized gains on available-for-sale securities $ 20,136 $ 153,723
Net unrealized gains on separate accounts 1,543 3,047
Related minority interests (1,786) (9,360)
Related deferred policy acquisition costs 17,139 (44,378)
Related present value of future profits of insurance acquired (3,048) (10,138)
Related deferred income taxes (12,758) (36,744)
- --------------------------------------------------------------------------------------------------------------------
Increase in net unrealized gains 21,226 56,150
Balance, beginning of year 85,017 28,867
- --------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 106,243 $ 85,017
====================================================================================================================
Balance, end of year includes:
Net unrealized gains on available-for-sale securities $ 251,070 $ 230,934
Net unrealized gains on separate accounts 5,815 4,272
Related minority interests (8,672) (6,886)
Related deferred policy acquisition costs (77,539) (94,678)
Related present value of future profits on insurance acquired (1,547) 1,501
Related deferred income taxes (62,884) (50,126)
- --------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 106,243 $ 85,017
====================================================================================================================
</TABLE>
Net other comprehensive income for 1998 of $21.2 million is presented net of
reclassifications to net income for gross gains realized during the period of
$9.0 million and net of tax and deferred acquisition cost offsets of $6.6
million.
The amortized cost and estimated fair values of debt securities by contractual
maturity at December 31, 1998 are shown below (in thousands). Expected
maturities may differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Amortized Estimated Fair
Cost Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 134,111 $ 136,343
Due after one year through five years 798,659 813,326
Due after five years through ten years 1,936,192 2,030,568
Due after ten years 1,002,508 1,103,952
Mortgage-backed securities 1,137,465 1,175,237
- -----------------------------------------------------------------------------------------------------
Total $ 5,008,935 $ 5,259,426
=====================================================================================================
</TABLE>
Information relating to available-for-sale debt security sale transactions for
the years ended December 31 is shown below (in thousands):
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Proceeds from sales $ 1,167,190 $ 1,928,055
Gross realized gains $ 22,969 $ 27,318
Gross realized losses $ 16,578 $ 16,916
</TABLE>
F-11
<PAGE> 83
National Life periodically lends certain U.S. government or corporate bonds to
approved counterparties to enhance the yield of its bond portfolio. National
Life receives cash collateral for at least 103% of the market value of
securities loaned. Collateral adequacy is evaluated daily and periodically
adjusted for changes in the market value of securities loaned. The carrying
values of securities loaned are unaffected by the transaction. Collateral held
(included in cash and cash equivalents) and the corresponding liability for
collateral held (included in other liabilities and accrued expenses) were $193.5
million and $19.8 million at December 31, 1998 and 1997, respectively.
National Life also periodically enters into repurchase agreements on U.S.
Treasury securities to enhance the yield of its bond portfolio. These
transactions are accounted for as financings because the securities received at
the end of the repurchase period are identical to the securities transferred.
There were no open transactions at December 31, 1998. The repurchase liability
is included in other liabilities and was $234.6 million at December 31, 1997.
MORTGAGE LOANS AND REAL ESTATE
The distributions of mortgage loans and real estate at December 31 were as
follows:
<TABLE>
<CAPTION>
1998 1997
---------------------- --------------------
<S> <C> <C>
GEOGRAPHIC REGION
- -----------------
New England 3.8% 4.0%
Middle Atlantic 9.7 10.3
East North Central 9.3 8.8
West North Central 4.5 4.9
South Atlantic 25.7 29.1
East South Central 5.0 5.0
West South Central 10.3 10.8
Mountain 17.7 16.7
Pacific 14.0 10.4
- ---------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0%
===============================================================================================================
PROPERTY TYPE
- -------------
Residential 0.2% 0.2%
Apartment 24.2 24.3
Retail 12.2 15.9
Office Building 35.0 34.0
Industrial 26.2 22.2
Hotel/Motel 0.8 0.9
Other Commercial 1.4 2.5
- ---------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0%
===============================================================================================================
Total mortgage loans and real estate
(in thousands) $ 1,174,070 $ 1,088,096
===============================================================================================================
</TABLE>
F-12
<PAGE> 84
Mortgage loans and related valuation allowances at December 31 were as follows
(in thousands):
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unimpaired loans $ 1,077,637 $ 965,760
Impaired loans without valuation allowances 11,757 9,413
- ----------------------------------------------------------------------------------------------------------
Subtotal 1,089,394 975,173
- ----------------------------------------------------------------------------------------------------------
Impaired loans with valuation allowances 10,244 21,426
Related valuation allowances (1,134) (4,429)
- ----------------------------------------------------------------------------------------------------------
Subtotal 9,110 16,997
- ----------------------------------------------------------------------------------------------------------
Total $ 1,098,504 $ 992,170
==========================================================================================================
Impaired loans:
Average recorded investment $ 27,755 $ 34,076
Interest income recognized $ 3,124 $ 3,543
Interest received $ 2,818 $ 3,818
</TABLE>
Impaired loans are mortgage loans where it is not probable that all amounts due
under the contractual terms of the loan will be received. Impaired loans
without valuation allowances are mortgage loans where the estimated fair value
of the collateral exceeds the recorded investment in the loan. For these
impaired loans, interest income is recognized on an accrual basis, subject to
recoverability from the estimated fair value of the loan collateral. For
impaired loans with valuation allowances, interest income is recognized on a
cash basis.
Activity in the valuation allowances for impaired mortgage loans for the years
ended December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
===========================================================================================================================
<S> <C> <C>
Additions for impaired loans charged to realized losses $ 1,564 $ 1,543
Impairment losses charged to valuation allowances (2,217) (1,419)
Changes to previously established valuation allowances (2,642) (2,978)
- ---------------------------------------------------------------------------------------------------------------------------
Decrease in valuation allowances (3,295) (2,854)
Balance, beginning of year 4,429 7,283
- ---------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 1,134 $ 4,429
===========================================================================================================================
</TABLE>
NET INVESTMENT INCOME
The components of net investment income for the years ended December 31 were as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Debt securities interest $ 405,184 $ 392,674
Equity securities dividends 6,380 2,765
Mortgage loan interest 90,991 85,782
Policy loan interest 47,189 48,856
Real estate income 12,802 15,822
Other investment income 12,363 9,230
- -----------------------------------------------------------------------------------------------------
Gross investment income 574,909 555,129
Less: investment expenses 24,570 26,932
- -----------------------------------------------------------------------------------------------------
Net investment income $ 550,339 $ 528,197
=====================================================================================================
</TABLE>
DERIVATIVES
National Life purchases over-the-counter options and exchange-traded futures on
the Standard & Poor's 500 (S&P 500) index to hedge obligations relating to
equity indexed products. When the S&P 500 index increases, increases in the
intrinsic value of the options and fair value of futures are offset by increases
in equity indexed product account values. When the S&P 500 index decreases,
National Life's loss is the decrease in the fair value of futures and is limited
to the premium paid for the options.
F-13
<PAGE> 85
National Life purchases options only from highly rated counterparties. However,
in the event a counterparty failed to perform, National Life's loss would be
equal to the fair value of the net options held from that counterparty.
The option premium is expensed over the term of the option. Amortization of the
option premium is reflected in investment income. Interest credited includes
amounts that would be credited on the next policy anniversary based on the S&P
500 index's value at the reporting date, offset by changes in the intrinsic
value of options held and changes in the fair value of futures. The call options
are included in other invested assets and are carried at amortized cost plus
intrinsic value, if any, of the call options as of the valuation date.
The notional amounts and net book value of options and futures at December 31
were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Notional amounts:
Options $ 79,754 $ 245,187
Futures $ 28,835 $ 27,892
====================================================================================================================
Book values:
Options: Net amortized cost $ 5,514 $ 4,058
Intrinsic value 18,953 7,876
- --------------------------------------------------------------------------------------------------------------------
Book value 24,467 11,934
Futures at fair value 463 630
- --------------------------------------------------------------------------------------------------------------------
Net book value (included in other invested assets) $ 24,930 $ 12,564
====================================================================================================================
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values and estimated fair values of financial instruments at
December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------------------------------
Carrying Estimated Fair Carrying Estimated Fair
Value Value Value Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 347,949 $ 347,949 $ 372,180 $ 372,180
Available-for-sale debt and equity securities 5,438,784 5,438,784 5,317,427 5,317,427
Mortgage loans 1,098,504 1,180,630 992,170 1,024,582
Policy loans 776,363 743,687 791,753 730,059
Derivatives 24,930 28,496 12,564 11,629
Investment products 2,507,012 2,522,940 2,642,511 2,503,727
Debt 78,088 75,141 80,085 82,314
</TABLE>
For cash and cash equivalents carrying value approximates estimated fair value.
Debt and equity securities estimated fair values are based on quoted values
where available. Where quoted values are not available, estimated fair values
are based on discounted cash flows using current interest rates of similar
securities.
Mortgage loan fair values are estimated as the average of discounted cash flows
under different scenarios of future mortgage interest rates (including
appropriate provisions for default losses and borrower prepayments).
For variable rate policy loans the unpaid balance approximates fair value. Fixed
rate policy loan fair values are estimated based on discounted cash flows using
the current variable policy loan rate (including appropriate provisions for
mortality and repayments).
F-14
<PAGE> 86
Derivatives estimated fair values are based on quoted values.
Investment products include flexible premium annuities, single premium deferred
annuities and supplementary contracts not involving life contingencies.
Investment product fair values are estimated as the average of discounted cash
flows under different scenarios of future interest rates of A-rated corporate
bonds and related changes in premium persistency and surrenders.
Debt fair values are estimated based on discounted cash flows using current
interest rates of similar securities.
NOTE 4 - INSURANCE IN-FORCE AND REINSURANCE
National Life reinsures certain risks assumed in the normal course of business.
For individual life products, National Life generally retains no more than $3.0
million of risk on any person (excluding accidental death benefits and dividend
additions). Reinsurance for life products is ceded under yearly renewable term,
coinsurance, and modified coinsurance. Disability income products are
significantly reinsured under coinsurance and modified coinsurance.
National Life remains liable in the event any reinsurer is unable to meet its
assumed obligations. National Life regularly evaluates the financial condition
of its reinsurers and concentrations of credit risk of reinsurers to minimize
its exposure to significant losses from reinsurer insolvencies.
The effects of reinsurance for the years ended December 31 were as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Insurance premiums:
Direct premiums $ 453,859 $ 470,853
Reinsurance assumed 898 896
Reinsurance ceded (68,497) (72,732)
- -------------------------------------------------------------------------------------------------------
$ 386,260 $ 399,017
=======================================================================================================
Other income:
Direct $ 3,694 3,543
Reinsurance ceded 13,577 13,981
- -------------------------------------------------------------------------------------------------------
$ 17,271 $ 17,524
=======================================================================================================
Increase in policy liabilities:
Direct increase in policy liabilities $ 94,949 $ 112,577
Reinsurance assumed (4) 17
Reinsurance ceded 3,307 5,540
- -------------------------------------------------------------------------------------------------------
$ 98,252 $ 118,134
=======================================================================================================
Policy benefits:
Direct policy benefits $ 348,672 $ 393,082
Reinsurance assumed 1,286 12
Reinsurance ceded (3,179) (79,275)
- -------------------------------------------------------------------------------------------------------
$ 346,779 $ 313,819
=======================================================================================================
Policyholders' dividends:
Direct policyholders' dividends $ 110,630 $ 111,617
Reinsurance ceded (3,528) (5,305)
- -------------------------------------------------------------------------------------------------------
$ 107,102 $ 106,312
=======================================================================================================
</TABLE>
F-15
<PAGE> 87
NOTE 5 - INCOME TAXES
The components of income taxes and a reconciliation of the expected and actual
income taxes and marginal and effective federal income tax rates for the years
ended December 31 were as follows ($ in thousands):
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current $ 17,144 $ 41,654
Deferred (18,164) (20,747)
- ------------------------------------------------------------------- --------------------
Income taxes $ (1,020) $ 20,907
=================================================================== ====================
Expected income taxes $ 9,686 35.0% $ 22,531 35.0%
Differential earnings amount (7,953) (28.7) 4,581 7.1
Affordable housing tax credit (6,638) (24.0) (4,318) (6.7)
Net change in tax reserves 5,035 18.2 1,298 2.0
Other, net (1,150) (4.2) (3,185) (4.9)
- --------------------------------------------------------------------------------------------------------------------------------
Income taxes $ (1,020) $ 20,907
=================================================================== ====================
Effective federal income tax rate (3.7)% 32.5%
=================================================== ===================== ==================
</TABLE>
Components of net deferred income tax assets at December 31 were as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets:
Policy liabilities $ 185,294 $ 172,387
Other liabilities and accrued expenses 67,291 56,946
Other 4,761 4,294
- --------------------------------------------------------------------------------------------------------------
Total deferred income tax assets 257,346 233,627
- --------------------------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Deferred policy acquisition costs 126,380 126,914
Present value of future profits of insurance acquired 17,683 20,642
Net unrealized gain on available-for-sale securities 62,884 50,126
Debt and equity securities 16,947 9,253
Other 11,911 9,175
- --------------------------------------------------------------------------------------------------------------
Total deferred income tax liabilities 235,805 216,110
- --------------------------------------------------------------------------------------------------------------
Net deferred income tax assets $ 21,541 $ 17,517
==============================================================================================================
</TABLE>
Management believes it is more likely than not that National Life will realize
the benefit of deferred tax assets.
National Life's federal income tax returns are routinely audited by the IRS.
The IRS has examined tax returns through 1993 and is currently examining the
years 1994 and 1995. In management's opinion adequate tax liabilities have been
established for all open years.
F-16
<PAGE> 88
NOTE 6 - BENEFIT PLANS
National Life sponsors a qualified defined benefit pension plan covering
substantially all employees. The plan is administered by National Life's
Benefits Committee and is non-contributory, with benefits based on an
employee's retirement age, years of service and compensation near retirement.
Plan assets are primarily bonds and common stocks held in a National Life
separate account and funds invested in an annuity contract issued by National
Life. National Life also sponsors other, non-qualified pension plans, including
a non-contributory defined benefit plan for general agents that provides
benefits based on years of service and sales levels, a contributory defined
benefit plan for certain employees, agents and general agents and a
non-contributory defined supplemental benefit plan for certain executives.
These non-qualified defined benefit pension plans are not funded.
National Life sponsors four defined benefit postretirement plans that provide
medical, dental and life insurance benefits to employees and agents.
Substantially all employees and agents may be eligible for retiree benefits if
they reach normal retirement age and meet certain minimum service requirements
while working for National Life. Most of the plans are contributory, with
retiree contributions adjusted annually, and contain cost sharing features such
as deductibles and copayments. The plans are not funded and National Life pays
for plan benefits on a current basis. The cost of these benefits is recognized
as earned.
During 1997, National Life offered enhanced pension and postretirement benefits
to employees meeting certain defined eligibility requirements. The program
resulted in special termination benefits for the expected present value of the
enhancements to benefits, curtailment gains for reductions in the pension
benefit obligations relating to assumed increases in future compensation levels
and settlement gains for the pro-rata recognition of actuarial gains on lump
sum settlements of pension benefit obligations.
The status of the defined benefit plans at December 31 was as follows (in
thousands):
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------------------------------------------------
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, beginning of year $ 162,986 $ 180,075 $ 24,759 $ 24,351
Service cost (benefits earned during the current period) 2,849 4,467 547 630
Interest cost on benefit obligation 11,430 13,629 1,699 1,669
Actuarial losses (gains) 34,444 (19,077) 1,939 (3,587)
Benefits paid (22,185) (14,557) (1,061) (784)
1997 early retirement program:
Special termination benefits 10,878 2,480
Curtailment gain (3,630)
Settlement payments (8,799)
- ---------------------------------------------------------------------------------------------------------------------------
Benefit obligation, end of year $ 189,524 $ 162,986 $ 27,883 $ 24,759
===========================================================================================================================
CHANGE IN PLAN ASSETS:
Plan assets, beginning of year $ 108,884 $ 97,566
Actual return on plan assets 7,200 23,337
Employer contributions 2,502
Benefits paid (16,039) (5,722)
1997 early retirement program settlement payments (8,799)
- ------------------------------------------------------------------------------------------------
Plan assets, end of year $ 100,045 $ 108,884
================================================================================================
FUNDED STATUS:
Benefit obligation $ 189,524 $ 162,986 $ 27,883 $ 24,759
Plan assets (100,045) (108,884)
- ---------------------------------------------------------------------------------------------------------------------------
Benefit obligation in excess of plan assets 89,479 54,102 27,883 24,759
Unrecognized actuarial gains (losses) (11,259) 28,485 2,526 4,548
Unrecognized prior service cost (1,152) (1,224)
- ---------------------------------------------------------------------------------------------------------------------------
Accrued benefit cost (included in other liabilities) $ 78,220 $ 82,587 $ 29,257 $ 28,083
===========================================================================================================================
</TABLE>
F-17
<PAGE> 89
The components of net periodic benefit cost for the years ended December 31
were as follows (in thousands):
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
--------------------------------------------------------------
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost (benefits earned during the current period) $ 2,849 $ 4,467 $ 547 $ 630
Interest cost on benefit obligation 11,430 13,629 1,699 1,669
Expected return on plan assets (9,078) (8,636)
Net amortization and deferrals (1,167) (83) 31
Amortization of prior service cost 72 72
1997 early retirement program:
Special termination benefits 10,878 2,480
Curtailment gain (3,630)
Settlement gains (3,131) (2,917)
- ------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost (included in operating expenses) $ 903 $ 13,791 $ 2,235 $ 4,882
==============================================================================================================================
</TABLE>
F-18
<PAGE> 90
The total projected benefit obligation for non-qualified defined benefit pension
plans was $81.4 million and $69.1 million at December 31, 1998 and 1997,
respectively. The total accumulated benefit obligation for these plans was $75.2
million and $66.3 million at December 31, 1998 and 1997, respectively.
The actuarial assumptions used in determining benefit obligations at December
31, were as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------------------------------------------------------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate 6.75% 7.50% 6.75% 7.50%
Rate of increase in future compensation levels 5.00% 5.00%
Expected long term return on plan assets 9.00% 9.00%
</TABLE>
Health care cost trend rates grade to 5% in year 2000 and remain level
thereafter. Increasing the assumed health care trend rates by one percentage
point in each year would increase the APBO by about $3.2 million and the 1998
service and interest cost components of net periodic postretirement benefit cost
by about $0.1 million. Decreasing the assumed health care trend rates by one
percentage point in each year would reduce the APBO by about $2.6 million and
the 1998 service and interest cost components of net periodic postretirement
benefit cost by about $0.1 million. National Life uses the straight-line method
of amortization for prior service cost and unrecognized gains and losses.
National Life provides employee savings and 401(k) plans where up to 3% of an
employee's compensation may be invested by the employee in either plan with
matching funds contributed by the company. National Life also contributes
various amounts of an employee's compensation (up to certain levels) to a 401(k)
account. Additional voluntary employee contributions may be made to the plans
subject to certain limits. Company contributions to these plans generally vest
within two years.
NOTE 7 - DEBT
Debt consists of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
8.25% Surplus Notes: $ 69,688 $ 69,685
$70 million, maturing March 1, 2024 with interest payable semi-annually
on March 1 and September 1. The notes are unsecured and subordinated to
all present and future indebtedness, policy claims and prior claims.
The notes may be redeemed in whole or in part any time after March 1,
2004 at predetermined redemption prices. All interest and principal
payments require prior written approval by the State of Vermont
Department of Banking, Insurance, Securities and Health Care
Administration.
6.57% Term Note: 8,400 10,400
$8.4 million, maturing March 1, 2002 with interest payable
semi-annually on March 1 and September 1. The note is secured by
subsidiary stock, includes certain restrictive covenants and requires
annual payments of principal (see below).
- --------------------------------------------------------------------------------------------------------------------
Total debt $ 78,088 $ 80,085
====================================================================================================================
</TABLE>
F-19
<PAGE> 91
The aggregate annual maturities of debt for the next five years are as follows
(in thousands):
1999 2,000
2000 2,000
2001 2,000
2002 2,400
2003 -
NOTE 8 - SALES PRACTICE REMEDIATION COSTS
During 1997, several class action lawsuits were filed against National Life in
various states related to the sale of life insurance policies during the 1980's
and 1990's. National Life specifically denied any wrongdoing. National Life
agreed to a settlement of these class action lawsuits in June 1998. This
agreement was subsequently approved by the court in October 1998. The settlement
provides class members with various policy enhancement options and new product
purchase discounts. Class members may instead pursue alternative dispute
resolution according to predetermined guidelines. Management believes that while
the ultimate cost of this litigation is still uncertain, it is unlikely (after
considering existing provisions) to have a material adverse effect on National
Life's financial position.
NOTE 9 - STATUTORY INFORMATION
National Life prepares statutory basis financial statements for regulatory
filings with insurance regulators in all 50 states and the District of Columbia.
A reconciliation of National Life Insurance Company's statutory surplus to GAAP
retained earnings at December 31 and statutory net income to GAAP net income for
the years ended December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------------------------
Surplus/ Surplus/
Retained Retained
Earnings Net Income Earnings Net Income
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Statutory surplus/net income $ 373,063 $ 67,841 $ 342,614 $ 49,574
Asset valuation reserve 69,994 - 67,734 -
Interest maintenance reserve 52,826 (4,114) 56,940 (229)
Surplus notes (70,700) (2) (69,685) (3)
Non-admitted assets 17,033 - 20,874 -
Investments 650 13,991 (944) (18,856)
Deferred policy acquisition costs 428,453 (9,479) 437,932 (5,651)
Deferred income taxes 74,132 (1,588) 72,544 13,807
Policy liabilities (203,832) (17,483) (186,349) 7,449
Policyholders' dividends 64,205 529 64,734 2,206
Benefit plans (27,904) 9,922 (37,826) (1,732)
Sales remediation costs - (40,575) - (11,900)
Other changes, net (1,860) 1,146 (12,696) 1,166
- -----------------------------------------------------------------------------------------------------
GAAP retained earnings/net income $ 776,060 $ 20,188 $ 755,872 $ 35,831
=====================================================================================================
</TABLE>
The New York Insurance Department recognizes only statutory accounting practices
for determining and reporting the financial condition and results of operations
of an insurance company and for determining solvency under the New York
Insurance Law. No consideration is given by the New York Insurance Department to
financial statements prepared in accordance with generally accepted accounting
principles in making such determinations.
F-20
<PAGE> 92
NOTE 10 - NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (FAS 133), which establishes accounting and reporting
standards for derivative instruments. FAS 133 requires that an entity recognize
all derivatives as either assets or liabilities at fair value in the statement
of financial position, and establishes special accounting for the following
three types of hedges: fair value hedges, cash flow hedges, and hedges of
foreign currency exposures of net investments in foreign operations. The
statement is effective for fiscal years beginning after June 15, 1999. National
Life is currently assessing the impact of the adoption of FAS 133.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 requires that
certain costs incurred in developing internal use computer software be
capitalized and provides guidance for determining whether computer software is
considered to be for internal use. This statement is effective for fiscal years
beginning after December 15, 1998. National Life adopted SOP 98-1 effective
January 1, 1998. The adoption of SOP 98-1 resulted in net after tax
capitalization (after current year amortization) of approximately $2 million in
software costs.
NOTE 11 - SUBSEQUENT EVENTS
On January 1, 1999, National Life converted from a mutual to a stock insurance
company as part of a reorganization into a mutual holding company corporate
structure.
Prior to the conversion, policyowners held policy contractual and membership
rights from National Life. The contractual rights, as defined in the various
insurance and annuity policies, remained with National Life after the
conversion. Membership interests held by policyowners of National Life at
December 31, 1998 were converted to membership interests in National Life
Holding Company, an upstream corporation. National Life Holding Company
currently owns all the outstanding shares of NLV Financial, which in turn
currently owns all the outstanding shares of National Life.
This reorganization was approved by policyowners of National Life and was
completed with the approval of the Vermont Department of Banking, Insurance,
Securities, and Health Care Administration.
F-21
<PAGE> 93
NATIONAL VARIABLE
ANNUITY ACCOUNT II
FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1998
F-22
<PAGE> 94
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of National Life Insurance Company
and Contractholders of National Variable Annuity Account II
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets present fairly, in all
material respects, the financial position of each of the sub-accounts
constituting the National Variable Annuity Account II (a Separate Account of
National Life Insurance Company) (the Variable Account) at December 31, 1998,
and the results of each of their operations and the changes in each of their net
assets for the year ended December 31, 1998 and for the period from June 20,
1997 through December 31, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Variable
Account's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audits 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1998 by correspondence with the
funds, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 31, 1999
F-23
<PAGE> 95
NATIONAL VARIABLE ANNUITY ACCOUNT II
(A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
CONTRACTHOLDER
ACCOUNT
VALUES
--------------------
<S> <C>
ASSETS:
Investments in shares of mutual fund portfolios at market value:
(contractholder accumulation units and unit value)
Market Street Fund Money Market (464,682.04 units at $10.59 per unit) $ 4,919,765
Market Street Fund Growth (681,315.40 units at $11.96 per unit) 8,147,400
Market Street Fund Aggressive Growth (67,028.38 units at $11.43 per unit) 766,252
Market Street Fund Managed (321,764.26 units at $11.80 per unit) 3,797,496
Market Street Fund Bond (258,757.6 units at $11.12 per unit) 2,877,768
Market Street Fund International (117,450.09 units at $10.34 per unit) 1,214,433
Market Street Fund Sentinel Growth (167,349.38 units at $12.71 per unit) 2,127,070
Strong Opportunity Fund II (125,380.26 units at $12.50 per unit) 1,566,747
Strong Growth Fund II (79,046.28 units at $14.29 per unit) 1,129,736
Van Eck Worldwide Bond Fund (8,968.55 units at $11.39 per unit) 102,192
VIPF Equity-Income (446,646.08 units at $11.93 per unit) 5,328,200
VIPF Overseas (137,169.62 units at $10.51 per unit) 1,441,055
VIPF Growth (128,908.47 units at $14.74 per unit) 1,899,754
VIPF High Income (316,357.63 units at $10.22 per unit) 3,233,068
VIPF Index 500 (644,354.50 units at $13.77 per unit) 8,874,441
VIPF Contra Fund (220,659.55 units at $14.04 per unit) 3,097,797
Alger American Growth (174,624.86 units at $15.55 per unit) 2,715,839
Alger American Small Capitalization (180,967.55 units at $12.53 per unit) 2,268,367
American Century Value Fund (480.38 units at $10.41 per unit) 4,999
American Century Income & Growth Fund (2,561.63 units at $10.95 per unit) 28,051
JP Morgan Small Company Fund (10,554.25 units at $9.98) 105,354
Neuberger & Berman Partners Fund (9,444.56 units at $10.19) 96,245
Goldman Sachs International Equity Fund (4,799.45 units at $10.11) 48,510
Goldman Sachs Mid Cap Equity Fund (1,009.46 units at $9.88) 9,972
--------------------
TOTAL NET ASSETS $ 55,800,511
====================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE> 96
NATIONAL VARIABLE ANNUITY ACCOUNT II
( A Separate Account of National Life Insurance Company)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
MARKET STREET FUND
---------------------------------------------------------------------------------------------
MONEY AGGRESSIVE SENTINEL
MARKET GROWTH GROWTH MANAGED BOND INTERNATIONAL GROWTH
------------ ------------ ------------ ----------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividend income and
capital gain distributions $ 185,319 $ 347,569 $ 11,494 $ 103,637 $ 35,475 $ 44,221 $ 82,215
Expenses:
Mortality and expense risk
and administrative charges 51,068 68,736 5,766 30,795 13,683 13,805 21,509
----------------------------------------------------------------------------------------------
Net investment (loss) income 134,251 278,833 5,728 72,842 21,792 30,416 60,706
----------------------------------------------------------------------------------------------
Realized and unrealized
gain (loss) on investments:
Net realized gain (loss) from
shares sold - (148,064) (540) 2,236 11,051 (22,126) (61,135)
Net unrealized appreciation
(depreciation) on investments - 479,266 17,348 182,327 31,347 28,945 197,891
----------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments - 331,202 16,808 184,563 42,398 6,819 136,756
----------------------------------------------------------------------------------------------
Increase (decrease) in net assets
resulting from operations $ 134,251 $ 610,035 $ 22,536 $ 257,405 $ 64,190 $ 37,235 $ 197,462
==============================================================================================
<CAPTION>
STRONG CAPITAL MANAGEMENT
----------------------------
OPPORTUNITY II GROWTH II
---------------- -----------
<S> <C> <C>
Investment Income:
Dividend income and
capital gain distributions $ 98,918 $ 3
Expenses:
Mortality and expense risk
and administrative charges 14,172 7,793
----------------------------
Net investment (loss) income 84,746 (7,790)
----------------------------
Realized and unrealized
gain (loss) on investments:
Net realized gain (loss) from
shares sold (20,284) 6,111
Net unrealized appreciation
(depreciation) on investments 14,710 192,023
----------------------------
Net realized and unrealized
gain (loss) on investments (5,574) 198,134
----------------------------
Increase (decrease) in net assets
resulting from operations $ 79,172 $ 190,344
============================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE> 97
NATIONAL VARIABLE ANNUITY ACCOUNT II
( A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
VAN ECK VIPF
----------- --------------------------------------------------------------------------
WORLDWIDE EQUITY - HIGH INDEX
BOND INCOME OVERSEAS GROWTH INCOME 500
----------- ----------- ---------- ---------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Investment Income:
Dividend income and
capital gain distributions $ 395 $ 116,499 $ 28,711 $ 35,223 $ 127,589 $ 64,307
Expenses:
Mortality and expense risk
and administrative charges 733 48,110 12,936 12,021 27,538 68,068
------------------------------------------------------------------------------------------
Net investment (loss) income (338) 68,389 15,775 23,202 100,051 (3,761)
------------------------------------------------------------------------------------------
Realized and unrealized
gain (loss) on investments:
Net realized gain (loss) from
shares sold 1,014 2,740 (2,727) 17,639 (90,962) 196,577
Net unrealized appreciation
(depreciation) on investments 5,116 201,202 32,101 302,409 (150,485) 930,496
------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 6,130 203,942 29,374 320,048 (241,447) 1,127,073
------------------------------------------------------------------------------------------
Increase (decrease) in net assets
resulting from operations $ 5,792 $ 272,331 $ 45,149 $ 343,250 $ (141,396) $ 1,123,312
==========================================================================================
<CAPTION>
ALGER AMERICAN
---------------- ---------------------------
CONTRA
FUND GROWTH SMALL CAP
---------------- ---------- -------------
<S> <C> <C> <C>
Investment Income:
Dividend income and
capital gain distributions $ 44,054 $ 156,792 $ 97,173
Expenses:
Mortality and expense risk
and administrative charges 24,781 16,948 12,814
---------------------------------------------------
Net investment (loss) income 19,273 139,844 84,359
---------------------------------------------------
Realized and unrealized
gain (loss) on investments:
Net realized gain (loss) from
shares sold 28,011 46,167 (150,917)
Net unrealized appreciation
(depreciation) on investments 430,650 342,232 241,928
---------------------------------------------------
Net realized and unrealized
gain (loss) on investments 458,661 388,399 91,011
---------------------------------------------------
Increase (decrease) in net assets
resulting from operations $ 477,934 $ 528,243 $ 175,370
===================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 98
NATIONAL VARIABLE ANNUITY ACCOUNT II
( A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
NEUBERGER
AMERICAN CENTURY JP MORGAN & BERMAN GOLDMAN SACHS
------------------------ ------------ ------------- ---------------------------
INCOME & SMALL INTERNATIONAL MID CAP
VALUE GROWTH COMPANY PARTNERS EQUITY EQUITY
----------- ----------- ------------ ------------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Investment Income:
Dividend income and
capital gain distributions $ - $ 109 $ 2,520 $ - $ 387 $ 83
Expenses:
Mortality and expense risk
and administrative charges 3 26 212 208 111 9
------------------------------------------------------------------------------------------
Net investment (loss) income (3) 83 2,308 (208) 276 74
------------------------------------------------------------------------------------------
Realized and unrealized
gain (loss) on investments:
Net realized gain (loss) from
shares sold - 377 1,220 37 2,080 -
Net unrealized appreciation
(depreciation) on investments 155 1,347 7,460 6,843 2,672 (101)
------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 155 1,724 8,680 6,880 4,752 (101)
------------------------------------------------------------------------------------------
Increase (decrease) in net assets
resulting from operations $ 152 $ 1,807 $ 10,988 $ 6,672 $ 5,028 $ (27)
==========================================================================================
<CAPTION>
TOTAL
-------------
<S> <C>
Investment Income:
Dividend income and
capital gain distributions $ 1,582,693
Expenses:
Mortality and expense risk
and administrative charges 451,845
-------------
Net investment (loss) income 1,130,848
-------------
Realized and unrealized
gain (loss) on investments:
Net realized gain (loss) from
shares sold (181,495)
Net unrealized appreciation
(depreciation) on investments 3,497,882
-------------
Net realized and unrealized
gain (loss) on investments 3,316,387
-------------
Increase (decrease) in net assets
resulting from operations $ 4,447,235
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE> 99
NATIONAL VARIABLE ANNUITY ACCOUNT II
(A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS
FOR THE PERIOD JUNE 20, 1997 THROUGH DECEMBER 31, 1997
<TABLE>
<CAPTION>
MARKET STREET FUND
-------------------------------------------------------------------------------------
MONEY AGGRESSIVE
MARKET GROWTH GROWTH MANAGED BOND
--------------- -------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 24,176 $ 45,501 $ - $ 3,309 $ 536
EXPENSES:
Mortality and expense risk
and administrative charges 6,545 5,886 404 2,724 312
-------------------------------------------------------------------------------------
Net investment income (loss) 17,631 39,615 (404) 585 224
-------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized (loss) gain from
shares sold - (3,148) 82 153 4
Net unrealized appreciation
(depreciation) on investments - 30,216 3,543 25,993 2,499
-------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments - 27,068 3,625 26,146 2,503
-------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 17,631 $ 66,683 $ 3,221 $ 26,731 $ 2,727
=====================================================================================
</TABLE>
<TABLE>
<CAPTION>
MARKET STREET FUND STRONG CAPITAL MANAGEMENT VAN ECK
------------------------------- ------------------------------ -------------
SENTINEL WORLDWIDE
INTERNATIONAL GROWTH OPPORTUNITY II GROWTH II BOND
-------------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ - $ - $ - $ 5,893 $ -
EXPENSES:
Mortality and expense risk
and administrative charges 1,416 1,175 441 432 76
-----------------------------------------------------------------------------------
Net investment income (loss) (1,416) (1,175) (441) 5,461 (76)
-----------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized (loss) gain from
shares sold (630) 114 16 (35) 98
Net unrealized appreciation
(depreciation) on investments (17,374) 6,125 (192) (2,944) 53
-----------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (18,004) 6,239 (176) (2,979) 151
-----------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ (19,420) $ 5,064 $ (617) $ 2,482 $ 75
===================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 100
NATIONAL VARIABLE ANNUITY ACCOUNT II
(A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS
FOR THE PERIOD JUNE 20, 1997 THROUGH DECEMBER 31, 1997
<TABLE>
<CAPTION>
VIPF
----------------------------------------------------------------------------------------
EQUITY - HIGH INDEX
INCOME OVERSEAS GROWTH INCOME 500
-------------- ------------- ------------- ------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ - $ - $ - $ - $ -
EXPENSES:
Mortality and expense risk
and administrative charges 2,835 761 482 1,462 4,076
----------------------------------------------------------------------------------------
Net investment (loss) income (2,835) (761) (482) (1,462) (4,076)
----------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized (loss) gain from
shares sold (1,282) (1,122) (109) 286 1,024
Net unrealized appreciation
(depreciation) on investments 26,669 (5,590) (946) 8,486 39,925
----------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 25,387 (6,712) (1,055) 8,772 40,949
----------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 22,552 $ (7,473) $ (1,537) $ 7,310 $ 36,873
========================================================================================
</TABLE>
<TABLE>
<CAPTION>
VIPF ALGER AMERICAN
------------- -------------------------------
CONTRA
FUND GROWTH SMALL CAP TOTAL
------------- ------------ --------------- ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ - $ - $ - $ 79,415
EXPENSES:
Mortality and expense risk
and administrative charges 1,517 1,404 1,338 33,286
----------------------------------------------------------------
Net investment (loss) income (1,517) (1,404) (1,338) 46,129
----------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized (loss) gain from
shares sold (283) (374) (200) (5,406)
Net unrealized appreciation
(depreciation) on investments 4,881 (5,576) (9,910) 105,858
----------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 4,598 (5,950) (10,110) 100,452
----------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 3,081 $ (7,354) $ (11,448) $ 146,581
================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE> 101
NATIONAL VARIABLE ANNUITY ACCOUNT II
( A Separate Account of National Life Insurance Company)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
MARKET STREET FUND
--------------------------------------------------------------------------------
MONEY AGGRESSIVE
MARKET GROWTH GROWTH MANAGED BOND
--------------- --------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Increase (decrease) in net assets
resulting from operations $ 134,251 $ 610,035 $ 22,536 $ 257,405 $ 64,190
--------------------------------------------------------------------------------
Accumulation unit transactions:
Participant deposits 18,471,185 2,919,395 323,271 1,534,081 1,163,394
Transfers between investment
sub-accounts and general account, net (14,985,342) 2,697,446 283,669 1,126,815 1,501,305
Surrenders and lapses (42,216) (189,398) (370) (44,969) (27,617)
Contract benefits - (6,019) - - -
Contract charges (19,023) (3,531) (397) (1,251) (453)
Miscellaneous 186 850 2,438 1,326 3,502
--------------------------------------------------------------------------------
Total net accumulation unit transactions 3,424,790 5,418,743 608,611 2,616,002 2,640,131
--------------------------------------------------------------------------------
Increase in net assets 3,559,041 6,028,778 631,147 2,873,407 2,704,321
Net assets, beginning of period 1,360,724 2,118,622 135,105 924,089 173,447
--------------------------------------------------------------------------------
Net assets, end of period $ 4,919,765 $ 8,147,400 $ 766,252 $ 3,797,496 $ 2,877,768
================================================================================
<CAPTION>
STRONG CAPITAL MANAGEMENT
------------------------------------ -----------------------------------
SENTINEL
INTERNATIONAL GROWTH OPPORTUNITY II GROWTH II
----------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets
resulting from operations $ 37,235 $ 197,462 $ 79,172 $ 190,344
--------------------------------------------------------------------------
Accumulation unit transactions:
Participant deposits 551,150 1,258,833 1,072,615 376,539
Transfers between investment
sub-accounts and general account, net 101,197 298,905 292,790 408,147
Surrenders and lapses (30,653) (35,298) (52,346) (114)
Contract benefits - - - -
Contract charges (431) (1,889) (1,066) (431)
Miscellaneous 985 3,243 1,544 5
--------------------------------------------------------------------------
Total net accumulation unit transactions 622,248 1,523,794 1,313,537 784,146
--------------------------------------------------------------------------
Increase in net assets 659,483 1,721,256 1,392,709 974,490
Net assets, beginning of period 554,950 405,814 174,038 155,246
--------------------------------------------------------------------------
Net assets, end of period $ 1,214,433 $ 2,127,070 $ 1,566,747 $ 1,129,736
==========================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 102
NATIONAL VARIABLE ANNUITY ACCOUNT II
( A Separate Account of National Life Insurance Company)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
VAN ECK VIPF
--------------------------------------------------------------------------------
WORLDWIDE EQUITY - HIGH
BOND INCOME OVERSEAS GROWTH INCOME
------------- -------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Increase (decrease) in net assets
resulting from operations $ 5,792 $ 272,331 $ 45,149 $ 343,250 $ (141,396)
--------------------------------------------------------------------------------
Accumulation unit transactions:
Participant deposits 17,867 2,615,694 502,113 682,403 1,694,141
Transfers between investment
sub-accounts and general account, net 55,180 1,394,123 620,833 722,740 852,066
Surrenders and lapses (8,541) (110,956) (20,126) (63,100) (30,107)
Contract benefits - - - - -
Contract charges (80) (2,632) (852) (839) (1,027)
Miscellaneous (5) 8,112 96 (371) 438
--------------------------------------------------------------------------------
Total net accumulation unit transactions 64,421 3,904,341 1,102,064 1,340,833 2,515,511
--------------------------------------------------------------------------------
Increase in net assets 70,213 4,176,672 1,147,213 1,684,083 2,374,115
Net assets, beginning of period 31,979 1,151,528 293,842 215,671 858,953
--------------------------------------------------------------------------------
Net assets, end of period $ 102,192 $ 5,328,200 $ 1,441,055 $ 1,899,754 $ 3,233,068
================================================================================
<CAPTION>
ALGER AMERICAN
--------------------------------- ---------------------------------
INDEX CONTRA
500 FUND GROWTH SMALL CAP
----------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets
resulting from operations $ 1,123,312 $ 477,934 $ 528,243 $ 175,370
-----------------------------------------------------------------------
Accumulation unit transactions:
Participant deposits 4,148,335 1,210,839 1,062,754 527,418
Transfers between investment
sub-accounts and general account, net 2,346,923 842,416 753,387 609,911
Surrenders and lapses (66,786) (83,902) (15,519) (55,867)
Contract benefits (6,390) - - -
Contract charges (4,044) (1,422) (975) (788)
Miscellaneous (5,864) 5,199 6,812 3,797
-----------------------------------------------------------------------
Total net accumulation unit transactions 6,412,174 1,973,130 1,806,459 1,084,471
-----------------------------------------------------------------------
Increase in net assets 7,535,486 2,451,064 2,334,702 1,259,841
Net assets, beginning of period 1,338,955 646,733 381,137 1,008,526
-----------------------------------------------------------------------
Net assets, end of period $ 8,874,441 $ 3,097,797 $ 2,715,839 $ 2,268,367
=======================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE> 103
NATIONAL VARIABLE ANNUITY ACCOUNT II
( A Separate Account of National Life Insurance Company)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
NEUBERGER &
AMERICAN CENTURY JP MORGAN BERMAN GOLDMAN SACHS
------------------------------ ------------- ------------ ---------------------------
SMALL INTERNATIONAL MID CAP
VALUE INCOME & GROWTH COMPANY PARTNERS EQUITY EQUITY
---------- ----------------- ------------- ------------ --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets
resulting from operations $ 152 $ 1,807 $ 10,988 $ 6,672 $ 5,028 $ (27)
--------------------------------------------------------------------------------------
Accumulation unit transactions:
Participant deposits 4,500 13,665 76,493 69,096 34,293 10,000
Transfers between investment
sub-accounts and general account, net 355 12,598 17,925 20,000 9,113 -
Surrenders and lapses - (4) (50) (50) - -
Contract benefits - - - - - -
Contract charges (8) (9) (8) (18) (9) -
Miscellaneous - (6) 6 545 85 (1)
--------------------------------------------------------------------------------------
Total net accumulation unit transactions 4,847 26,244 94,366 89,573 43,482 9,999
--------------------------------------------------------------------------------------
Increase in net assets 4,999 28,051 105,354 96,245 48,510 9,972
Net assets, beginning of period - - - - - -
--------------------------------------------------------------------------------------
Net assets, end of period $ 4,999 $ 28,051 $ 105,354 $ 96,245 $ 48,510 $ 9,972
======================================================================================
<CAPTION>
TOTAL
---------------
<S> <C>
Increase (decrease) in net assets
resulting from operations $ 4,447,235
---------------
Accumulation unit transactions:
Participant deposits 40,340,074
Transfers between investment
sub-accounts and general account, net (17,498)
Surrenders and lapses (877,989)
Contract benefits (12,409)
Contract charges (41,183)
Miscellaneous 32,922
----------------
Total net accumulation unit transactions 39,423,917
----------------
Increase in net assets 43,871,152
Net assets, beginning of period 11,929,359
----------------
Net assets, end of period $ 55,800,511
================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE> 104
NATIONAL VARIABLE ANNUITY ACCOUNT II
( A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD JUNE 20, 1997 THROUGH DECEMBER 31, 1997
<TABLE>
<CAPTION>
MARKET STREET FUND
---------------------------------------------------------------------------------
MONEY AGGRESSIVE
MARKET GROWTH GROWTH MANAGED BOND
-------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 17,631 $ 66,683 $ 3,221 $ 26,731 $ 2,727
---------------------------------------------------------------------------------
ACCUMULATION UNIT TRANSACTIONS:
Participant deposits 5,916,043 1,014,026 86,684 561,094 108,621
Transfers between investment
sub-accounts and general account, net (4,569,640) 1,078,365 45,231 355,723 62,194
Surrenders and lapses (55) (21,676) - (827) -
Contract benefits - (18,475) - (18,517) -
Contract charges (3,704) (802) (73) (201) (95)
Miscellaneous 449 501 42 86 -
---------------------------------------------------------------------------------
Total net accumulation unit transactions 1,343,093 2,051,939 131,884 897,358 170,720
---------------------------------------------------------------------------------
Increase in net assets 1,360,724 2,118,622 135,105 924,089 173,447
Net assets, beginning of period - - - - -
---------------------------------------------------------------------------------
Net assets, end of period $ 1,360,724 $ 2,118,622 $ 135,105 $ 924,089 $ 173,447
=================================================================================
</TABLE>
<TABLE>
<CAPTION>
MARKET STREET FUND STRONG CAPITAL MANAGEMENT VAN ECK
------------------------------ ---------------------------------- ---------------
SENTINEL WORLDWIDE
INTERNATIONAL GROWTH OPPORTUNITY II GROWTH II BOND
---------------- ----------- ----------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ (19,420) $ 5,064 $ (617) $ 2,482 $ 75
-------------------------------------------------------------------------------------
ACCUMULATION UNIT TRANSACTIONS:
Participant deposits 252,281 301,156 116,713 99,170 10,931
Transfers between investment
sub-accounts and general account, net 327,246 99,612 57,931 53,827 21,188
Surrenders and lapses (5,054) - - - (202)
Contract benefits - - - - -
Contract charges (215) (291) (51) (63) (14)
Miscellaneous 112 273 62 (170) 1
-------------------------------------------------------------------------------------
Total net accumulation unit transactions 574,370 400,750 174,655 152,764 31,904
-------------------------------------------------------------------------------------
Increase in net assets 554,950 405,814 174,038 155,246 31,979
Net assets, beginning of period - - - - -
-------------------------------------------------------------------------------------
Net assets, end of period $ 554,950 $ 405,814 $ 174,038 $ 155,246 $ 31,979
=====================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE> 105
NATIONAL VARIABLE ANNUITY ACCOUNT II
( A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD JUNE 20, 1997 THROUGH DECEMBER 31, 1997
<TABLE>
<CAPTION>
VIPF
-------------------------------------------------------------------------------------
EQUITY - HIGH INDEX
INCOME OVERSEAS GROWTH INCOME 500
-------------- --------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 22,552 $ (7,473) $ (1,537) $ 7,310 $ 36,873
-------------------------------------------------------------------------------------
ACCUMULATION UNIT TRANSACTIONS:
Participant deposits 763,280 203,987 156,775 504,002 859,802
Transfers between investment
sub-accounts and general account, net 382,484 97,368 61,564 348,556 461,112
Surrenders and lapses (332) (37) - (40) (332)
Contract benefits (18,516) - - - (18,673)
Contract charges (375) (168) (144) (227) (515)
Miscellaneous 2,435 165 (987) (648) 688
-------------------------------------------------------------------------------------
Total net accumulation unit transactions 1,128,976 301,315 217,208 851,643 1,302,082
-------------------------------------------------------------------------------------
Increase in net assets 1,151,528 293,842 215,671 858,953 1,338,955
Net assets, beginning of period - - - - -
-------------------------------------------------------------------------------------
Net assets, end of period $ 1,151,528 $ 293,842 $ 215,671 $ 858,953 $ 1,338,955
=====================================================================================
</TABLE>
<TABLE>
<CAPTION>
VIPF ALGER AMERICAN
------------- ------------------------------
CONTRA
FUND GROWTH SMALL CAP TOTAL
------------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 3,081 $ (7,354) $ (11,448) $ 146,581
-----------------------------------------------------------------
ACCUMULATION UNIT TRANSACTIONS:
Participant deposits 336,880 379,757 225,642 11,896,844
Transfers between investment
sub-accounts and general account, net 306,864 8,561 794,399 (7,415)
Surrenders and lapses (122) - - (28,677)
Contract benefits - - - (74,181)
Contract charges (303) (295) (110) (7,646)
Miscellaneous 333 468 43 3,853
-----------------------------------------------------------------
Total net accumulation unit transactions 643,652 388,491 1,019,974 11,782,778
-----------------------------------------------------------------
Increase in net assets 646,733 381,137 1,008,526 11,929,359
Net assets, beginning of period - - - -
-----------------------------------------------------------------
Net assets, end of period $ 646,733 $ 381,137 $ 1,008,526 $ 11,929,359
================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE> 106
NATIONAL VARIABLE ANNUITY ACCOUNT II
(A Separate Account of National Life Insurance Company)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
National Variable Annuity Account II (the Variable Account) began operations on
June 20, 1997 and is registered as a unit investment trust under the Investment
Company Act of 1940, as amended. The operations of the Variable Account are part
of National Life Insurance Company (National Life). The Variable Account was
established by National Life as a separate investment account to invest the net
premiums received from the sale of certain variable annuity products. Equity
Services, Inc., an indirect wholly-owned subsidiary of National Life, is the
principal underwriter for the variable annuity contracts issued by National
Life. Sentinel Advisors Company, an indirectly-owned subsidiary of National
Life, provides investment advisory services for certain Market Street Fund, Inc.
mutual fund portfolios.
The Variable Account invests the accumulated contractholder account values in
shares of mutual fund portfolios within Market Street Fund, Inc., Strong Capital
Management, Van Eck Worldwide Bond Fund, Variable Insurance Products Fund
(VIPF), Alger American Fund, American Century, JP Morgan, Neuberger & Berman,
and Goldman Sachs. Net premiums received by the Variable Account are deposited
in investment portfolios as designated by the contractholder, except for initial
net premiums on new contracts which are first invested in the Market Street Fund
Money Market Portfolio. Contractholders may also direct the allocations of their
account value between the various investment portfolios within the Variable
Account and a declared interest account (within the General Account of National
Life) through participant transfers.
There are twenty-seven sub-accounts within the Variable Account of which
twenty-four sub-accounts were in use during the year. Each sub-account, which
invests exclusively in the shares of the corresponding portfolio, comprises the
accumulated contractholder account values of the underlying variable annuity
contracts investing in the sub-account.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in conformity with generally
accepted accounting principles (GAAP). The preparation of financial statements
in accordance with GAAP requires management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates. The following is a summary of
significant accounting policies consistently followed in the preparation of the
Variable Account's financial statements.
INVESTMENTS
The mutual fund portfolios consist of the Market Street Fund Money Market,
Market Street Fund Growth, Market Street Fund Aggressive Growth, Market Street
Fund Managed, Market Street Fund Bond, Market Street Fund International, Market
Street Fund Sentinel Growth, Strong Capital Management Opportunity Fund II,
Strong Capital Management Growth Fund II, Van Eck Worldwide Bond, VIPF
Equity-Income, VIPF Overseas, VIPF Growth, VIPF High Income, VIPF Index 500,
VIPF Contra Fund, Alger American Growth, Alger American Small Capitalization,
American Century Value, American Century Income & Growth, JP Morgan
International Opportunities Fund, JP Morgan Small Company Fund, Neuberger &
Berman Partners, Goldman Sachs International Equity, Goldman Sachs Global
Income, Goldman Sachs CORE Small Cap Equity Fund and Goldman Sachs Mid Cap
Equity Fund (the Portfolios). The following three funds had a zero balance at
year end: JP Morgan International Opportunities Fund, Goldman Sachs Global
Income Fund and Goldman Sachs CORE Small Cap Equity Fund. The assets of each
portfolio are
F-35
<PAGE> 107
held separate from the assets of the other portfolios and each has different
investment objectives and policies. Each portfolio operates separately and the
gains or losses in one portfolio have no effect on the investment performance of
the other portfolios.
INVESTMENT VALUATION
The investments in the Portfolios are valued at the closing net asset value per
share as determined by the portfolio at the end of each period. The change in
the difference between cost and market value is reflected as unrealized gain
(loss) in the Statement of Operations.
INVESTMENT TRANSACTIONS
Investment transactions are accounted for on the trade date (date the order to
buy or sell is executed) and dividend income (including capital gain
distributions) are recorded on the ex-dividend date. The cost of investments
sold was determined using the average cost method prior to 1998. Effective
January 1, 1998, the Variable Account changed its method of calculating the cost
of investments sold from the average cost method to the first in, first out
method (FIFO). Management believes FIFO better matches contractholder and
sub-account investment activity. This change had no impact on the results of
operations for 1998 or prior years, and no impact on the unit value reported
within each of the sub-accounts. Management also believes it would be
impractical to calculate the cumulative effect of this change on previously
reported realized and unrealized gains and losses; however, during 1998 the
change increased realized losses by $44,175 and increased unrealized
appreciation by the same amount.
FEDERAL INCOME TAXES
The operations of the Variable Account are part of, and taxed with, the total
operations of National Life. Under existing federal income tax law, investment
income and capital gains attributable to the Variable Account are not taxed.
NOTE 3 - CHARGES AND EXPENSES
National Life deducts a daily charge from the Variable Account based on an
annual rate of 1.4% of each sub-account's net asset value as partial
compensation for administration services provided and for National Life's
assumption of mortality and expense risks. The mortality risk assumed is that
the insureds under the contracts may die sooner than anticipated. The expense
risk assumed is that expenses incurred in issuing and administering the
contracts may exceed expected levels.
A contract rider providing certain contract benefit guarantees is available.
Contract charges are deducted annually from each contractholder's accumulated
account value for the insurance protection provided and are remitted to National
Life.
The underlying variable annuity contracts are subject to deferred sales charges.
Net premiums paid are subject to these charges if withdrawn within seven years
of the date of premium deposit.
Contract values under $50,000 are assessed an annual fee.
F-36
<PAGE> 108
NOTE 4 - INVESTMENTS
The number of shares held and cost for each of the portfolios at December 31,
1998 are set forth below:
<TABLE>
<CAPTION>
Portfolio Shares Cost
- --------- ------ ----
<S> <C> <C>
Market Street Fund Money Market 4,919,765 $ 4,919,765
Market Street Fund Growth 432,912 7,637,917
Market Street Fund Aggressive Growth 34,973 745,361
Market Street Fund Managed 214,791 3,589,176
Market Street Fund Bond 256,486 2,843,922
Market Street Fund International 87,685 1,202,862
Market Street Fund Sentinel Growth 158,382 1,923,054
Strong Opportunity Fund II 72,134 1,552,229
Strong Growth Fund II 70,520 940,657
Van Eck Worldwide Bond 8,322 97,023
VIPF Equity-Income 209,607 5,100,329
VIPF Overseas 71,873 1,414,544
VIPF Growth 42,339 1,598,291
VIPF High Income 280,405 3,375,066
VIPF Index 500 62,828 7,904,021
VIPF Contra 126,751 2,662,267
Alger American Growth 51,030 2,379,184
Alger American Small Capitalization 51,589 2,036,349
American Century Value 743 4,844
American Century Income & Growth 4,137 26,705
JP Morgan Small Company 8,883 97,894
Neuberger & Berman Partners 5,084 89,402
Goldman Sachs International Equity 4,073 45,839
Goldman Sachs Mid Cap Equity 1,164 10,074
-----------
Total $52,196,775
===========
</TABLE>
The cost also represents the aggregate cost for federal income tax purposes.
F-37
<PAGE> 109
NOTE 5 - PURCHASES AND SALES OF PORTFOLIO SHARES
Purchases and proceeds from sales of shares in the portfolios for the period
ended December 31, 1998 aggregated the following:
<TABLE>
<CAPTION>
Portfolio Purchases Proceeds
- --------- --------- --------
<S> <C> <C>
Market Street Fund Money Market $24,420,191 $20,861,150
Market Street Fund Growth 7,015,708 1,318,133
Market Street Fund Aggressive Growth 674,371 60,032
Market Street Fund Managed 3,256,233 567,389
Market Street Fund Bond 3,307,382 645,459
Market Street Fund International 987,796 335,132
Market Street Fund Sentinel Growth 2,419,644 835,144
Strong Opportunity Fund II 1,757,590 359,307
Strong Growth Fund II 921,535 145,179
Van Eck Worldwide Bond 81,001 16,918
VIPF Equity-Income 4,959,116 986,386
VIPF Overseas 1,259,996 142,157
VIPF Growth 1,540,387 176,352
VIPF High Income 3,461,812 846,251
VIPF Index 500 8,883,018 2,474,604
VIPF Contra 2,413,656 421,252
Alger American Growth 3,167,363 1,221,059
Alger American Small Capitalization 2,518,318 1,349,488
American Century Value 4,854 10
American Century Income & Growth 40,534 14,206
JP Morgan Small Company 117,519 20,845
Neuberger & Berman Partners 89,655 290
Goldman Sachs International Equity 66,055 22,296
Goldman Sachs Mid Cap Equity 10,084 10
</TABLE>
NOTE 6 - DISTRIBUTION OF NET INCOME
The Variable Account does not expect to declare dividends to contractholders
from accumulated net income. The accumulated net income will be distributed to
contractholders as withdrawals (in the form of death benefits, surrenders or
contract loans) in excess of the contractholders' net contributions to the
Variable Account.
NOTE 7 - DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue Code (IRC), a
variable annuity contract, other than a contract issued in connection with
certain types of employee benefit plans, will not be treated as a variable
annuity contract for federal income 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 IRC 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.
National Life believes that the Variable Account satisfies the current
requirements of the regulations, and it intends that the Variable Account will
continue to meet such requirements.
F-38
<PAGE> 110
PART C
OTHER INFORMATION
<PAGE> 111
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
(1) Financial statements and schedule included in
Prospectus
Condensed Financial Information
(2) Financial statements and schedule included in Part B:
National Life Insurance Company:
Independent Auditor's Report.
Consolidated Balance Sheets (GAAP Basis) as of December
31, 1998 and 1997.
Consolidated Statements of Operations and Policyholder's
Equity (GAAP basis) for the years ended December 31, 1998
and 1997.
Consolidated Statements of Cash Flows (GAAP Basis) for the
years ended December 31, 1998 and 1997.
Notes to Consolidated Financial Statements
Independent Auditor's Report.
National Variable Annuity Account II
Independent Auditor's Report
Statement of Assets
Statement of Operations
Statement of Changes in Net Assets
Notes to Financial Statement
(b) Exhibits
(1) Resolution of the Depositor's Board of
Directors authorizing the establishment of
the Registrant.(1)
(2) Not Applicable
(3) Distribution Agreement between the Variable
Account/Registrant and Principal
Underwriter (2)
(4) (a) The form of the variable annuity
contract (2)
(b) Enhanced Death Benefit Rider (2)
(5) Variable Annuity Application (2)
(6) Articles of Incorporation and By-Laws of
Depositor (3).
(7) Not Applicable
C-1
<PAGE> 112
(8) (a) Participation Agreement by and
among Market Street Fund, Inc., National
Life Insurance Company and PML Securities
Company. dated January, 30, 1996 (4).
1. Form of Amendment No. 1 dated
June 20, 1997 by & among Market Street
Fund, Inc., National Life Insurance
Company, and 1717 Capital Management
(formerly PML Securities Company) (7).
(b) Participation Agreement by
and among Variable Insurance Products Fund,
Fidelity Distributors Corporation and
Vermont Life Insurance Company, (now
National Life Insurance Company), dated
August 1, 1989 (7).
1. Form of Amendment No. 1 to
Participation Agreement by and among
Variable Insurance Products Fund, Fidelity
Distributions Corporation and Vermont Life
Insurance Company (now National Life
Insurance Company) dated January 1, 1996
(5).
2. Form of Amendment No. 2 to
Participation Agreement by and among
Variable Insurance Products Fund, Fidelity
Distributors Corporation and Vermont Life
Insurance Company (now National Life
Insurance Company) dated April 28,
1997 (2).
(c) Participation Agreement by
and among The Alger American Fund, National
Life Insurance Company and Fred Alger and
Company, dated January 31, 1995 (4).
1. Form of amended Schedule A to the
Participation Agreement by and among The
Alger American Fund, National Life
Insurance Company and Fred Alger Company,
Dated April 25, 1997 (2).
(d) Form of Participation Agreement by
and among National Life Insurance Company,
National Life Variable Annuity Account II
and Strong Variable Insurance Funds, Inc.,
Strong Special Fund II, Inc., and Strong
Funds Distributors, Inc., dated
May 7, 1997 (2).
(e) Participation Agreement by and
among Variable Insurance Products Fund II,
Fidelity Distributors Corporation and
Vermont Life Insurance Company (now
National Life Insurance Company) dated
April 1, 1990 (7).
(1) Form of Amendment No. 1 by and
among Variable Insurance Products Fund II,
Fidelity Distributors Corporation and
Vermont Life Insurance Company (now
National Life Insurance Company) dated
April 28, 1997 (2).
(f) Form of Participation Agreement by
and among Van Eck Worldwide Insurance Trust
and National Life Insurance Company dated
June 27, 1997 (2).
(g) Form of Participation Agreement
between National Life Insurance Company and
American Century Investment, Inc. (6).
(h) Form of Participation Agreement
between National Life Insurance Company and
Neuberger & Berman Advisers Managers
Trust (6).
(i) Form of Participation Agreement
between National Life Insurance Company and
J. P. Morgan Series Trust II (6).
(j) Form of Participation Agreement
between National Life Insurance Company and
Goldman Sachs Variable Insurance
Trust (6).
(9) Opinion and consent of Michele S. Gatto,
Senior Vice President & General Counsel of
National Life Insurance Company.
(10) (a) Consent of Sutherland, Asbill &
Brennan, L.L.P.
(b) Consent of Price Waterhouse
LLP.
(11) Not Applicable.
(12) Not Applicable.
(13) Performance Advertising Calculation
Schedules (2)
(14) Powers of Attorney******.
(a) Robert E. Boardman
(b) David R. Coates
(c) Benjamin F. Edwards III
(d) Charles H. Erhart, Jr.
(e) Earle H. Harbison, Jr.
(f) Roger B. Porter
(g) E. Miles Prentice, III
(h) Thomas P. Salmon
(i) A. Gary Shilling
(j) Patricia K. Woolf
(1) Incorporated herein by reference to Registration Statement (File No.
333-19583) for National Variable Annuity Account II filed on
January 10, 1997.
C-2
<PAGE> 113
(2) Incorporated herein by reference to Pre-Effective Amendment No. 1 to the
Form N-4 Registration Statement (File No. 333-19583) for National
Variable Annuity Account II filed May 28, 1997.
(3) Incorporated herein by reference to the to the Pre-Effective Amendment
No. 2 to the Form S-6 Registration Statement (File No. 333-67003) for
National Variable Life Insurance Account (COLI) filed on February 11,
1999.
(4) Incorporated herin by reference to Post-Effective Amendment No. 1 to the
Form S-6 Registration Statement (File No. 33-91938) for National Variable
Life Insurance Account filed March 12, 1996.
(5) Incorporated herein by reference to Pre-Effective Amendment No. 1 to the
Form S-6 Registration Statement (File No. 33-91938) for National Variable
Life Insurance Account filed December 29, 1995.
(6) Incorporated herein by reference to Pre-Effective Amendment No. 1 to the
Form S-6 Registration Statement filed April 16, 1998 (File No.
333-44723), Accession No. 950133-98-1468
(7) Incorporated herein by reference to Post-Effective Amendment No. 2 to the
Form N-4 Registration Statement filed February 25, 1999 (File No.
333-19583), Accession No. 950133-99-000622
Item 25. Directors and Officers of the Depositor
<TABLE>
<CAPTION>
Name and Principal Business Address* Position with Depositor
- ------------------------------------ -----------------------
<S> <C>
Patrick E. Welch Chairman of the Board, Chief Executive
Officer and Director
Thomas H. MacLeay President, Chief Operating Officer and
Director
Robert E. Boardman Director
Hickok & Boardman Financial Network
346 Shelburne Street, P. O. Box 1064
Burlington, VT 05402-1064
Earle H. Harbison, Jr. Director
Harbison Corporation
8112 Maryland Avenue, Suite 250
St. Louis, MO 63105
</TABLE>
C-3
<PAGE> 114
<TABLE>
<S> <C>
A. Gary Shilling Director
A. Gary Shilling & Co., Inc.
500 Morris Avenue
Springfield, New Jersey 07081-1020
James A. Mallon Executive Vice President
& Chief Marketing Officer
William A. Smith Executive Vice President
& Chief Financial Officer
Rodney A. Buck Senior Vice President & Chief
Investment Officer
Gregory H. Doremus Senior Vice President-
New Business & Customer
Services
Michele S. Gatto Senior Vice President &
General Counsel
Charles C. Kittredge Senior Vice President-Sales
& Distribution
Michael A. Tahan Senior Vice President & Chief
Information Officer
</TABLE>
*Unless otherwise indicated, the principal business address is National Life
Drive, Montpelier, Vermont 05604.
C-4
<PAGE> 115
Item 26. Persons Controlled by or Under Common Control with the Depositor or
Registrant.
A list of all persons directly or indirectly controlled by
or under common control with National Life is set forth below.
All of the stock of National Life is owned by NLV Financial
Corporation, a Delaware corporation. All of the stock of NLV
Financial Corporation is owned by National Life Holding Company, a
mutual insurance holding company organized under Vermont law.
National Life Insurance Company owns 100% of Administrative Services,
Inc. and National Financial Services, Inc. National Financial
Services, Inc. owns 66.667% of LSW National Holdings, Inc.; LSW
National Holdings Inc. owns 100% of Insurance Investors Life
Insurance Company; Insurance Investors Life Insurance Company owns
100% of Life Insurance Company of the Southwest.
National Life Insurance Company owns 100% of National Life Investment
Management Company, Inc. National Life Investment Management Company,
Inc. owns 100% of Sentinel Advisors, Inc., Equity Services, Inc. and
NL Capital Management, Inc. Equity Services, Inc. owns 100% of
Sentinel Administrative Service Corporation. Sentinel Administrative
Service Corporation is the majority partner of Sentinel Administrative
Service Company and Sentinel Advisors, Inc. is the majority partner of
Sentinel Advisors Company.
National Life Investment Management Company, Inc. is the majority
partner of Sentinel Management Company, and Sentinel Financial
Services Company. Sentinel Management Company owns 100% of American
Guaranty & Trust Company.
Item 27. Number of Contract Owners
As of January 31, 1999, 1,220 contracts have been issued to date.
Item 28. Indemnification
The By-Laws of Depositor provide, in part in Article VI, as follows:
7.1 Indemnification.
(a) The Corporation shall indemnify and hold harmless any officer,
director, employee or agent of the Corporation to the fullest extent
permitted under Title 11A, Chapter 8, Subchapter 5 of the Vermont
Statutes Annotated, as the same may be amended from time to time. Any
repeal or modification of this Section 7.1 or of Title 11A, Chapter 8,
Subchapter 5 of the Vermont Statutes Annotated shall not adversely
affect any right of indemnification of any officer, director or
employee of the Corporation existing at any time prior to such repeal
or modification. Provided, however, that the Corporation shall not be
required to indemnify a person in connection with a proceeding
initiated by such person, including a counterclaim or crossclaim,
unless the proceeding was authorized by the Board of Directors.
(b) The Corporation may pay or reimburse the reasonable expenses
incurred in defending any proceeding in advance of its final
disposition if the Corporation has received in advance an undertaking
by the person receiving such payment or reimbursement to repay all
amounts advanced if it should be ultimately determined that he or she
is not entitled to be indemnified under this article or otherwise. The
Corporation may require security for any such undertaking.
Insofar as indemnification for liabilities 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
C-5
<PAGE> 116
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 such 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 of whether such indemnification by it is
against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
Item 29 Principal Underwriter
(a) Equity Services, Inc. (ESI) is the principal underwriter for
National Variable Annuity Account II and National Variable Life
Insurance Account.
(b) The following information is furnished with respect to the officers
and directors of ESI:
<TABLE>
<CAPTION>
Name and Principal Positions and Offices
Business Address* with ESI
- ----------------- --------
<S> <C>
Joseph M. Rob Chairman, Chief Executive Officer, President & Director
John M. Grab, Jr. Senior Vice President & Chief Financial Officer
Stephen A. Englese Vice President - Financial Products
Budd A. Shedaker Assistant Vice President - Communications
Greg D. Teese Vice President - Compliance
D. Russell Morgan Counsel
Sharon E. Bernard Treasurer & Controller
Lisa A. Pettrey Secretary
JoAnn K. Morissette Assistant Secretary
Thomas H. MacLeay Director
Rodney A. Buck Director
Patrick E. Welch Director
</TABLE>
*Unless otherwise indicated, principal business address is One National Life
Drive, Montpelier, Vermont 05604.
Item 30. Location of Accounts and Records
All accounts and records required to be maintained by Section 31(a) of
the Investment Company Act of 1940 and the rules thereunder are maintained by
National Life Insurance Company at One National Life Drive, Montpelier, Vermont
05604.
Item 31. Management Services
C-6
<PAGE> 117
All management contracts are discussed in Part A or Part B.
Item 32 Undertakings
(a) Registrant hereby undertakes to file a post-effective amendment to
this registration statement as frequently as is necessary to ensure that the
audited financial statements in the registration statement are never more than
sixteen (16) months old for so long as payments under the variable annuity
contracts may be accepted;
(b) Registrant hereby undertakes to include either (1) as part of any
application to purchase a contract offered by the Prospectus, a space that an
applicant can check to request a Statement of Additional Information, or (2) a
postcard or similar written communication affixed to or included in the
Prospectus that the applicant can remove to send for a Statement of Additional
Information; and
(c) Registrant hereby undertakes to deliver any Statement of Additional
Information and any financial statement required to be made available under this
form promptly upon written or oral request.
(d) Reliance on No-Action Letter Regarding Section 403(b) Retirement
Plan. National Life Insurance Company and the Registrant/Variable Account rely
on a no-action letter issued by the Division of Investment Management to the
American Council of Life Insurance on November 28, 1988 and represent that the
conditions enumerated therein have been or will be complied with.
(e) National 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 National Life Insurance Company.
C-7
<PAGE> 118
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, National Variable Annuity
Account II, certifies that it meets all the requirements for effectiveness of
this Registration Statement pursuant to Rule 485(b) under the Securities Act of
1933, and has duly caused this Post-Effective Amendment No. 3 to the
Registration Statement to be signed on its behalf by the undersigned thereunto
duly authorized, in the City of Montpelier and the State of Vermont, on the
30th day of April, 1999.
NATIONAL VARIABLE ANNUITY ACCOUNT II
(Registrant)
By: NATIONAL LIFE INSURANCE COMPANY
Attest: /s/ Christine M. Bilbrey By: /s/ Patrick E. Welch
--------------------------- ---------------------------------
Christine M. Bilbrey Patrick E. Welch, Chairman
Assistant Secretary of the Board and Chief Executive
Officer
By: NATIONAL LIFE INSURANCE COMPANY
(Depositor)
Attest: /s/ Christine M. Bilbrey By: /s/ Patrick E. Welch
--------------------------- ---------------------------------
Christine M. Bilbrey Patrick E. Welch, Chairman
Assistant Secretary of the Board and Chief Executive
Officer
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this Post
Effective Amendment No.3 to the Registration Statement has been signed below by
the following persons in the capacities indicated on the date(s) set forth
below.
Signature Title Date
- --------- ----- ----
/s/ Patrick E. Welch Chairman of the Board and April 30, 1999
- ----------------------------- and Chief Executive Officer,
Patrick E. Welch and Director
C-8
<PAGE> 119
/s/ Thomas H. MacLeay President & Chief Operating April 30, 1999
- ----------------------------- Officer, and Director
Thomas H. MacLeay
/s/ William A. Smith Executive Vice President & April 30, 1999
- ----------------------------- Chief Financial Officer
William A. Smith
/s/ Robert E. Boardman* Director
- -----------------------------
Robert E. Boardman
/s/ Earle H. Harbison, Jr.* Director
- -----------------------------
Earle H. Harbison, Jr.
/s/ A. Gary Shilling* Director
- -----------------------------
A. Gary Shilling
C-9
<PAGE> 120
*By /s/ Patrick E. Welch Date: April 30, 1999
----------------------
Patrick E. Welch
Pursuant to Power of Attorney
<PAGE> 1
Exhibit (b)(9)
April 30, 1999
The Board of Directors
National Life Insurance Company
National Life Drive
Montpelier, Vermont 05604
RE: Variable Annuity Registration Statement
Ladies and Gentlemen:
With reference to the Post-Effective Amendment No. 3 to the
Registration Statement on Form N-4 as amended, filed by National Life Insurance
Company and National Variable Annuity Account II with the Securities and
Exchange Commission covering individual variable annuity contracts, I have
examined such documents and such laws as I considered necessary and appropriate
and on the basis of such examination, it is my opinion that:
1. National Life Insurance Company is duly organized and validly
existing under the laws of the state of Vermont, and has been duly authorized
to issue individual variable annuity contracts by the Department of Insurance
of the State of Vermont.
2. National Variable Annuity Account II is a duly authorized and
existing separate account established pursuant to the provisions of Title 8,
Vermont Statutes Annotated, sections 3855 to 3859.
3. The individual variable annuity contracts, when issued as
contemplated by said Form N-4 Registration Statement, will constitute legal,
validly issued and binding obligations of National Life Insurance Company.
I hereby consent to the filing of this opinion as an Exhibit to said
Post-Effective Amendment No. 3 to the Form N-4 Registration Statement and to
the use of my name under the caption "Legal Matters" in the Registration
Statement.
Sincerely,
Michele S. Gatto
Senior Vice President
& General Counsel
<PAGE> 1
[SUTHERLAND, ASBILL & BRENNAN LLP LETTERHEAD]
EXHIBIT (b)(10)(a)
April 30, 1999
National Life Insurance Company
One National Life Drive
Montpelier, Vermont 05604
Re: National Variable Annuity Account II
Registration Statement on Form N-4
File No. 333-19583
Ladies and Gentlemen:
We hereby consent to the reference to our name under the caption
"Legal Matters" in the Prospectus filed as part of Post-Effective Amendment No.
3 to Form N-4 for National Variable Annuity Account II, which Prospectus
describes certain individual flexible premium variable annuity policies. In
giving this consent, we do not admit that we are in the category of persons
whose consent is required under Section 7 of the Securities Act of 1933.
Very truly yours,
SUTHERLAND, ASBILL & BRENNAN LLP
By: /s/ STEPHEN E. ROTH
---------------------------
Stephen E. Roth
<PAGE> 1
EXHIBIT (b)(10)(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 3 to the Registration
Statement of the National Variable Annuity Account II, a Separate Account of
National Life Insurance Company, on Form N-4 of our report dated March 2, 1999
relating to the financial statements of National Life Insurance Company and our
report dated March 31, 1999 relating to the financial statements of the National
Variable Annuity Account II, both of which appear in such Statement of
Additional Information. We also consent to the reference to us under the heading
"Experts" in such Statement of Additional Information.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 30, 1999
