<PAGE> 1
V.A.
As filed with the Securities and Exchange Commission on May 1, 2000
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. 6 [ ]
---
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 8
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, 2000 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
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> 3
(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> 4
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> 5
PART A
PROSPECTUS
<PAGE> 6
Sentinel Advantage Variable Annuity
P R O S P E C T U S
Dated May 1, 2000
National Life Insurance Company - Home 0ffice: National Life Drive,
Montpelier, Vermont 05604 -
1-800-537-7003
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 currently 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.
J.P. MORGAN SERIES TRUST II
International Opportunities Portfolio J.P. Morgan Asset
Small Company Portfolio Management, Inc.
STRONG VARIABLE INSURANCE FUNDS, INC.
Strong Mid Cap Growth Fund II 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 Mgmt.
Mid Cap Value Goldman Sachs Asset Mgmt.
NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
Partners Portfolio Neuberger Berman
Management Incorporated
</TABLE>
We are currently planning to substitute new fund options for all seven of
the Market Street Fund, Inc. portfolios, all four of the Goldman Sachs Variable
Insurance Trust portfolios and the Van Eck Worldwide Bond Fund during 2000.
Please see page __ of this Prospectus for more information.
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, 2000 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, 2000, is
incorporated herein by reference. The Table of Contents for the Statement of
Additional Information appears on page 51 of the Prospectus.
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY..............................................................................1
SUMMARY OF CONTRACT EXPENSES.........................................................4
UNDERLYING FUND ANNUAL EXPENSES......................................................5
ACCUMULATION UNIT VALUES.............................................................8
NATIONAL LIFE INSURANCE COMPANY, THE VARIABLE ACCOUNT, AND
THE FUNDS.......................................................................9
National Life Insurance Company...............................................9
The Variable Account..........................................................9
Underlying Fund Options.......................................................9
Planned Substitutions.........................................................
Additional Funds to be Offered in the Future..................................
DETAILED DESCRIPTION OF CONTRACT PROVISIONS............................................14
Issuance of the Contract......................................................14
Premium Payments..............................................................15
The Initial Premium Payment...........................................15
Subsequent Premium Payments...........................................15
Allocation of Net Premium Payments....................................15
Transfers.....................................................................16
Value of a Variable Account Accumulation Unit.................................16
Net Investment Factor.................................................16
Determining the Contract Value................................................17
Annuitization.................................................................17
Maturity Date.........................................................17
Election of Payment Options...........................................17
Frequency and Amount of Annuity Payments..............................17
Annuitization - Variable Account..............................................18
Value of an Annuity Unit..............................................18
Assumed Investment Rate...............................................18
Annuitization - Fixed Account.................................................18
Annuity Payment Options.......................................................19
Death of Owner................................................................19
Death of Annuitant Prior to the Annuitization Date............................20
Generation-Skipping Transfers.................................................20
Ownership Provisions..........................................................20
CHARGES AND DEDUCTIONS.................................................................21
Deductions from the Variable Account..........................................22
Contingent Deferred Sales Charge..............................................22
Annual Contract Fee...........................................................23
Transfer Charge...............................................................23
Premium Taxes.................................................................24
Charge for Optional Enhanced Death Benefit Rider..............................24
Other Charges.................................................................24
CONTRACT RIGHTS AND PRIVILEGES.........................................................24
Free Look.....................................................................24
Loan Privilege -Tax Sheltered Annuities.......................................25
Surrender and Withdrawal......................................................26
Payments......................................................................27
Surrenders and Withdrawals Under a Tax-Sheltered Annuity Contract.............28
Telephone Transaction Privilege...............................................29
Available Automated Fund Management Features..................................29
Dollar Cost Averaging................................................29
Portfolio Rebalancing................................................29
Systematic Withdrawals...............................................30
Contract Rights Under Certain Plans...........................................31
</TABLE>
<PAGE> 8
<TABLE>
<CAPTION>
Page
<S> <C>
THE FIXED ACCOUNT......................................................................31
Minimum Guaranteed and Current Interest Rates.................................31
Enhanced Fixed Account........................................................32
OPTIONAL ENHANCED DEATH BENEFIT RIDER..................................................33
FEDERAL INCOME TAX CONSIDERATIONS......................................................33
Taxation of Non-Qualified Contracts...........................................34
Taxation of Qualified Contracts...............................................35
Possible Tax Law Changes......................................................36
GENDER NEUTRALITY......................................................................36
VOTING RIGHTS..........................................................................37
CHANGES TO VARIABLE ACCOUNT............................................................37
ADVERTISING............................................................................38
Yield.........................................................................38
Performance...................................................................38
DISTRIBUTION OF THE CONTRACTS..........................................................45
INSURANCE MARKETPLACE STANDARDS ASSOCIATION............................................46
FINANCIAL STATEMENTS...................................................................46
STATEMENTS AND REPORTS.................................................................46
OWNER INQUIRIES........................................................................46
LEGAL PROCEEDINGS......................................................................47
GLOSSARY...............................................................................48
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION...............................51
</TABLE>
<PAGE> 9
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 14. 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 and Massachusetts - see page 15), 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 15).
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, you may revoke the Contract during the free look
period and we will refund Premium Payments.
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 9-14).
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 your Contract may
be more or less than the premiums paid.
1
<PAGE> 10
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", page 31).
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 17).
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, and less all outstanding loans and accrued
interest). The amount paid will be reduced by premium tax charges, if any. For
more information, see "Death of Owner," page 19.
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 20).
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 26). A
Withdrawal or a surrender may result in federal income tax, including a federal
penalty tax (see "Federal Income Tax Considerations," page 33).
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 22).
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 23).
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 22).
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 22).
2
<PAGE> 11
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
Optional Enhanced Death Benefit Rider," page 24).
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 24).
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 5, and the accompanying Fund
prospectuses).
ARE THERE ANY OTHER CONTRACT PROVISIONS?
For information concerning other important Contract provisions, see
"Contract Rights and Privileges," page 24, 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 33.
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.
3
<PAGE> 12
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 24.
(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 22).
(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 33.
4
<PAGE> 13
UNDERLYING FUND ANNUAL EXPENSES(5)(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% 0.05% 0.90%
Alger American Growth Portfolio 0.75% 0.04% 0.79%
Fidelity VIP Fund-Equity Income Portfolio 0.48% 0.08% 0.56%
Fidelity VIP Fund-Growth Portfolio 0.58% 0.07% 0.65%
Fidelity VIP Fund-High Income Portfolio 0.58% 0.11% 0.69%
Fidelity VIP Fund-Overseas Portfolio 0.73% 0.14% 0.87%
Fidelity VIP Fund II-Index 500 Portfolio 0.24% 0.04% 0.28%
Fidelity VIP Fund II-Contrafund Portfolio 0.58% 0.07% 0.65%
Market Street Growth Portfolio 0.32% 0.16% 0.48%
Market Street Sentinel Growth Portfolio 0.50% 0.21% 0.71%
Market Street Aggressive Growth Portfolio 0.41% 0.16% 0.57%
Market Street Managed Portfolio 0.40% 0.17% 0.57%
Market Street Bond Portfolio 0.35% 0.17% 0.52%
Market Street International Portfolio 0.75% 0.23% 0.98%
Market Street Money Market Portfolio 0.25% 0.15% 0.40%
Strong Opportunity Fund II, Inc. 1.00% 0.10% 1.10%
Strong Mid Cap Growth Fund II 1.00% 0.10% 1.10%
Van Eck Worldwide Bond Fund 1.00% 0.22% 1.22%
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% 0.35% 1.35%
Goldman Sachs Global Income 0.90% 0.25% 1.15%
Goldman Sachs CORE Small Cap Equity 0.75% 0.25% 1.00%
Goldman Sachs Mid Cap Value 0.80% 0.25% 1.05%
J.P. Morgan International Opportunities 0.60% 0.60% 1.20%
J.P. Morgan Small Company 0.60% 0.55% 1.15%
Neuberger Berman AMT Partners 0.80% 0.07% 0.87%
</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:
<TABLE>
<CAPTION>
Management Other Total Mutual
Fees Expenses Fund Expenses
---- -------- -------------
<S> <C> <C> <C>
Fidelity VIP Fund-Equity Income Portfolio 0.48% 0.09% 0.57%
Fidelity VIP Fund-Growth Portfolio 0.58% 0.08% 0.66%
Fidelity VIP Fund-Overseas Portfolio 0.73% 0.18% 0.91%
Fidelity VIP Fund II-Index 500 Portfolio 0.24% 0.10% 0.34%
Fidelity VIP Fund II-Contrafund Portfolio 0.58% 0.09% 0.67%
Strong Mid Cap Growth Fund II 1.00% 0.20% 1.20%
Strong Opportunity Fund II, Inc. 1.00% 0.20% 1.20%
Goldman Sachs International Equity 1.00% 0.77% 1.77%
Goldman Sachs Global Income 0.90% 1.78% 2.68%
Goldman Sachs CORE Small Cap Equity 0.75% 0.75% 1.50%
Goldman Sachs Mid Cap Value 0.80% 0.42% 1.22%
J.P. Morgan International Opportunities 0.60% 1.38% 1.98%
J.P. Morgan Small Company 0.60% 1.97% 2.57%
</TABLE>
5
<PAGE> 14
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.
Information with respect to the expenses of certain underlying funds we
anticipate substituting for other funds later in the year is set forth below.
<TABLE>
<CAPTION>
Management Other Total Mutual
Fees Expenses Fund Expenses
---- -------- -------------
<S> <C> <C> <C>
Fidelity VIP II Investment Grade Bond Portfolio 0.43% 0.11% 0.54%
Neuberger Berman AMT Balanced Portfolio 0.85% 0.17% 1.02%
</TABLE>
EXAMPLE
The following charts depict 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.
Currently Available Subaccounts:
<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 94 123 154 266 24 73 124 266
Alger American Growth 93 119 149 255 23 69 119 255
Fidelity VIP Fund-Equity Income 90 113 138 232 20 63 108 232
Fidelity VIP Fund-Growth 91 115 142 241 21 65 112 241
Fidelity VIP Fund-High Income 92 117 144 245 22 67 114 245
Fidelity VIP Fund-Overseas 93 122 153 263 23 72 123 263
Fidelity VIP Fund II-Index 500 88 104 123 203 18 54 93 203
Fidelity VIP Fund II-Contrafund 91 115 142 241 21 65 112 241
Market Street Growth 90 110 134 224 20 60 104 224
Market Street Sentinel Growth 92 117 145 247 22 67 115 247
Market Street Aggressive Growth 90 113 138 233 20 63 108 233
Market Street Managed 90 113 138 233 20 63 108 233
Market Street Bond 90 111 136 228 20 61 106 228
Market Street International 94 125 158 273 24 75 128 273
Market Street Money Market 89 108 130 215 19 58 100 215
Strong Opportunity Fund II, Inc. 96 129 164 285 26 79 134 285
Strong Mid Cap Growth Fund II 96 129 164 285 26 79 134 285
Van Eck Worldwide Bond Fund 97 132 170 296 27 82 140 296
American Century VP Value 95 126 159 275 25 76 129 275
American Century VP Income & Growth 92 117 145 246 22 67 115 246
Goldman Sachs International Equity 98 136 176 309 28 86 146 309
Goldman Sachs Global Income 96 130 167 290 26 80 137 290
Goldman Sachs CORE Small Cap Equity 95 126 159 275 25 76 129 275
Goldman Sachs Mid Cap Equity 95 127 162 280 25 77 132 280
J.P. Morgan International Opportunities 97 131 169 294 27 81 139 294
J.P. Morgan Small Company 96 130 167 290 26 80 137 290
Neuberger Berman Partners 93 122 153 263 23 72 123 263
</TABLE>
<TABLE>
<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 73 124 266
Alger American Growth 23 69 119 255
Fidelity VIP Fund-Equity Income 20 63 108 232
Fidelity VIP Fund-Growth 21 65 112 241
Fidelity VIP Fund-High Income 22 67 114 245
Fidelity VIP Fund-Overseas 23 72 123 263
Fidelity VIP Fund II-Index 500 18 54 93 203
Fidelity VIP Fund II-Contrafund 21 65 112 241
Market Street Growth 20 60 104 224
Market Street Sentinel Growth 22 67 115 247
Market Street Aggressive Growth 20 63 108 233
Market Street Managed 20 63 108 233
Market Street Bond 20 61 106 228
Market Street International 24 75 128 273
Market Street Money Market 19 58 100 215
Strong Opportunity Fund II, Inc. 26 79 134 285
Strong Mid Cap Growth Fund 26 79 134 285
Van Eck Worldwide Bond Fund 27 82 140 296
American Century VP Value 25 76 129 275
American Century VP Income & Growth 22 67 115 246
Goldman Sachs International Equity 28 86 146 309
Goldman Sachs Global Income 26 80 137 290
Goldman Sachs CORE Small Cap Equity 25 76 129 275
Goldman Sachs Mid Cap Value 25 77 132 280
J.P. Morgan International Opportunities 27 81 139 294
J.P. Morgan Small Company 26 80 137 290
Neuberger Berman Partners 23 72 123 263
</TABLE>
Subaccounts We Anticipate Making Available Later in the Year:
<TABLE>
<CAPTION>
If you surrender your If you do not surrender If you annuitize
Contract at the end of your Contract at the end of your Contract at the end of
the applicable time period. 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. 1 Yr** 3 Yrs. 5 Yrs. 10 Yrs.
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fidelity VIP II Investment Grade
Bond 90 112 137 230 20 62 107 230 20 62 107 230
Neuberger Berman AMT Balanced 95 126 160 277 25 76 130 277 25 76 130 277
</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
1999 and dividing by the average assets in the Variable Account. This works out
to 0.6% 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.
6
<PAGE> 15
For an Owner who has elected the Enhanced Death Benefit Rider (see "Optional
Enhanced Death Benefit Rider", page 33), and again assuming a $1000 investment
and 5% annual return, the chart below depicts the annual expenses that would be
incurred under this Contract:
Currently Available Subaccounts:
<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 96 129 164 285 26 79 134 285
Alger American Growth 95 125 159 274 25 75 129 274
Fidelity VIP Fund-Equity Income 92 119 147 252 22 69 117 252
Fidelity VIP Fund-Growth 93 121 152 261 23 71 122 261
Fidelity VIP Fund-High Income 94 122 154 265 24 72 124 265
Fidelity VIP Fund-Overseas 95 128 163 282 25 78 133 282
Fidelity VIP Fund II-Index 500 90 110 134 224 20 60 104 224
Fidelity VIP Fund II-Contrafund 93 121 152 261 23 71 122 261
Market Street Growth 91 116 144 244 21 66 114 244
Market Street Sentinel Growth 94 123 155 267 24 73 125 267
Market Street Aggressive Growth 92 119 148 253 22 69 118 253
Market Street Managed 92 119 148 253 22 69 118 253
Market Street Bond 92 117 146 248 22 67 116 248
Market Street International 96 131 168 293 26 81 138 293
Market Street Money Market 91 114 140 236 21 64 110 236
Strong Opportunity Fund II, Inc. 98 134 174 304 28 84 144 304
Strong Mid Cap Growth Fund II 98 134 174 304 28 84 144 304
Van Eck Worldwide Bond Fund 99 138 179 315 29 88 149 315
American Century VP Value 97 131 169 294 27 81 139 294
American Century VP Income & Growth 94 123 154 266 24 73 124 266
Goldman Sachs International Equity 100 142 186 327 30 92 156 327
Goldman Sachs Global Income 98 136 176 309 28 86 146 309
Goldman Sachs CORE Small Cap Equity 97 131 169 294 27 81 139 294
Goldman Sachs Mid Cap Equity 97 133 171 299 27 83 141 299
J.P. Morgan International Opportunities 98 137 179 313 28 87 149 313
J.P. Morgan Small Company 98 136 176 309 28 86 146 309
Neuberger Berman AMT Partners 95 128 163 282 25 78 133 282
</TABLE>
<TABLE>
<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 79 134 285
Alger American Growth 25 75 129 274
Fidelity VIP Fund-Equity Income 22 69 117 252
Fidelity VIP Fund-Growth 23 71 122 261
Fidelity VIP Fund-High Income 24 72 124 265
Fidelity VIP Fund-Overseas 25 78 133 282
Fidelity VIP Fund II-Index 500 20 60 104 224
Fidelity VIP Fund II-Contrafund 23 71 122 261
Market Street Growth 21 66 114 244
Market Street Sentinel Growth 24 73 125 267
Market Street Aggressive Growth 22 69 118 253
Market Street Managed 22 69 118 253
Market Street Bond 22 67 116 248
Market Street International 26 81 138 293
Market Street Money Market 21 64 110 236
Strong Opportunity Fund II, Inc. 28 84 144 304
Strong Mid Cap Growth Fund II 28 84 144 304
Van Eck Worldwide Bond Fund 29 88 149 315
American Century VP Value 27 81 139 294
American Century VP Income & Growth 24 73 124 266
Goldman Sachs International Equity 30 92 156 327
Goldman Sachs Global Income 28 86 146 309
Goldman Sachs CORE Small Cap Equity 27 81 139 294
Goldman Sachs Mid Cap Equity 27 83 141 299
J.P. Morgan International Opportunities 28 87 149 313
J.P. Morgan Small Company 28 86 146 309
Neuberger Berman AMT Partners 25 78 133 282
</TABLE>
Subaccounts We Anticipate Making Available Later in the Year:
<TABLE>
<CAPTION>
If you surrender your If you do not surrender If you annuitize
Contract at the end of your Contract at the end of your Contract at the end of
the applicable time period. 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. 1 Yr.** 3 Yrs. 5 Yrs. 10 Yrs.
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fidelity VIP Fund II-Investment
Grade Bond 92 118 147 250 22 68 117 250 22 68 117 250
Neuberger Berman AMT Balanced 97 132 170 296 27 82 140 296 27 82 140 296
</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
1999 and dividing by the average assets in the Variable Account. This works out
to 0.06% 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 21. 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 24). Certain states impose
a premium tax, currently ranging up to 3.5%.
7
<PAGE> 16
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, 1998 and 1999, and the number of
accumulation units outstanding at December 31, 1999.
<TABLE>
<CAPTION>
Number of
Accumulation Accumulation Accumulation Accumulation Accumulation Units
Unit Value at Unit Value at Unit Value at Unit Value at Outstanding at
Subaccount 6/20/97 12/31/97 12/31/98 12/31/99 12/31/99
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Alger American Small Capitalization $10.00 11.00 12.53 17.73 243,153
- -----------------------------------------------------------------------------------------------------------------------------------
Alger American Growth $10.00 10.65 15.55 20.51 620,993
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Equity Income $10.00 10.84 11.93 12.51 704,688
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Growth $10.00 10.71 14.74 19.97 558,722
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-High Income $10.00 10.83 10.22 10.90 398,907
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Overseas $10.00 9.45 10.51 14.78 238,593
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund II-Index 500 $10.00 10.88 13.77 16.37 1,479,594
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund II-Contrafund $10.00 10.95 14.04 17.20 495,265
- -----------------------------------------------------------------------------------------------------------------------------------
Market Street Growth $10.00 10.68 11.96 12.14 1,054,556
- -----------------------------------------------------------------------------------------------------------------------------------
Market Street Sentinel Growth $10.00 11.16 12.71 17.40 351,290
- -----------------------------------------------------------------------------------------------------------------------------------
Market Street Aggressive Growth $10.00 10.74 11.43 13.07 95,954
- -----------------------------------------------------------------------------------------------------------------------------------
Market Street Managed $10.00 10.64 11.80 11.74 555,721
- -----------------------------------------------------------------------------------------------------------------------------------
Market Street Bond $10.00 10.42 11.12 10.60 454,241
- -----------------------------------------------------------------------------------------------------------------------------------
Market Street International $10.00 9.52 10.34 13.19 182,286
- -----------------------------------------------------------------------------------------------------------------------------------
Market Street Money Market $10.00 10.20 10.59 10.59 874,549
- -----------------------------------------------------------------------------------------------------------------------------------
Strong Opportunity Fund II, Inc. $10.00 11.16 12.50 16.63 200,977
- -----------------------------------------------------------------------------------------------------------------------------------
Strong Mid Cap Growth Fund II $10.00 11.26 14.29 26.76 318,572
- -----------------------------------------------------------------------------------------------------------------------------------
Van Eck Worldwide Bond $10.00 10.25 11.39 10.36 39,1466
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 1999, and the number of
accumulation units outstanding on December 31, 1999
<TABLE>
<CAPTION>
Number of
Accumulation Accumulation Accumulation Accumulation Units
Unit Value at Unit Value at Unit Value at Outstanding at
8/3/98 12/31/98 12/31/99 12/31/99
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
American Century VP Value 10.0 10.41 10.18 63,007
- -----------------------------------------------------------------------------------------------------------------------------------
American Century VP Income & Growth 10.0 10.96 12.76 183,326
- -----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs International Equity 10.0 10.11 13.14 26,306
- -----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Global Income 10.0 10.39 10.15 12,013
- -----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs CORE Small Cap Equity 10.0 9.45 10.96 8,930
- -----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Mid Cap Value 10.0 9.88 9.65 30,896
- -----------------------------------------------------------------------------------------------------------------------------------
J.P. Morgan International Opportunities 10.0 9.69 13.06 25,478
- -----------------------------------------------------------------------------------------------------------------------------------
J.P. Morgan Small Company 10.0 9.98 14.21 30,934
- -----------------------------------------------------------------------------------------------------------------------------------
Neuberger Berman AMT Partners 10.0 10.19 10.79 47,306
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 17
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.
9
<PAGE> 18
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.
-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.
10
<PAGE> 19
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.
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.
11
<PAGE> 20
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 II
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.
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.
12
<PAGE> 21
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
ten 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 CORESM Small Cap Equity and Mid Cap
Value* 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. The Fund pursues its objectives by managing
investments in equity securities of companies that are organized outside the
U.S. or whose securities are principally traded outside the United States. The
Fund intends to invest in companies with public stock market capitalizations
that are larger than $1 billion at the time of investment.
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 enters into transactions in foreign currencies.
GOLDMAN SACHS VIT CORE SMALL CAP EQUITY FUND: Investment Objective.
Seeks long-term growth of capital. The Fund pursues its investment objective by
investing in a broadly diversified portfolio of equity securities of U.S.
issuers which are included in the Russell 2000 Index at the time of investment.
GOLDMAN SACHS VIT MID CAP VALUE FUND: Investment Objective. Seeks
long-term capital appreciation primarily through investments in
mid-capitalization U. S. stocks that are believed to be undervalued or
undiscovered by the marketplace. The Fund invests, under normal circumstances,
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 $300 million
and $15 billion).
CORE(SM) is a service mark of Goldman, Sachs & Co.
*Formerly Mid Cap Equity
J.P. MORGAN SERIES TRUST II
J.P. Morgan Series Fund 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
13
<PAGE> 22
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.
PLANNED SUBSTITUTIONS
Before the end of 2000, we anticipate substituting shares of new
portfolios for all seven of the Market Street portfolios, all four of the
Goldman Sachs Variable Insurance Trust portfolios, and the Van Eck Worldwide
Bond Fund. We discuss certain information about the proposed substitutions
below. You should know, however, that we cannot proceed with the proposed
substitutions until we receive certain regulatory approvals, and that the
details of the substitutions, including the portfolios offered, may change.
We will notify you once the substitutions have occurred. Before the
substitutions, we will send you current prospectuses for the new fund options
including the replacement portfolios.
Below is a chart in which we list the portfolios affected by the proposed
substitutions, the replacement portfolios' investment objectives, and the
investment advisers for the replacement portfolios.
PORTFOLIOS AFFECTED BY THE SUBSTITUTIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
CURRENT PORTFOLIO REPLACEMENT PORTFOLIO REPLACEMENT PORTFOLIO'S
INVESTMENT ADVISER
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Market Street Growth Portfolio Sentinel Variable Products National Life Investment
Common Stock Fund* Management Company, Inc.
- ------------------------------------------------------------------------------------------------------
Market Street Sentinel Growth Sentinel Variable Products Mid National Life Investment
Portfolio Cap Growth Fund* Management Company, Inc.
- ------------------------------------------------------------------------------------------------------
Market Street Agressive Growth Sentinel Variable Products Small National Life Investment
Portfolio Company Fund* Management Company, Inc.
- ------------------------------------------------------------------------------------------------------
Market Street Bond Portfolio Fidelity VIP Investment Grade Fidelity Management & Research
Bond Portfolio Company
- ------------------------------------------------------------------------------------------------------
Market Street Managed Portfolio Neuberger Berman AMT Neuberger Berman Management
Balanced Portfolio Inc.
- ------------------------------------------------------------------------------------------------------
Market Street International J.P. Morgan International J.P. Morgan Investment
Portfolio Opportunities Portfolio Management, Inc.
- ------------------------------------------------------------------------------------------------------
Market Street Money Market Sentinel Variable Products National Life Investment
Portfolio Money Market Fund* Management Company, Inc.
- ------------------------------------------------------------------------------------------------------
Goldman Sachs VIT International Fidelity VIP Overseas Portfolio Fidelity Management & Research
Equity Fund Company
- ------------------------------------------------------------------------------------------------------
Goldman Sachs VIT Global Fidelity VIP Investment Grade Fidelity Management & Research
Income Fund Bond Portfolio Company
- ------------------------------------------------------------------------------------------------------
Goldman Sachs VIT CORE J.P. Morgan Small Company J.P. Morgan Investment
Small Cap Equity Fund Portfolio Management, Inc.
- ------------------------------------------------------------------------------------------------------
Goldman Sachs VIT Mid Cap American Century VP Value American Century Investment
Value Fund Portfolio Management, Inc.
- ------------------------------------------------------------------------------------------------------
Van Eck Worldwide Bond Fund Fidelity VIP Investment Grade Fidelity Management & Research
Bond Portfolio Company
- ------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------------
* A registration statement relating to these securities has been filed with the
Securities and Exchange Commission but has not yet become effective. These
securities may not be sold nor may offers to buy be accepted prior to the time
the registration statement becomes effective. When you receive the effective
prospectus for these securities from us, please read it carefully before you
invest or allocate Net Premium Payments.
ADDITIONAL FUNDS TO BE OFFERED IN THE FUTURE
National Life anticipates that at the time of the substitution referred
to in the previous paragraph, the following additional Funds or Portfolios,
in addition to those which will be receiving assets in the substitution, will
also be made available to owners of the Contracts: Alger American Leveraged
AllCap Fund, Dreyfus Socially Responsible Growth Fund, Inc., and INVESCO
Variable Investment Funds, Inc. - VIF Dynamics Fund, VIF Technology Fund, and
VIF Health Sciences Fund.
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.
National Life receives compensation from the adviser or distributor of the
Funds in connection with administration, distribution, or other services
provided with respect to the Fund and its availablity through the Contract. The
amount of this compensation with respect to the Contract during 1999, which is
based upon the indicated percentages of assets of each Fund attributable to the
Contract, is shown below.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Portfolios of the % of Assets Revenues National Life
Received During 1999
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Alger American Fund 0.10% $ 9,460.60
American Century Variable Portfolios, Inc. 0.20% 2,903.77
Goldman Sachs Variable Insurance Trust 0.20% 1,210.06
J.P. Morgan Series Trust II 0.20% 658.53
Neuberger Berman Advisers Management Trust 0.15% 359.78
Strong VIF and Opportunity Fund II 0.20% 10,457.91
Van Eck Worldwide Insurance Trust 0.15% 376.70
- -------------------------------------------------------------------------------------------
</TABLE>
These arrangements may change from time to time, and may include more Funds in
the future.
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 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.
A tax-favored arrangement, including an IRA and a Roth IRA, should
carefully consider the costs and benefits of the Contract (such as
annuitization benefits) before purchasing a Contract since the tax-favored
arrangement itself provides for tax-sheltered growth.
14
<PAGE> 23
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 28).
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.
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.
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.
15
<PAGE> 24
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 28. 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 27.
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 unloaned 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 23.
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.
16
<PAGE> 25
- 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, minus any
outstanding loans on the Contract and accrued interest on such loans.
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 Fixed Account in the same proportion that the your
interest in the Subaccounts and the unloaned value 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 20), 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.
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 with 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.
17
<PAGE> 26
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 16).
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 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.
18
<PAGE> 27
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 a 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.
Qualified Contracts (except Roth IRA's before the Owner's death) 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 minus any outstanding loans on the Contract and accrued interest, and
in each case minus any applicable premium tax charge to be assessed upon
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.
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
19
<PAGE> 28
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.
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.
20
<PAGE> 29
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
33). 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 26. 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;
21
<PAGE> 30
(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. We may also realize a
profit on one or more of these charges. We may use any profits for any corporate
purpose, including sales expenses.
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.
CONTINGENT DEFERRED SALES CHARGE
We may pay a commission up to 6.5% (7.0% 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
22
<PAGE> 31
an amount not exceeding the annual CDSC-free Withdrawal amount (see "Available
Automated Fund Management Features-Systematic Withdrawals", page 30), or by
making a Withdrawal which is part of a series of substantially equal periodic
payments over the life of the Owner or the joint lives of the Owner and his or
her spouse, to which section 72(t)(2)(A)(iv) of the Code applies. You may be
subject to a tax penalty if you take Withdrawals prior to age 59 1/2 (see
"Federal Income Tax Considerations", page 33). In New Jersey and Washington,
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 and less any outstanding loan and accrued interest, 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 under 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 unloaned portion of 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 16. 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. We would not
anticipate making a profit on any future transfer charge.
If we impose a transfer charge, we will deduct it 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
23
<PAGE> 32
Rebalancing features, transfers resulting from loans, 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.
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 33. 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 unloaned portion of 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 5.
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, you may revoke the Contract during the free look period and we will
refund Premium Payments.
24
<PAGE> 33
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.
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.
LOAN PRIVILEGE - TAX SHELTERED ANNUITIES
Subject to approval in your state, if you own a section 403(b)
Tax-Sheltered Annuity Contract, a loan provision will be available on your
Contract. Loans will be subject to the terms of the Contract and the Code.
If a loan provision is included in your Tax-Sheltered Annuity Contract,
loans will be available anytime prior to the Annuitization Date. You will be
able to borrow a minimum of $1500 (we may permit lower amounts). The maximum
loan balance which may be outstanding at any time on your Contract is 90% of the
sum of Contract Value, outstanding loans and accrued interest on loans minus the
CDSC that would apply if you surrended your Contract. In no event may the
aggregate amount borrowed from all your Tax-Sheltered Annuities or other
Qualified Contracts, including this Contract, exceed the lesser of:
(a) 50% of the combined nonforfeitable account balances of all your
Tax-Sheltered Annuities or other Qualified Contracts (or in the
case of non-ERISA Plans, $10,000 if greater); and
(b) $50,000
The $50,000 limit will be reduced by the excess (if any) of the highest loan
balances owed during the prior one-year period over the loan balance on the date
the loan is made. The highest loan balance owed during the prior one-year period
may be more than the amount outstanding at the time of the loan, if an interest
payment or prinicpal repayment has been made.
All loans will be made from the Collateral Fixed Account. When a loan is
taken an amount equal to the principal amount of the loan will be transferred to
the Collateral Fixed Account. We will transfer to the Collateral Fixed Account
an amount equaling the loan from the Subaccounts of the Variable Account and
unloaned portion of the Fixed Account in the same proportion that such amounts
bear to the total Contract Value. No CDSC is deducted at the time of the loan or
on any transfers to the Collateral Fixed Account.
Until the loan is repaid in full, that portion of the Collateral Fixed
Account equal to the outstanding loan balance shall be credited with interest at
an annual rate we declare from time to time, but will never be less than an
annual rate of 3.0%. On each Contract Anniversary and on each date that a loan
repayment is received, any amount of interest credited on the Collateral Fixed
Account will be allocated among the Fixed Account and the Subaccounts of the
Variable Account in accordance with the allocation of Net Premium Payments then
in effect.
Loans must be repaid in substantially level payments, not less
frequently than quarterly, within five years. Loans used to purchase your
principal residence must be repaid within 20 years. During the loan term, the
outstanding balance of the loan will continue to accrue interest at annual
rates specified in the loan agreement or an amendment to the loan agreement.
- the Moody's Corporate Bond Yield Average - Monthly Average
Corporates, as published by Moody's Investors Service, Inc., or its
successor, (or if that average is no longer published, a
substantially similar average), for the calendar month ending two
months before the date the rate is determined; or
- 4%.
The loan interest rate is subject to change on each Contract
Anniversary. If the loan interest rate changes, we will send you a notice of the
new loan interest rate and new level payment amount. We must reduce the loan
interest if on a Contract Anniversary the maximum loan interest rate is lower
25
<PAGE> 34
than the interest rate for the previous Contract Year by 0.50% or more. We may
increase the loan interest rate if the maximum loan interest rate is at least
0.50% higher than the loan interest rate for the previous Contract Year. The
loan interest rate we charge will be equal to or less than the maximum loan
interest rate at the time it is determined, and will never be higher than 15%.
Twenty days prior to the due date of each loan repayment, as set forth
in the loan agreement or an amendment to the loan agreement, we will send you a
notice of the amount due. Corresponding to the due date of each loan repayment,
we will establish a "billing window" defined as the period beginning on the date
that we mail the repayment notice (20 days prior to the payment due date) and
extending 31 days after the due date.
Loan repayments received within the billing window that are sufficient
to satisfy the amount due will be applied to the Contract as interest and
repayment of principal. The amounts of principal and interest set forth in the
loan agreement or an amendment to the loan agreement, are the amounts if all
loan repayments are made exactly on the due date. The actual amount of a
repayment allocated to interest will be determined based on the actual date the
repayment is received, the amount of the outstanding loan, and the number of
days since the last repayment date. The amount of principal will be the
repayment amount minus the interest. The loan principal repayment will, on the
date it is received, be allocated among the Fixed Account and Subaccounts of the
Variable Account in accordance with the allocation of Net Premium Payments then
in effect.
Loan repayments received outside of the billing window will be
processed as a repayment of principal only. Only repayments received within the
billing window may satisfy the amount due. If a payment received within the
billing window is less than the amount due, it will be returned to you.
If a loan repayment that is sufficient to satisfy the amount due is not
made within the billing window, then the entire balance of the loan will be
considered in default. This amount may be taxable to the borrower, and may be
subject to the early withdrawal tax penalty. If you are not eligible to take a
distribution pursuant to the Contract or plan provisions, the deemed
distribution will be reportable for tax purposes, but will not be offset against
the Contract Value until such time as a distribution may be made. On each
Contract Anniversary, while a loan is in default, interest accrued on loans will
be added to the outstanding loans.
If you surrender your Contract while a loan is outstanding, you will
receive the Cash Surrender Value, which is reduced to reflect the loan
outstanding plus accrued interest. If the Owner/Annuitant dies while the loan
is outstanding, the Death Benefit will also be reduced to reflect the amount of
the loan outstanding plus accrued interest. If annuity payments start while the
loan is outstanding, the Contract Value will be reduced by the amount of the
outstanding loan plus accrued interest. Until the loan is repaid, we may
restrict any transfer of the Contract which would otherwise qualify as a
transfer as permitted in the Code.
Loans may also be subject to additional limitations or restrictions
under the terms of the employer's plan. Loans permitted under this Contract may
still be taxable in whole or part if the participant has additional loans from
other plans or contracts. We will calculate the maximum nontaxable loan based on
the information provided by the participant or the employer. In addition, if
the section 403(b) Tax-Sheltered Annuity Contract is subject to the Employee
Retirement Income Security Act of 1974 ("ERISA"), a loan will be treated as a
"prohibited transaction" subject to certain penalties unless additional ERISA
requirements are satisfied. You should seek competent legal advice before
requesting a loan.
If a loan is outstanding, all payments received from you will be
considered loan repayments. Any payments received from your employer will be
considered premium payments. We reserve the right to modify the terms or
procedures associated with the loan privilege in the event of a change in the
laws or regulations relating to the treatment of loans. We also reserve the
right to assess a loan processing fee. IRA's, Non-Qualified Contracts and
Qualified Contracts other than section 403(b) Tax-Sheltered Annuity Contracts
are not eligible for loans.
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 22), any outstanding loan and accrued
interest, and, in certain states, a premium tax charge (see "Premium Taxes",
page 24). 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.
26
<PAGE> 35
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, except where the Withdrawal is part of
an automated process of paying investment advisory fees to the Owner's
investment advisor. 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 22. However, see "Available
Automated Fund Management Features-Systematic Withdrawals" page 30, for
information on a limited means of making systematic Withdrawals in the first
year free of the CDSC. Another limited way to make a Withdrawal in the first
year without paying a CDSC is to make a Withdrawal which is part of a series of
substantially equal periodic payments made for the life of the Owner or the
joint lives of the Owner and his or her spouse, under section 72(t)(2)(a)(iv)
of the Code. 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 unloaned portion of 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 unloaned
portion of 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 CDSC 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 unloaned
portion of 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 33.
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,
(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.
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, Withdrawal or loan
for up to six months after we receive a written request in a form satisfactory
to us.
27
<PAGE> 36
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 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 or make changes in
dollar costs averaging or portfolio rebalancing, and in the case of section
403(b) Tax Sheltered Annuities, take loans up to $10,000, 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
28
<PAGE> 37
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 dollar cost averaging method of investment is
designed to reduce the risk of making purchases only when the price of units is
high. 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. 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.
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
29
<PAGE> 38
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. Portfolio
rebalancing does not guarantee a profit or protect against a loss.
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 unloaned portion of 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 unloaned portion of 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 22. 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 22). 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.
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.
30
<PAGE> 39
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 which is not held in a
Collateral Fixed Account is guaranteed to accumulate at a minimum effective
annual interest rate of 3.0%. We may credit the Contract Value in the unloaned
portion of 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 unloaned portion of 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 unloaned portion of 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.
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,
31
<PAGE> 40
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.
32
<PAGE> 41
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 less any outstanding loan and accrued interest, 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,minus any Withdrawals (including any CDSC
deducted in connection with such Withdrawals), and minus any loan taken
and accrued interest thereon, in each case 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
24).
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, and any outstanding loan on the Contract and accrued interest on
such loan.
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 24.
We distribute the Enhanced Death Benefit in the same manner as the
normal Death Benefit. See "Death of Owner", page 19.
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
33
<PAGE> 42
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.
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.
34
<PAGE> 43
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 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.
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
35
<PAGE> 44
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. 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 tax-sheltered annuity.
Because the Death Benefit may exceed this limitation, employers using the
Contract in connection with such plans should consult their tax adviser.
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. For non-governmental Section 457
plans, all such investments, 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, Section
403(a) annuities and Section 403(b) 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.
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.
36
<PAGE> 45
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 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 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
37
<PAGE> 46
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.
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
38
<PAGE> 47
0.15%, the Annual Contract Fee of $30.00, the applicable CDSC, 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, 1999. The charge
works out to 0.04% 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, 1999 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
12/31/1999 12/31/1999 12/31/1999 to 12/31/99 Effective
---------- ---------- ----------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Alger American Small Capitalization 34.11% N/A N/A 23.99% 07/02/1997
Alger American Growth 24.59% N/A N/A 32.18% 07/02/1997
Fidelity VIP Fund-Equity Income -2.39% N/A N/A 7.73% 07/02/1997
Fidelity VIP Fund-Growth 28.22% N/A N/A 30.58% 07/02/1997
Fidelity VIP Fund-High Income -0.59% N/A N/A 1.40% 07/02/1997
Fidelity VIP Fund-Overseas 33.33% N/A N/A 15.38% 07/02/1997
Fidelity VIP Fund II-Index 500 11.56% N/A N/A 20.38% 07/02/1997
Fidelity VIP Fund II-Contrafund 15.25% N/A N/A 22.93% 07/02/1997
Market Street Growth -5.71% N/A N/A 6.90% 07/02/1997
Market Street Sentinel Growth 29.57% N/A N/A 23.60% 07/02/1997
Market Street Aggressive Growth 7.04% N/A N/A 9.49% 07/02/1997
Market Street Managed -7.74% N/A N/A 5.22% 07/02/1997
Market Street Bond -11.88% N/A N/A 0.94% 07/02/1997
Market Street International 20.22% N/A N/A 9.95% 07/02/1997
Market Street Money Market -3.80% N/A N/A 1.56% 07/02/1997
Strong Opportunity Fund II, Inc. 25.73% N/A N/A 21.14% 07/02/1997
Strong Mid Cap Growth Fund II 79.83% N/A N/A 47.24% 07/02/1997
Van Eck Worldwide Bond -16.32% N/A N/A -0.78% 07/02/1997
American Century VP Value -9.46% N/A N/A -3.97% 08/03/1998
American Century VP Income & Growth 9.11% N/A N/A 14.03% 08/03/1998
Goldman Sachs International Equity 22.73% N/A N/A 15.89% 08/03/1998
Goldman Sachs Global Income -9.62% N/A N/A -3.36% 08/03/1998
Goldman Sachs CORE Small Cap Equity 8.64% N/A N/A 1.36% 08/03/1998
Goldman Sachs Mid Cap Value -9.55% N/A N/A -7.58% 08/03/1998
J.P. Morgan International Opportunities 27.46% N/A N/A 15.06% 08/03/1998
J.P. Morgan Small Company 35.07% N/A N/A 22.63% 08/03/1998
Neuberger Berman AMT Partners -1.37% N/A N/A 0.58% 08/03/1998
</TABLE>
The chart below shows Standardized Average Annual Total Returns
for a Contract which does not elect the optional Enhanced Death Benefit:
<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
12/31/1999 12/31/1999 12/31/1999 to 12/31/99 Effective
---------- ---------- ----------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Alger American Small Capitalization 34.38% N/A N/A 24.24% 07/02/1997
Alger American Growth 24.84% N/A N/A 32.45% 07/02/1997
Fidelity VIP Fund-Equity Income -2.18% N/A N/A 7.95% 07/02/1997
Fidelity VIP Fund-Growth 28.49% N/A N/A 30.84% 07/02/1997
Fidelity VIP Fund-High Income -0.38% N/A N/A 1.61% 07/02/1997
Fidelity VIP Fund-Overseas 33.60% N/A N/A 15.61% 07/02/1997
Fidelity VIP Fund II-Index 500 11.80% N/A N/A 20.63% 07/02/1997
Fidelity VIP Fund II-Contrafund 15.49% N/A N/A 23.18% 07/02/1997
Market Street Growth -5.50% N/A N/A 7.13% 07/02/1997
Market Street Sentinel Growth 29.84% N/A N/A 23.85% 07/02/1997
Market Street Aggressive Growth 7.27% N/A N/A 9.72% 07/02/1997
Market Street Managed -7.54% N/A N/A 5.44% 07/02/1997
Market Street Bond -11.69% N/A N/A 1.15% 07/02/1997
Market Street International 20.47% N/A N/A 10.18% 07/02/1997
Market Street Money Market -3.59% N/A N/A 1.77% 07/02/1997
Strong Opportunity Fund II, Inc. 25.99% N/A N/A 21.38% 07/02/1997
Strong Mid Cap Growth Fund II 80.19% N/A N/A 47.53% 07/02/1997
Van Eck Worldwide Bond -16.13% N/A N/A -0.57% 07/02/1997
American Century VP Value -9.26% N/A N/A -3.76% 08/03/1998
American Century VP Income & Growth 9.34% N/A N/A 14.26% 08/03/1998
Goldman Sachs International Equity 22.98% N/A N/A 16.13% 08/03/1998
Goldman Sachs Global Income -9.42% N/A N/A -3.15% 08/03/1998
Goldman Sachs CORE Small Cap Equity 8.87% N/A N/A 1.57% 08/03/1998
Goldman Sachs Mid Cap Value -9.36% N/A N/A -7.38% 08/03/1998
J.P. Morgan International Opportunities 27.72% N/A N/A 15.29% 08/03/1998
J.P. Morgan Small Company 35.34% N/A N/A 22.88% 08/03/1998
Neuberger Berman AMT Partners -1.16% N/A N/A 0.79% 08/03/1998
</TABLE>
39
<PAGE> 48
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 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. 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, 1999. The charge works out to 0.04%
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, 1999, were:
40
<PAGE> 49
<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
12/31/99 12/31/99 12/31/99 to 12/31/99 Effective
-------- -------- -------- ------------------ ---------
<S> <C> <C> <C> <C> <C>
Alger American Small Capitalization 41.11% N/A N/A 25.43% 07/02/1997
Alger American Growth 31.59% N/A N/A 33.49% 07/02/1997
Fidelity VIP Fund-Equity Income 4.61% N/A N/A 9.50% 07/02/1997
Fidelity VIP Fund-Growth 35.22% N/A N/A 31.91% 07/02/1997
Fidelity VIP Fund-High Income 6.41% N/A N/A 3.33% 07/02/1997
Fidelity VIP Fund-Overseas 40.33% N/A N/A 16.98% 07/02/1997
Fidelity VIP Fund II-Index 500 18.56% N/A N/A 21.89% 07/02/1997
Fidelity VIP Fund II-Contrafund 22.25% N/A N/A 24.39% 07/02/1997
Market Street Growth 1.29% N/A N/A 8.69% 07/02/1997
Market Street Sentinel Growth 36.57% N/A N/A 25.04% 07/02/1997
Market Street Aggressive Growth 14.04% N/A N/A 11.22% 07/02/1997
Market Street Managed -0.73% N/A N/A 7.05% 07/02/1997
Market Street Bond -4.88% N/A N/A 2.89% 07/02/1997
Market Street International 27.22% N/A N/A 11.67% 07/02/1997
Market Street Money Market 3.20% N/A N/A 3.49% 07/02/1997
Strong Opportunity Fund II, Inc. 32.73% N/A N/A 22.62% 07/02/1997
Strong Mid Cap Growth Fund II 86.83% N/A N/A 48.35% 07/02/1997
Van Eck Worldwide Bond -9.32% N/A N/A 1.21% 07/02/1997
American Century VP Value -2.46% N/A N/A 0.32% 08/03/1998
American Century VP Income & Growth 16.11% N/A N/A 18.03% 08/03/1998
Goldman Sachs International Equity 29.73% N/A N/A 19.87% 08/03/1998
Goldman Sachs Global Income -2.62% N/A N/A 0.92% 08/03/1998
Goldman Sachs CORE Small Cap Equity 15.64% N/A N/A 5.55% 08/03/1998
Goldman Sachs Mid Cap Value -2.55% N/A N/A -3.22% 08/03/1998
J.P. Morgan International Opportunities 34.46% N/A N/A 19.05% 08/03/1998
J.P. Morgan Small Company 42.07% N/A N/A 26.52% 08/03/1998
Neuberger Berman AMT Partners 5.63% N/A N/A 4.79% 08/03/1998
</TABLE>
41
<PAGE> 50
The chart below shows 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
12/31/1999 12/31/1999 12/31/1999 to 12/31/99 Effective
----------- ---------- ----------- ------------------- ---------------
<S> <C> <C> <C> <C> <C>
Alger American Small Capitalization 41.38% N/A N/A 25.68% 07/02/1997
Alger American Growth 31.84% N/A N/A 33.75% 07/02/1997
Fidelity VIP Fund-Equity Income 4.82% N/A N/A 9.72% 07/02/1997
Fidelity VIP Fund-Growth 35.49% N/A N/A 32.17% 07/02/1997
Fidelity VIP Fund-High Income 6.62% N/A N/A 3.54% 07/02/1997
Fidelity VIP Fund-Overseas 40.60% N/A N/A 17.21% 07/02/1997
Fidelity VIP Fund II-Index 500 18.80% N/A N/A 22.13% 07/02/1997
Fidelity VIP Fund II-Contrafund 22.49% N/A N/A 24.64% 07/02/1997
Market Street Growth 1.50% N/A N/A 8.91% 07/02/1997
Market Street Sentinel Growth 36.84% N/A N/A 25.29% 07/02/1997
Market Street Aggressive Growth 14.27% N/A N/A 11.44% 07/02/1997
Market Street Managed -0.54% N/A N/A 7.26% 07/02/1997
Market Street Bond -4.69% N/A N/A 3.09% 07/02/1997
Market Street International 27.47% N/A N/A 11.89% 07/02/1997
Market Street Money Market 3.41% N/A N/A 3.69% 07/02/1997
Strong Opportunity Fund II, Inc. 32.99% N/A N/A 22.87% 07/02/1997
Strong Mid Cap Growth Fund II 87.19% N/A N/A 48.64% 07/02/1997
Van Eck Worldwide Bond -9.13% N/A N/A 1.42% 07/02/1997
American Century VP Value -2.26% N/A N/A 0.52% 08/03/1998
American Century VP Income & Growth 16.34% N/A N/A 18.26% 08/03/1998
Goldman Sachs International Equity 29.98% N/A N/A 20.11% 08/03/1998
Goldman Sachs Global Income -2.42% N/A N/A 1.12% 08/03/1998
Goldman Sachs CORE Small Cap Equity 15.87% N/A N/A 5.76% 08/03/1998
Goldman Sachs Mid Cap Value -2.36% N/A N/A -3.03% 08/03/1998
J.P. Morgan International Opportunities 34.72% N/A N/A 19.28% 08/03/1998
J.P. Morgan Small Company 42.34% N/A N/A 26.76% 08/03/1998
Neuberger Berman AMT Partners 5.84% N/A N/A 4.99% 08/03/1998
</TABLE>
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 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 average annual 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-
42
<PAGE> 51
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, 1999. The charge works out to 0.04% 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, 1999 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
12/31/99 12/31/99 12/31/99 to 12/31/99 Effective
-------- -------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Alger American Small Capitalization 41.38% 20.91% 16.54% 19.16% 09/21/1988
Alger American Growth 31.84% 29.09% 21.16% 21.33% 01/09/1989
Fidelity VIP Fund-Equity Income 4.82% 16.93% 12.87% 12.18% 10/09/1986
Fidelity VIP Fund-Growth 35.49% 27.91% 18.24% 17.09% 10/09/1986
Fidelity VIP Fund-High Income 6.62% 9.31% 10.85% 9.32% 09/19/1985
Fidelity VIP Fund-Overseas 40.60% 15.69% 9.84% 9.33% 01/28/1987
Fidelity VIP Fund II-Index 500 18.80% 26.35% N/A 19.37% 08/27/1992
Fidelity VIP Fund II-Contrafund 22.49% N/A N/A 25.95% 01/03/1995
Market Street Growth 1.50% 16.11% 10.91% 11.98% 02/24/1984
Market Street Sentinel Growth 36.84% N/A N/A 23.53% 03/18/1996
Market Street Aggressive Growth 14.27% 14.15% 12.93% 12.34% 05/01/1989
Market Street Managed -0.54% 12.08% 8.32% 8.03% 12/12/1985
Market Street Bond -4.69% 5.43% 5.09% 6.40% 02/24/1984
Market Street International 27.47% 13.02% N/A 10.03% 11/01/1991
Market Street Money Market 3.41% 3.78% 3.46% 4.41% 02/24/1984
Strong Opportunity Fund II, Inc. 32.99% 21.61% N/A 19.32% 05/08/1992
Strong Mid Cap Growth Fund II 87.19% N/A N/A 44.86% 12/31/1996
Van Eck Worldwide Bond -9.13% 3.56% 3.94% 3.83% 09/01/1989
American Century VP Value -2.26% N/A N/A 9.52% 05/01/1996
American Century VP Income & Growth 16.34% N/A N/A 22.93% 10/30/1997
Goldman Sachs International Equity 29.98% N/A N/A 24.53% 01/12/1998
Goldman Sachs Global Income -2.42% N/A N/A 2.12% 01/12/1998
Goldman Sachs CORE Small Cap Equity 15.87% N/A N/A 1.97% 02/13/1998
Goldman Sachs Mid Cap Value -2.36% N/A N/A -10.21% 05/01/1998
J.P. Morgan International Opportunities 34.72% N/A N/A 12.32% 01/03/1995
J.P. Morgan Small Company 42.34% N/A N/A 20.32% 01/03/1995
Neuberger Berman AMT Partners 5.84% 19.32% N/A 15.82% 03/22/1994
</TABLE>
<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
12/31/99 12/31/99 12/31/99 to 12/31/99 Effective
-------- -------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Alger American Small Capitalization 34.38% 20.63% 16.54% 19.16% 09/21/1988
Alger American Growth 24.84% 28.88% 21.16% 21.33% 01/09/1989
Fidelity VIP Fund-Equity Income -2.18% 16.61% 12.87% 12.18% 10/09/1986
Fidelity VIP Fund-Growth 28.49% 27.68% 18.24% 17.09% 10/09/1986
Fidelity VIP Fund-High Income -0.38% 8.89% 10.85% 9.32% 09/19/1985
Fidelity VIP Fund-Overseas 33.60% 15.36% 9.84% 9.33% 01/28/1987
Fidelity VIP Fund II-Index 500 11.80% 26.12% N/A 19.37% 08/27/1992
Fidelity VIP Fund II-Contrafund 15.49% N/A N/A 25.71% 01/03/1995
Market Street Growth -5.50% 15.78% 10.91% 11.98% 02/24/1984
Market Street Sentinel Growth 29.84% N/A N/A 22.94% 03/18/1996
Market Street Aggressive Growth 7.27% 13.80% 12.93% 12.34% 05/01/1989
Market Street Managed -7.54% 11.70% 8.32% 8.03% 12/12/1985
Market Street Bond -11.69% 4.94% 5.09% 6.40% 02/24/1984
Market Street International 20.47% 12.65% N/A 10.03% 11/01/1991
Market Street Money Market -3.59% 3.25% 3.46% 4.41% 02/24/1984
Strong Opportunity Fund II, Inc. 25.99% 21.34% N/A 19.32% 05/08/1992
Strong Mid Cap Growth Fund II 80.19% N/A N/A 44.22% 12/31/1996
Van Eck Worldwide Bond -16.13% 3.04% 3.94% 3.83% 09/01/1989
American Century VP Value -9.26% N/A N/A 8.66% 05/01/1996
American Century VP Income & Growth 9.34% N/A N/A 21.10% 10/30/1997
Goldman Sachs International Equity 22.98% N/A N/A 22.04% 01/12/1998
Goldman Sachs Global Income -9.42% N/A N/A -0.92% 01/12/1998
Goldman Sachs CORE Small Cap Equity 8.87% N/A N/A -1.22% 02/13/1998
Goldman Sachs Mid Cap Value -9.36% N/A N/A -14.13% 05/01/1998
J.P. Morgan International Opportunities 27.72% N/A N/A 11.94% 01/03/1995
J.P. Morgan Small Company 35.34% N/A N/A 20.03% 01/03/1995
Neuberger Berman AMT Partners -1.16% 19.02% N/A 15.65% 03/22/1994
</TABLE>
43
<PAGE> 52
Adjusted Historic Average Annual Total Return
(Assuming the Enhanced Death Benefit Rider is Elected
and the Contingent Deferred Sales Charge Is Not Deducted)
<TABLE>
<CAPTION>
1 Year to 5 Years to 10 Years to Life of Fund Date Fund
12/31/1999 12/31/1999 12/31/1999 to 12/31/99 Effective
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Alger American Small Capitalization 41.11% 20.67% 16.31% 18.92% 09/21/1988
Alger American Growth 31.59% 28.84% 20.92% 21.09% 01/09/1989
Fidelity VIP Fund-Equity Income 4.61% 16.70% 12.64% 11.95% 10/09/1986
Fidelity VIP Fund-Growth 35.22% 27.66% 18.00% 16.86% 10/09/1986
Fidelity VIP Fund-High Income 6.41% 9.10% 10.63% 9.10% 09/19/1985
Fidelity VIP Fund-Overseas 40.33% 15.47% 9.62% 9.11% 01/28/1987
Fidelity VIP Fund II-Index 500 18.56% 26.11% N/A 19.14% 08/27/1992
Fidelity VIP Fund II-Contrafund 22.25% N/A N/A 25.70% 01/03/1995
Market Street Growth 1.29% 15.88% 10.69% 11.76% 02/24/1984
Market Street Sentinel Growth 36.57% N/A N/A 23.29% 03/18/1996
Market Street Aggressive Growth 14.04% 13.93% 12.70% 12.11% 05/01/1989
Market Street Managed -0.73% 11.86% 8.11% 7.81% 12/12/1985
Market Street Bond -4.88% 5.22% 4.88% 6.19% 02/24/1984
Market Street International 27.22% 12.80% N/A 9.81% 11/01/1991
Market Street Money Market 3.20% 3.57% 3.26% 4.20% 02/24/1984
Strong Opportunity Fund II, Inc. 32.73% 21.38% N/A 19.08% 05/08/1992
Strong Mid Cap Growth Fund II 86.83% N/A N/A 44.58% 12/31/1996
Van Eck Worldwide Bond -9.32% 3.36% 3.73% 3.63% 09/01/1989
American Century VP Value -2.46% N/A N/A 9.31% 05/01/1996
American Century VP Income & Growth 16.11% N/A N/A 22.69% 10/30/1997
Goldman Sachs International Equity 29.73% N/A N/A 24.29% 01/12/1998
Goldman Sachs Global Income -2.62% N/A N/A 1.91% 01/12/1998
Goldman Sachs CORE Small Cap Equity 15.64% N/A N/A 1.76% 02/13/1998
Goldman Sachs Mid Cap Value -2.55% N/A N/A -10.39% 05/01/1998
J.P. Morgan International Opportunities 34.46% N/A N/A 12.10% 01/03/1995
J.P. Morgan Small Company 42.07% N/A N/A 20.09% 01/03/1995
Neuberger Berman AMT Partners 5.63% 19.08% N/A 15.59% 03/22/1994
</TABLE>
Adjusted Historic Average Annual Total Return
(Assuming the Enhanced Death Benefit Rider is Elected and
the Contingent Deferred Sales Charge Is Deducted)
<TABLE>
<CAPTION>
1 Year to 5 Years to 10 Years to Life of Fund Date Fund
12/31/1999 12/31/1999 12/31/1999 to 12/31/99 Effective
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Alger American Small Capitalization 34.11% 20.39% 16.31% 18.92% 09/21/1988
Alger American Growth 24.59% 28.62% 20.92% 21.09% 01/09/1989
Fidelity VIP Fund-Equity Income -2.39% 16.38% 12.64% 11.95% 10/09/1986
Fidelity VIP Fund-Growth 28.22% 27.43% 18.00% 16.86% 10/09/1986
Fidelity VIP Fund-High Income -0.59% 8.67% 10.63% 9.10% 09/19/1985
Fidelity VIP Fund-Overseas 33.33% 15.13% 9.62% 9.11% 01/28/1987
Fidelity VIP Fund II-Index 500 11.56% 25.87% N/A 19.14% 08/27/1992
Fidelity VIP Fund II-Contrafund 15.25% N/A N/A 25.46% 01/03/1995
Market Street Growth -5.71% 15.55% 10.69% 11.76% 02/24/1984
Market Street Sentinel Growth 29.57% N/A N/A 22.70% 03/18/1996
Market Street Aggressive Growth 7.04% 13.57% 12.70% 12.11% 05/01/1989
Market Street Managed -7.74% 11.47% 8.11% 7.81% 12/12/1985
Market Street Bond -11.88% 4.72% 4.88% 6.19% 02/24/1984
Market Street International 20.22% 12.42% N/A 9.81% 11/01/1991
Market Street Money Market -3.80% 3.04% 3.26% 4.20% 02/24/1984
Strong Opportunity Fund II, Inc. 25.73% 21.10% N/A 19.08% 05/08/1992
Strong Mid Cap Growth Fund II 79.83% N/A N/A 43.94% 12/31/1996
Van Eck Worldwide Bond -16.32% 2.82% 3.73% 3.63% 09/01/1989
American Century VP Value -9.46% N/A N/A 8.44% 05/01/1996
American Century VP Income & Growth 9.11% N/A N/A 20.86% 10/30/1997
Goldman Sachs International Equity 22.73% N/A N/A 21.79% 01/12/1998
Goldman Sachs Global Income -9.62% N/A N/A -1.13% 01/12/1998
Goldman Sachs CORE Small Cap Equity 8.64% N/A N/A -1.43% 02/13/1998
Goldman Sachs Mid Cap Value -9.55% N/A N/A -14.32% 05/01/1998
J.P. Morgan International Opportunities 27.46% N/A N/A 11.72% 01/03/1995
J.P. Morgan Small Company 35.07% N/A N/A 19.79% 01/03/1995
Neuberger Berman AMT Partners -1.37% 18.78% N/A 15.42% 03/22/1994
</TABLE>
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%.
44
<PAGE> 53
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 services for individually sold life insurance and
annuities.
FINANCIAL STATEMENTS
National Life's financial statements as of and for the years ended
December 31, 1999 and 1998, 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.
46
<PAGE> 54
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
The Company, like other life insurance companies, is involved in lawsuits,
including class action lawsuits. In some class action and other lawsuits
involving insurance companies, substantial damages have been sought and/or
material settlement payments have been made. Although the Company cannot predict
the outcome of any litigation with certainty, the Company believes that at the
present time, there are no pending or threatened lawsuits that are reasonably
likely to have a material adverse impact on it or the Variable Account. ESI is
not engaged in any litigation of any material nature.
47
<PAGE> 55
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<S> <C>
National Life Insurance Company.........................................................3
Additional Contract Provisions..........................................................3
The Contract...................................................................3
Misstatement of Age or Sex.....................................................3
Dividends......................................................................3
Assignment.....................................................................3
Calculation of Yields and Total Returns.................................................4
Money Market Subaccount........................................................4
Other Subaccounts..............................................................5
Total Returns..................................................................6
Other Total Returns............................................................7
Effect of the Annual Contract Fee on Performance Data..........................8
Tax Status of the Contracts.............................................................8
Distribution of the Contracts...........................................................9
Safekeeping of Account Assets...........................................................10
State Regulation........................................................................10
Records and Reports.....................................................................10
Legal Matters...........................................................................10
Experts 10
Other Information.......................................................................11
Financial Statements....................................................................11
Financial Statements:
National Life:
1999-1998 Financial Statements.................................................F-1
National Variable Annuity Account II:
1999 Financial Statements
</TABLE>
<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 received.
ANNUITIZATION DATE - The date on which annuity payments 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.
COLLATERAL FIXED ACCOUNT - The portion of the Fixed Account which holds value
that secures a loan on the Contract.
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, and minus any outstanding loan and accrued interest on such
loans.
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.
48
<PAGE> 57
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.
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
(IRA's) or 403(b) (Tax-Sheltered Annuities) of 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 (IRA's),
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. Separate Accumulation Units and Annuity
Units are maintained for each Subaccount.
TAX-SHELTERED ANNUITY - An annuity which qualifies for favorable tax treatment
under section 403(b) of the Code.
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.
49
<PAGE> 58
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.
50
<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, 2000 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.
May 1,2000
1
<PAGE> 63
TABLE OF CONTENTS
<TABLE>
<S> <C>
National Life Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Additional Contract Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Misstatement of Age or Sex . . . . . . . . . . . . . . . . . . . . . . . . 3
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Calculation of Yields and Total Returns . . . . . . . . . . . . . . . . . . . . . . 4
Money Market Subaccount Yields . . . . . . . . . . . . . . . . . . . . . . 4
Other Subaccount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Total Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Other Total Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Effect of the Annual Contract Fee on Performance Data . . . . . . . . . . 8
Tax Status of the Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Distribution of the Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Safekeeping of Account Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
State Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Records and Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Financial Statements: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
National Life Holding Company
National Life Insurance Company
National Variable Annuity Account II:
</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.
3
<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 range from 0% to 3.5% of premium
based on the state in which the Contract is sold.
Money Market Subaccount
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
pre-existing account 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 the base period return on a 365-day
basis, simple interest. 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, the $30 Annual Contract Fee is converted to a per
dollar per day charge. 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 pre-existing account having an initial
balance of one Subaccount unit.
ES = per unit expenses attributable to the hypothetical
account for the seven-day period.
UV = The unit value at the beginning of the seven-day period.
The effective yield of the Money Market Subaccount determined on a
compound 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 pre-existing
account having an initial balance of one Subaccount unit.
ES = per unit expenses attributable to the hypothetical
account for the seven day period.
UV = The unit value at the beginning 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,
1999 was 4.09% the effective yield for that Subaccount as of the same date was
4.18%. These yields were calculated based on the performance of the Market
Street Money Market Portfolio for the seven day period ended December 31, 1999,
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 Subaccounts
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 a 30-day or one-month period. 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
earned during the period by the Portfolio company attributable to shares owned
by the Subaccount less Subaccount expenses for the period; by (2) the maximum
offering price per Subaccount unit on the last day of the period times the
daily average daily number of Subaccount units outstanding for the period; and
3) compounding that yield for a six-month period; and then 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
theyield, the $30 Annual Contract fee is converted to a per dollar per day
charge to determine the amount of this charge attributable to the Subaccount
for the period. The yieldis calculated according to the following formula:
6
Yield = 2 x (((NI - ES)/(U x UV) + 1) -1)
Where:
NI = net investment income earned during the period by the
Portfolio company attributable to the shares owned by the
Subaccount.
ES = expenses of the Subaccount for the period.
U = the average daily number of Subaccount units outstanding
during the period.
UV = the maximum offering price per Subaccount unit on the last day
of the period. This is equivalent to the unit value at the
close of the last day in the 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
Portfolio.
The yield on the amounts held in the Subaccounts normally will
fluctuate over time. THEREFORE, THE DISCLOSED YIELD OF 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 on
amounts surrendered or withdrawn under the Contract. The Surrender Charge
ranges 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. 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, 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.
Standardized average annual total returns represent the average annual
compounded rates of return that would equate a hypothetical initial investment
of $1,000 under a Contract to the redemption value of that investment as of the
last day of the measuring period. 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 returns are calculated using
Subaccount unit values which we calculate on each Valuation Day based on the
performance of the Subaccount's underlying Portfolio and deductions for the
Mortality and Expense Risk Chargeand the Administration Charge. For purpose of
calculating average annual total returns, the $30 Annual Contract Fee is
converted to a per dollar per day charge to determine the amount of this
charge attributable to the Subaccount for the period. 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 is calculated according to the following formula:
1/N
-TR=(ERV/P) -1
Where:
TR = the average annual total return net of recurring
Subaccount charges.
ERV= the ending redeemable value (net of any applicable
surrender charge) of the hypothetical investment 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 returns are reported only for
periods during which a given Subaccount was available in the Contract.
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
Standardized average annual total returns as of December 31, 1999 are
shown 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.
Nonstandardized average annual total returns as of December 31, 1999 are shown
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 recurring Subaccount
charges for the period.
ERV = The ending redeemable value of the hypothetical investment
at the end of the period.
P = A hypothetical initial 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 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, Goldman Sachs Variable Insurance Trust,
and Van Eck Global Worldwide Insurance Trust are not affiliated with us.
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 average Accumulated Value in the Contracts as of
December 31, 1999. The charge works out to be 0.04% 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 underwriting commissions of
$4,862,631, $2,382,082, and $691,647 in 1999, 1998, and 1997 respectively, and
retained $4,201,190, $2,206,648, and $674,055 in 1999, 1998, and 1997
respectively.
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, 1999 and 1998, and the financial statements of the
Variable Account as of and for the years ended December 31, 1999 and 1998, 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 - 4th 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
-UNAUDITED-
- --------------------------------------------------------------------------------
On January 1, 1999, National Life Insurance Company (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, a mutual insurance
holding company created for this purpose. Policyholders of National Life with
policies issued after December 31, 1998 also become members of National Life
Holding Company.
As part of this reorganization, National Life established and began operating a
closed block (the Closed Block) on January 1, 1999. The Closed Block was
established pursuant to regulatory requirements as part of the reorganization,
and was established for the benefit of policyholders of participating policies
inforce at December 31, 1998. Notes 2, 11 and 13 of National Life's financial
statements provide additional information about the Closed Block.
Under current accounting guidance, National Life's assets, liabilities, pre-tax
net income and cash flows associated with the Closed Block were reclassified
into single line net presentations within National Life Insurance Company and
Subsidiaries' financial statements, and excluded from many of the disclosures
contained in the corresponding notes to those financial statements.
The American Institute of Certified Public Accountants has proposed changes to
the accounting treatment for Closed Blocks. Included in the proposal is the
presentation of Closed Block assets, liabilities, pre-tax net income and cash
flows in their normal categories, instead of the current single line net
presentations. It is currently anticipated that this proposal will be adopted
retroactively for all presented periods beginning with December 31, 2000
reporting.
Management of National Life has therefore elected to also include consolidated
financial statements prepared at the National Life Holding Company level. These
financial statements do not reflect the closed block single line net
presentation, and therefore should provide more comparable year to year
information for the reader.
- --------------------------------------------------------------------------------
F-1
<PAGE> 73
NATIONAL LIFE GROUP
* * * * *
FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1999 AND 1998
F-2
<PAGE> 74
[PRICEWATERHOUSECOOPERS LLP LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Members of
National Life Holding 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 Holding Company and its subsidiaries (the National
Life Group) at December 31, 1999 and 1998, and the results of their operations
and their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of National Life Group'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 auditing standards
generally accepted in the United States 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 13 to the financial statements, 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. Members'
voting and liquidation rights in National Life were transferred to National Life
Holding Company as part of this reorganization.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 10, 2000
F-3
<PAGE> 75
NATIONAL LIFE GROUP
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
- -----------------------------------------------------------------------------------------------------
(In Thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 296,468 $ 347,949
Available-for-sale debt and equity securities 5,110,272 5,438,784
Trading equity securities 11,793 -
Mortgage loans 1,162,956 1,098,504
Policy loans 761,235 776,363
Real estate investments 86,003 75,566
Other invested assets 150,963 113,696
- -----------------------------------------------------------------------------------------------------
Total cash and invested assets 7,579,690 7,850,862
Deferred policy acquisition costs 538,127 416,733
Accrued investment income 118,273 119,249
Premiums and fees receivable 22,033 21,044
Deferred income taxes 101,183 21,541
Amounts recoverable from reinsurers 302,607 253,651
Present value of future profits of insurance acquired 113,851 45,539
Property and equipment, net 45,609 59,503
Other assets 130,081 133,702
Separate account assets 404,030 283,948
- -----------------------------------------------------------------------------------------------------
Total assets $ 9,355,484 $ 9,205,772
=====================================================================================================
LIABILITIES:
Policy benefit liabilities $ 4,039,966 $ 3,907,114
Policyholders' accounts 3,503,328 3,348,132
Policyholders' deposits 46,189 38,520
Policy claims payable 39,262 31,900
Policyholders' dividends 53,552 54,757
Amounts payable to reinsurers 19,213 35,481
Collateral held on loaned securities 115,524 193,491
Other liabilities and accrued expenses 274,172 307,036
Debt 76,092 78,088
Separate account liabilities 400,867 264,421
- -----------------------------------------------------------------------------------------------------
Total liabilities 8,568,165 8,258,940
- -----------------------------------------------------------------------------------------------------
MINORITY INTERESTS 12,331 64,529
EQUITY:
Retained earnings 832,688 776,060
Accumulated other comprehensive (loss) income (57,700) 106,243
- -----------------------------------------------------------------------------------------------------
Total equity 774,988 882,303
- -----------------------------------------------------------------------------------------------------
Total liabilities, minority interests and equity $ 9,355,484 $ 9,205,772
=====================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 76
NATIONAL LIFE GROUP
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------
(In Thousands) 1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Insurance premiums $ 383,395 $ 386,260
Policy and contract charges 54,624 48,463
Net investment income 565,818 550,339
Net investment gains 3,140 8,450
Mutual fund commission and fee income 56,232 49,670
Other income 19,847 17,271
- -----------------------------------------------------------------------------------------
Total revenues 1,083,056 1,060,453
- -----------------------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Increase in policy liabilities 112,923 98,252
Policy benefits 330,334 346,779
Policyholders' dividends 106,858 107,102
Interest credited to policyholders' accounts 207,736 208,505
Operating expenses 164,899 141,242
Sales practice remediation costs - 40,575
Policy acquisition expenses, net 76,862 90,323
- -----------------------------------------------------------------------------------------
Total benefits and expenses 999,612 1,032,778
- -----------------------------------------------------------------------------------------
Income before income taxes and minority interests 83,444 27,675
Income tax expense (benefit) 17,380 (1,020)
- -----------------------------------------------------------------------------------------
Income before minority interests 66,064 28,695
Minority interests 9,436 8,507
- -----------------------------------------------------------------------------------------
NET INCOME 56,628 20,188
OTHER COMPREHENSIVE INCOME, NET
Unrealized (losses) gains on securities, net (163,943) 21,226
- -----------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE (LOSS) INCOME $ (107,315) $ 41,414
=========================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 77
NATIONAL LIFE GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------
(In Thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
RETAINED EARNINGS:
Balance at January 1 $ 776,060 $ 755,872
Net income 56,628 20,188
- -----------------------------------------------------------------------------------------------------
Balance at December 31 $ 832,688 $ 776,060
=====================================================================================================
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME:
Balance at January 1 $ 106,243 $ 85,017
Unrealized (losses) gains on available-for-sale securities, net (163,943) 21,226
- -----------------------------------------------------------------------------------------------------
Balance at December 31 $ (57,700) $ 106,243
=====================================================================================================
TOTAL EQUITY:
Balance at December 31 $ 774,988 $ 882,303
=====================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 78
NATIONAL LIFE GROUP
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------
(In Thousands) 1999 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 56,628 $ 20,188
Adjustments to reconcile net income to net cash provided by operations:
Change in:
Accrued investment income 976 6,541
Policy liabilities 82,699 87,367
Deferred policy acquisition costs (36,857) (7,580)
Policyholders' dividends (1,205) 1,362
Deferred income taxes 9,883 (13,330)
Net investment gains (3,140) (8,450)
Depreciation 7,339 6,977
Other 4,767 12,714
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 121,090 105,789
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales, maturities and repayments of investments 1,576,457 2,020,526
Cost of investments acquired (1,778,511) (2,236,001)
Acquisition of remaining interest in LSWNH, Inc. (61,632) -
Other 14,788 14,656
- --------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (248,898) (200,819)
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' deposits, including interest credited 579,795 563,606
Policyholders' withdrawals, including policy charges (424,599) (452,184)
Net decrease in borrowings under repurchase agreements - (234,570)
Net (decrease) increase in securities lending liabilities (77,967) 173,726
Other (902) 20,221
- --------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 76,327 70,799
- --------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (51,481) (24,231)
CASH AND CASH EQUIVALENTS:
Beginning of year 347,949 372,180
- --------------------------------------------------------------------------------------------------------------
End of year $ 296,468 $ 347,949
==============================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 79
NATIONAL LIFE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
National Life Holding Company and its subsidiaries and affiliates (the National
Life Group) offer a broad range of financial products and services, including
life insurance, annuities, disability income insurance, mutual funds, and
investment advisory and administration services. The flagship company of the
organization, National Life Insurance Company (National Life), was chartered in
1848, and is also known by its registered trade name "National Life of Vermont".
National Life Group employs about 900 people, primarily concentrated in
Montpelier, Vermont and Dallas, Texas. On January 1, 1999, pursuant to a mutual
holding company reorganization, National Life converted from a mutual to a stock
life insurance company. All of National Life's outstanding shares are currently
held by its parent, NLV Financial Corp, which is the wholly-owned subsidiary of
National Life Holding Company. See Note 13 for more information.
The insurance operations within National Life Group develop and distribute
individual life insurance and annuity products. National Life Group markets this
diverse product portfolio to small business owners, professionals and other
middle to upper income individuals. National Life Group provides financial
solutions in the form of estate, business succession and retirement planning,
deferred compensation and other key executive fringe benefit plans, and asset
management. Insurance and annuity products are primarily distributed through
about 32 general agencies in major metropolitan areas, a system of managing
general agents, and independent brokers throughout the United States. National
Life Group has in excess of 300,000 policyholders and through its member
companies is licensed to do business in all 50 states and the District of
Columbia. About 26% of National Life Group's total collected premiums and
deposits are from residents of New York and California.
Members of the National Life Group also distribute and provide investment
advisory and administrative services to the Sentinel Group Funds, Inc. The
Sentinel Funds' $3.1 billion of net assets represent fourteen mutual funds
managed on behalf of about 117,000 individual, corporate and institutional
shareholders worldwide.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements of National Life Group have
been prepared in conformity with accounting principles generally accepted in the
United States (GAAP).
The consolidated financial statements include the accounts of National Life
Group, which consists of National Life HoIding Company and its subsidiaries. All
significant intercompany transactions and balances have been eliminated in
consolidation. Certain reclassifications have been made to conform prior periods
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.
F-8
<PAGE> 80
Available-for-sale and trading debt 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 net investment losses.
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 investment 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.
Investments in joint ventures and limited partnerships are generally carried at
cost.
Net realized investment gains and losses are recognized using the specific
identification method and are reported as net investment gains and losses.
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. Changes in the fair value of
trading equity securities are reflected in net investment gains and losses.
POLICY ACQUISITION EXPENSES
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 other comprehensive income, net of related income
taxes.
Deferred policy acquisition costs for non-participating term life insurance and
disability income insurance are 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.
GOODWILL
Goodwill is amortized over 20 years using the straight line method and is
periodically evaluated for recoverability.
F-9
<PAGE> 81
PROPERTY AND EQUIPMENT
Property and equipment is reported at depreciated cost. Real property is
primarily depreciated over 39.5 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.
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. See additional information below
on dividends on contracts within the Closed Block.
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.
F-10
<PAGE> 82
FEDERAL INCOME TAXES
National Life Holding Company will file a consolidated tax return for the tax
year ended December 31, 1999. The income tax return will include all members
within the National Life Group except Life Insurance Company of the Southwest
(LSW) and Insurance Investors Life Insurance Company (IIL). LSW and IIL will
file a separate tax return due to tax regulatory requirements. 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.
MINORITY INTERESTS
Minority interests at December 31, 1999 represent minority partners interests in
entities within the National Life Group. Minority interests attributable to
common stockholders are carried on the equity method. Those attributable to
preferred stockholders are carried on the cost method, with dividends paid
reflected as minority interests within the consolidated financial statements.
CLOSED BLOCK
National Life established and began operating a closed block (the Closed Block)
on January 1, 1999. The Closed Block was established pursuant to regulatory
requirements as part of the reorganization into a mutual holding company
corporate structure. This Closed Block was established for the benefit of
policyholders of participating policies inforce at December 31, 1998. Included
in the block are traditional dividend paying life insurance policies, certain
participating term insurance policies, dividend paying flex premium annuities,
and other related liabilities. The Closed Block was established to protect the
policy dividend expectations related to these policies. The Closed Block is
expected to remain in effect until all policies within the Closed Block are no
longer inforce. Assets assigned to the Closed Block at January 1, 1999, together
with projected future premiums and investment returns, are reasonably expected
to be sufficient to pay out all future Closed Block policy benefits. Such
benefits include dividends paid out under the current dividend scale, adjusted
to reflect future changes in the underlying experience. See Note 11 for
additional information on the Closed Block's financial position and results of
operations.
F-11
<PAGE> 83
NOTE 3 - INVESTMENTS
DEBT AND EQUITY SECURITIES
The amortized cost and estimated fair values of available-for-sale debt and
equity securities at December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated Fair
1999 Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale (AFS) debt and equity
securities:
U.S. government obligations $ 281,194 $ 3,232 $ 19,020 $ 265,406
Government agencies, authorities
and subdivisions 118,459 4,010 3,100 119,369
Public utilities 380,253 10,687 17,275 373,665
Corporate 2,462,499 23,937 94,932 2,391,504
Private placements 735,597 9,818 30,172 715,243
Mortgage-backed securities 1,112,382 2,432 37,065 1,077,749
- ------------------------------------------------------------------------------------------------------------------------
Total AFS debt securities 5,090,384 54,116 201,564 4,942,936
Preferred stocks 134,852 2,708 8,109 129,451
Common stocks 33,032 7,169 2,316 37,885
- ------------------------------------------------------------------------------------------------------------------------
Total AFS debt and equity
securities $ 5,258,268 $ 63,993 $ 211,989 $ 5,110,272
========================================================================================================================
<CAPTION>
1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AFS debt and equity securities:
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
========================================================================================================================
</TABLE>
F-12
<PAGE> 84
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>
1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net unrealized (losses) gains on available-for-sale securities $ (399,066) $ 20,136
Net unrealized (losses) gains on separate accounts (2,652) 1,543
Related minority interests 8,672 (1,786)
Related deferred policy acquisition costs 116,725 17,139
Related present value of future profits of insurance acquired 16,353 (3,048)
Related deferred income taxes 96,025 (12,758)
- -------------------------------------------------------------------------------------------------------------
(Decrease) increase in net unrealized gains (163,943) 21,226
Balance, beginning of year 106,243 85,017
- -------------------------------------------------------------------------------------------------------------
Balance, end of year $ (57,700) $ 106,243
=============================================================================================================
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, end of year includes:
Net unrealized (losses) gains on available-for-sale securities $ (147,996) $ 251,070
Net unrealized gains on separate accounts 3,163 5,815
Related minority interests - (8,672)
Related deferred policy acquisition costs 39,186 (77,539)
Related present value of future profits on insurance acquired 14,806 (1,547)
Related deferred income taxes 33,141 (62,884)
- -------------------------------------------------------------------------------------------------------------
Balance, end of year $ (57,700) $ 106,243
=============================================================================================================
</TABLE>
Net other comprehensive (loss) income for 1999 and 1998 of $(163.9) million and
$21.2 million is presented net of reclassifications to net income for gross
gains realized during the period of $13.9 million and $9.0 million and net of
tax and deferred acquisition cost offsets of $9.4 million and $6.6 million,
respectively.
The amortized cost and estimated fair values of debt securities by contractual
maturity at December 31, 1999 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 $ 125,445 $ 125,798
Due after one year through five years 1,386,200 1,355,240
Due after five years through ten years 1,607,586 1,545,609
Due after ten years 858,770 838,540
Mortgage-backed securities 1,112,383 1,077,749
- --------------------------------------------------------------------------------------------------------------
Total $ 5,090,384 $ 4,942,936
==============================================================================================================
</TABLE>
Information relating to available-for-sale debt security sale transactions for
the years ended December 31 is shown below (in thousands):
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Proceeds from sales $ 921,594 $ 1,167,190
Gross realized gains $ 40,496 $ 22,969
Gross realized losses $ 24,312 $ 16,578
</TABLE>
F-13
<PAGE> 85
On January 1, 1999, National Life Group reclassified certain mutual fund
investments from an available-for-sale to a trading classification. The
cumulative gross unrealized gain reclassified into net investment gains was $0.6
million. For the year ended December 31, 1999, these securities recorded $0.9
million net investment income and $(0.5) million investment losses. Cost of
trading securities held at December 31, 1999 was $12.1 million. National Life
Group held no securities classified as trading prior to January 1, 1999.
National Life Group 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 were $115.5 million and $193.5 million at December 31, 1999 and
1998, respectively.
National Life Group 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, 1999 or 1998.
MORTGAGE LOANS AND REAL ESTATE
The distributions of mortgage loans and real estate at December 31 were as
follows:
<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
<S> <C> <C>
GEOGRAPHIC REGION
- -----------------
New England 5.4% 3.8%
Middle Atlantic 9.1 9.7
East North Central 10.1 9.3
West North Central 5.4 4.5
South Atlantic 24.7 25.7
East South Central 5.6 5.0
West South Central 10.1 10.3
Mountain 15.9 17.7
Pacific 13.7 14.0
- ----------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0%
======================================================================================================================
PROPERTY TYPE
- -------------
Residential 0.1% 0.2%
Apartment 24.6 24.2
Retail 11.0 12.2
Office Building 34.9 35.0
Industrial 26.4 26.2
Hotel/Motel 1.8 0.8
Other Commercial 1.2 1.4
- ----------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0%
======================================================================================================================
Total mortgage loans and real estate
(in thousands) $ 1,248,959 $ 1,174,070
======================================================================================================================
</TABLE>
F-14
<PAGE> 86
Mortgage loans and related valuation allowances at December 31 were as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unimpaired loans $ 1,148,526 $ 1,077,637
Impaired loans without valuation allowances 6,943 11,757
- -----------------------------------------------------------------------------------------------------------------
Subtotal 1,155,469 1,089,394
- -----------------------------------------------------------------------------------------------------------------
Impaired loans with valuation allowances 10,600 10,244
Related valuation allowances (3,113) (1,134)
- -----------------------------------------------------------------------------------------------------------------
Subtotal 7,487 9,110
- -----------------------------------------------------------------------------------------------------------------
Total $ 1,162,956 $ 1,098,504
=================================================================================================================
Impaired loans:
Average recorded investment $ 19,771 $ 27,755
Interest income recognized $ 2,137 $ 3,124
Interest received $ 2,092 $ 2,818
</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>
1999 1998
===================================================================================================
<S> <C> <C>
Additions for impaired loans charged to realized losses $ 1,993 $ 1,564
Impairment losses charged to valuation allowances - (2,217)
Changes to previously established valuation allowances (14) (2,642)
- ---------------------------------------------------------------------------------------------------
Increase/decrease in valuation allowances 1,979 (3,295)
Balance, beginning of year 1,134 4,429
- ---------------------------------------------------------------------------------------------------
Balance, end of year $ 3,113 $ 1,134
===================================================================================================
</TABLE>
NET INVESTMENT INCOME
The components of net investment income for the years ended December 31 were as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Debt securities interest $ 404,195 $ 405,184
Equity securities dividends 2,385 6,380
Mortgage loan interest 94,258 90,991
Policy loan interest 46,393 47,189
Real estate income 11,698 12,802
Other investment income 29,943 12,363
- ------------------------------------------------------------------------------------------------------------------
Gross investment income 588,872 574,909
Less: investment expenses 23,054 24,570
- ------------------------------------------------------------------------------------------------------------------
Net investment income $ 565,818 $ 550,339
==================================================================================================================
</TABLE>
DERIVATIVES
National Life Group 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
F-15
<PAGE> 87
increases in equity indexed product account values. When the S&P 500 index
decreases, National Life Group's loss is the decrease in the fair value of
futures and is limited to the premium paid for the options.
National Life Group purchases options only from highly rated counterparties.
However, in the event a counterparty failed to perform, National Life Group'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>
1999 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Notional amounts:
Options $ 166,858 $ 79,754
Futures $ 5,439 $ 28,835
================================================================================================
Book values:
Options: Net amortized cost $ 17,800 $ 5,514
Intrinsic value 18,894 18,953
- ------------------------------------------------------------------------------------------------
Book value 36,694 24,467
Futures at fair value 890 463
- ------------------------------------------------------------------------------------------------
Net book value (included in other invested assets) $ 37,584 $ 24,930
================================================================================================
</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>
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 296,468 $ 296,468 $ 347,949 $ 347,949
Available-for-sale debt and equity securities 5,110,272 5,110,272 5,438,784 5,438,784
Trading equity securities 11,793 11,793 - -
Mortgage loans 1,162,956 1,177,342 1,098,504 1,180,630
Policy loans 761,235 724,953 776,363 743,687
Derivatives 37,584 35,528 24,930 28,496
Investment products 2,770,295 2,740,443 2,507,012 2,522,940
Debt 76,092 62,615 78,088 75,141
</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).
F-16
<PAGE> 88
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).
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 Group reinsures certain risks assumed in the normal course of
business. For individual life products, National Life Group 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 agreements.
Disability income products are significantly reinsured under coinsurance and
modified coinsurance agreements.
National Life Group remains liable in the event any reinsurer is unable to meet
its assumed obligations. National Life Group 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.
Transactions between the open and Closed Block (see Notes 11 and 13) have been
excluded from the following schedule.
The effects of reinsurance for the years ended December 31 were as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Insurance premiums:
Direct premiums $ 439,562 $ 453,859
Reinsurance assumed 4,731 898
Reinsurance ceded (60,898) (68,497)
- -----------------------------------------------------------------------------------------------------------
$ 383,395 $ 386,260
===========================================================================================================
Other income:
Direct $ 6,960 $ 3,694
Reinsurance ceded 12,887 13,577
- -----------------------------------------------------------------------------------------------------------
$ 19,847 $ 17,271
===========================================================================================================
Increase in policy liabilities:
Direct increase in policy liabilities $ 129,448 $ 94,949
Reinsurance assumed - (4)
Reinsurance ceded (16,525) 3,307
- -----------------------------------------------------------------------------------------------------------
$ 112,923 $ 98,252
===========================================================================================================
</TABLE>
F-17
<PAGE> 89
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Policy benefits:
Direct policy benefits $ 393,216 $ 416,919
Reinsurance assumed (2,479) 1,286
Reinsurance ceded (60,403) (71,426)
- -----------------------------------------------------------------------------------------------------------
$ 330,334 $ 346,779
===========================================================================================================
Policyholders' dividends:
Direct policyholders' dividends $ 110,793 $ 110,630
Reinsurance ceded (3,935) (3,528)
- -----------------------------------------------------------------------------------------------------------
$ 106,858 $ 107,102
===========================================================================================================
</TABLE>
NOTE 5 - DEFERRED POLICY ACQUISITION COSTS
The following reflects the changes in the deferred policy acquisition costs
asset (in thousands):
<TABLE>
<CAPTION>
1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of year $ 416,733 $ 392,014
Acquisition costs deferred 73,648 57,318
Amortization to expense during the year (36,791) (49,738)
Adjustment to equity during the year 116,725 17,139
Purchase GAAP effect on purchase of LSWNH (Note 12) (32,188) -
- ---------------------------------------------------------------------------------------------------
Balance, end of year $ 538,127 $ 416,733
===================================================================================================
</TABLE>
NOTE 6 - FEDERAL INCOME TAXES
The components of federal income taxes and a reconciliation of the expected and
actual federal income taxes and income tax rates for the years ended December 31
were as follows ($ in thousands):
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current $ 7,497 $ 17,144
Deferred 9,883 (18,164)
- ------------------------------------------------------------------- --------------------
Income taxes $ 17,380 $ (1,020)
=================================================================== ====================
Expected income taxes $ 29,206 35.0% $ 9,686 35.0%
Differential earnings amount (2,058) (2.5) (7,953) (28.7)
Affordable housing tax credit (6,509) (7.8) (6,638) (24.0)
Net change in tax reserves 2,033 2.4 5,035 18.2
Other, net (5,292) (6.3) (1,150) (4.2)
- ----------------------------------------------------------------------------------------------------------------------------------
Income taxes $ 17,380 $ (1,020)
=================================================================== ====================
Effective federal income tax rate 20.8% (3.7)%
==================================================== ===================== =====================
</TABLE>
National Life Group received net federal income tax refunds of $9.4 million in
1999 and paid federal income taxes of $13.3 million in 1998.
F-18
<PAGE> 90
Components of net deferred income tax assets at December 31 were as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets:
Net unrealized loss on available-for-sale securities $ 33,141 -
Debt and equity securities 15,456 -
Policy liabilities 179,008 $ 185,294
Other liabilities and accrued expenses 51,609 67,291
Other 490 4,761
- --------------------------------------------------------------------------------------------------------------------------
Total deferred income tax assets 279,704 257,346
- --------------------------------------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Deferred policy acquisition costs 125,842 126,380
Present value of future profits of insurance acquired 37,908 17,683
Net unrealized gain on available-for-sale securities - 62,884
Debt and equity securities - 16,947
Other 14,771 11,911
- --------------------------------------------------------------------------------------------------------------------------
Total deferred income tax liabilities 178,521 235,805
- --------------------------------------------------------------------------------------------------------------------------
Net deferred income tax assets $ 101,183 $ 21,541
==========================================================================================================================
</TABLE>
Management believes it is more likely than not that National Life Group 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 National Life's tax returns through 1995 and is currently
examining the years 1996 - 1998. In management's opinion adequate tax
liabilities have been established for all open years.
NOTE 7 - 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 a group 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 Group
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. Some of the plan participants
elected to defer their lump sum payouts until 1998, which also deferred
recognition of the related settlement gain until 1998.
F-19
<PAGE> 91
The status of the defined benefit plans at December 31 was as follows (in
thousands):
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
----------------------------------------------------------------------
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, beginning of year $ 189,524 $ 162,986 $ 27,883 $ 24,759
Service cost (benefits earned during the current period) 4,194 2,849 581 547
Interest cost on benefit obligation 12,260 11,430 1,876 1,699
Actuarial (gains) losses (26,832) 34,444 (3,937) 1,939
Benefits paid (12,002) (22,185) (1,170) (1,061)
- ----------------------------------------------------------------------------------------------------------------------------------
Benefit obligation, end of year $ 167,144 $ 189,524 $ 25,233 $ 27,883
==================================================================================================================================
CHANGE IN PLAN ASSETS:
Plan assets, beginning of year $ 100,045 $ 108,884
Actual return on plan assets 9,952 7,200
Benefits paid (5,747) (16,039)
- ------------------------------------------------------------------------------------------------
Plan assets, end of year $ 104,250 $ 100,045
================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------------------------------------------------------------
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FUNDED STATUS:
Benefit obligation $ 167,144 $ 189,524 $ 25,233 $ 27,883
Plan assets (104,250) (100,045)
- -------------------------------------------------------------------------------------------------------------------------------
Benefit obligation in excess of plan assets 62,894 89,479 25,233 27,883
Unrecognized actuarial gains (losses) 18,309 (11,259) 6,397 2,526
Unrecognized prior service cost (1,080) (1,152)
---------------------------------------------------------------------
Accrued benefit cost at September 30 81,203 78,220 30,550 29,257
Payments subsequent to measurement date (1,638) (1,518)
- -------------------------------------------------------------------------------------------------------------------------------
Accrued benefit cost at December 31 $ 79,565 $ 76,702 $ 30,550 $ 29,257
===============================================================================================================================
</TABLE>
The components of net periodic benefit cost for the years ended December 31 were
as follows (in thousands):
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
-------------------------------------------------------------------
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost (benefits earned during the current period) $ 4,194 $ 2,849 $ 581 $ 547
Interest cost on benefit obligation 12,260 11,430 1,876 1,699
Expected return on plan assets (8,745) (9,078)
Net amortization and deferrals 281 (1,167) (66) (83)
Amortization of prior service cost 72 72
Settlement gains from 1997 early retirement program (3,131)
- -----------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost (included in operating
expenses) $ 7,990 $ 903 $ 2,463 $ 2,235
=============================================================================================================================
</TABLE>
The total projected benefit obligation for non-qualified defined benefit pension
plans was $70.9 million and $81.4 million at December 31, 1999 and 1998,
respectively. The total accumulated benefit obligation (APBO) for these plans
was $67.7 million and $75.2 million at December 31, 1999 and 1998, respectively.
The actuarial assumptions used in determining benefit obligations at December
31, were as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
--------------------------------------------------------------------
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate 7.75% 6.75% 7.75% 6.75%
Rate of increase in future compensation levels 6.00% 5.00%
Expected long term return on plan assets 9.00% 9.00%
</TABLE>
F-20
<PAGE> 92
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 $2.4 million and the 1999
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 $2.0 million and
the 1999 service and interest cost components of net periodic postretirement
benefit cost by about $0.1 million. National Life Group 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. Employees below specified levels of
compensation also receive a foundation contribution of 1.5% of compensation.
Additional employee voluntary contributions may be made to the plans up to a set
maximum. Vesting and withdrawal privilege schedules are attached to the
Company's contributions.
National Life also provides a 401(k) plan for it's regular full-time agents
whereby accumulated funds may be invested by the agent in a group annuity
contract with National Life or in mutual funds sponsored by an affiliate of
National Life. Total annual contributions can not exceed certain limits that
vary based on total agent compensation. No National Life contributions are made
to the plan.
Life Insurance Company of the Southwest (LSW), an indirectly held wholly-owned
subsidiary of National Life, provides a 401(k) to its employees. Additional
voluntary employee contributions may be made to the plan subject to certain
limits. LSW's contributions to these plans generally vest within two years.
NOTE 8 - DEBT
Debt consists of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
8.25% Surplus Notes: $ 69,692 $ 69,688
$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: 6,400 8,400
$6.4 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 $ 76,092 $ 78,088
===========================================================================================================================
</TABLE>
The aggregate annual scheduled maturities of debt for the next five years are as
follows (in thousands):
2000 2,000
2001 2,000
2002 2,400
2003 -
2004 -
F-21
<PAGE> 93
Interest paid was $6.3 million and $6.2 million in 1999 and 1998, respectively.
NOTE 9 - CONTINGENCIES
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. Qualifying members may also
opt out of the class action and pursue litigation separately against National
Life. Most of the alternative dispute resolution cases were settled by December
31, 1999. Management believes that while the ultimate cost of this litigation
(including those opting out of the class action) is still uncertain, it is
unlikely, after considering existing provisions, to have a material adverse
effect on National Life's financial position.
In late 1999, two lawsuits were filed against National Life and the State of
Vermont in Vermont related to National Life's conversion to a mutual holding
company structure. National Life and the State of Vermont specifically deny any
wrongdoing and intend to defend these cases vigorously. In the opinion of
National Life Group's management, based on advice from legal counsel, the
ultimate resolution of these lawsuits will not have a material effect on
National Life Group's financial position. However, liabilities related to these
lawsuits could be established in the near term if estimates of the ultimate
resolution of these proceedings are revised.
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 was originally effective for fiscal years beginning after June 15,
1999. In June, 1999 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133 (FAS 137). FAS 137 requires the application of FAS 133 for fiscal years
beginning after June 15, 2000. National Life Group is currently assessing the
impact of the adoption of FAS 133.
NOTE 11 - CLOSED BLOCK
Included within the financial statement categories in the 1999 Consolidated
Statement of Operations and Comprehensive Income is a net pre-tax contribution
from the Closed Block of $24.4 million. The Closed Block was established on
January 1, 1999 as part of the conversion to a mutual holding company corporate
structure (see Note 13). Summarized financial information for the Closed Block
effects included in the consolidated financial statements as of December 31,
1999 and for the year then ended is as follows (in thousands):
F-22
<PAGE> 94
<TABLE>
<CAPTION>
1999
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Cash and cash equivalents $ 122,982
Available-for-sale debt securities (amortized cost of $1,800.1 million) 1,771,494
Mortgage loans 380,986
Policy loans 640,490
Accrued investment income 53,387
Premiums and fees receivable 18,864
Deferred policy acquisition costs 312,588
Other assets 123,690
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $3,424,481
=================================================================================================================================
LIABILITIES:
Policy liabilities and accruals $3,629,560
Other liabilities 69,186
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities $3,698,746
=================================================================================================================================
<CAPTION>
1999
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C>
REVENUES:
Premiums and other income $ 325,445
Net investment income 216,432
Realized investment gain 8,720
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenues 550,597
- ---------------------------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Increase in policy liabilities 66,324
Policy benefits 283,598
Policyholders' dividends 107,941
Interest credited to policyholders' accounts 13,294
Operating expenses 17,407
Policy acquisition expenses, net 37,662
- ---------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 526,226
- ---------------------------------------------------------------------------------------------------------------------------------
Pre-tax contribution from the Closed Block $ 24,371
=================================================================================================================================
</TABLE>
There were no mortgage valuation allowances on Closed Block mortgage loans at
December 31, 1999. Many expenses related to Closed Block operations are charged
to operations outside the Closed Block; accordingly, the contribution from the
Closed Block does not represent the actual profitability of the Closed Block
operations. Operating costs and expenses outside the Closed Block are therefore
disproportionate to the actual business outside the Closed Block.
F-23
<PAGE> 95
NOTE 12 - ACQUISITION
On July 2, 1999, National Life Group acquired the outstanding one-third interest
in LSW National Holdings, Inc., (LSWNH) the parent of Dallas, Texas-based Life
Insurance Company of the Southwest (LSW), a financial services company
specializing in the sale of annuities. National Life Group had previously
purchased a two-thirds interest in the company in February, 1996.
The purchase price was $61.6 million in cash. Purchasing the remaining one-third
interest eliminated the ongoing provision for minority interests for the last
six months of 1999. The effect of the cash purchase on the consolidated
financial statements was to reduce minority interests by $39.7 million and
record net purchase GAAP adjustments of $21.9 million, which included intangible
assets for the present value of future profits of insurance acquired of $59.4
million and goodwill of $3.0 million.
Had the one-third purchase been made at January 1, 1998, pro-forma consolidated
net income would have increased by about $3.1 million and $2.2 million in 1999
and 1998, respectively. These pro-forma consolidated results are not necessarily
indicative of the actual results which might have occurred had National Life
Group owned all of LSWNH since that date. (unaudited)
NOTE 13 - REORGANIZATION INTO A MUTUAL HOLDING COMPANY
CORPORATE STRUCTURE
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, a mutual insurance holding company created for this purpose.
National Life Holding Company currently owns all the outstanding shares of NLV
Financial, a stock holding company created for this purpose, which in turn
currently owns all the outstanding shares of National Life. National Life
Holding Company currently has no other assets, liabilities or operations other
than that related to its ownership of NLV Financial's outstanding stock.
Similarly, NLV Financial currently has no other assets, liabilities or
operations other than that related to its ownership of National Life's
outstanding stock. Under the terms of the reorganization, National Life Holding
Company must always hold a majority of the voting shares of NLV Financial.
This reorganization was approved by policyowners of National Life and was
completed with the approval of the Commissioner of the Vermont Department of
Banking, Insurance, Securities, and Health Care Administration (the
"Commissioner").
Under the provisions of the reorganization, National Life issued 2.5 million
common stock $1 par shares to its parent, NLV Financial as a transfer from
retained earnings. There were no dividends paid or declared in 1999 by National
Life. Dividends declared by National Life in excess of ten percent of statutory
surplus (see Note 14 for statutory information) require pre-approval by the
Commissioner.
F-24
<PAGE> 96
NOTE 14 - 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's statutory surplus to GAAP equity at December
31 and statutory net income to GAAP net income for the years ended December 31
were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------------------------
Surplus/ Surplus/
Equity Net Income Equity Net Income
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Statutory surplus/net income $ 408,086 $ 25,923 $ 373,063 $ 67,841
Asset valuation reserve 79,207 69,994
Interest maintenance reserve 58,507 5,681 52,826 (4,114)
Surplus notes (70,716) (70,700)
Non-admitted assets 2,101 17,033
Investments 30,149 5,916 650 (4,471)
Deferred policy acquisition costs 445,704 17,250 428,453 (9,479)
Deferred income taxes 45,587 (3,837) 74,132 15,555
Policy liabilities (202,061) 10,063 (203,832) (6,476)
Policyholders' dividends 67,494 3,289 64,205 529
Benefit plans (29,475) (1,571) (27,904) 6,730
Sales remediation costs (40,575)
Other comprehensive income, net (57,700) 106,243
Other changes, net (1,895) (6,086) (1,860) (5,352)
- ----------------------------------------------------------------------------------------------------------------------------
GAAP equity/net income $ 774,988 $ 56,628 $ 882,303 $ 20,188
============================================================================================================================
</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.
In 1998, the National Association of Insurance Commissioners (NAIC) adopted the
Codification of Statutory Accounting Principles guidance (Codification), which
will replace the current Accounting Practices and Procedures manual as the
NAIC's primary guidance on statutory accounting. The NAIC has recommended an
effective date of January 1, 2001. The Codification provides guidance for areas
which promulgated statutory accounting principles had not previously addressed,
and changes current promulgated guidance in other areas.
The Vermont Department of Banking, Insurance, Securities, and Health Care
Administration has adopted Codification effective January 1, 2001. The
Department may make changes to the promulgated guidance prior to the effective
date. National Life has not estimated the potential effect of the Codification
guidance on its reported results.
F-25
<PAGE> 97
NATIONAL LIFE INSURANCE COMPANY
AND SUBSIDIARIES
* * * * *
FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1999 AND 1998
F-26
<PAGE> 98
[PRICEWATERHOUSECOOPERS LLP LETTERHEAD]
Report of Independent Accountants
To the Board of Directors and Stockholder 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 (National
Life) at December 31, 1999 and 1998, and the results of their operations and
their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of National Life'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 auditing standards
generally accepted in the United States 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 13 to the financial statements, 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. Members'
voting and liquidation rights in National Life were transferred to National Life
Holding Company, the upstream parent of National Life, as part of this
reorganization.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 10, 2000
F-27
<PAGE> 99
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------
(In Thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 173,485 $ 347,949
Available-for-sale debt and equity securities 3,338,777 5,438,784
Trading equity securities 11,793 -
Mortgage loans 781,970 1,098,504
Policy loans 120,745 776,363
Real estate investments 86,003 75,566
Other invested assets 151,044 113,696
- ----------------------------------------------------------------------------------------------------------------
Total cash and invested assets 4,663,817 7,850,862
Deferred policy acquisition costs 225,539 416,733
Accrued investment income 64,886 119,249
Premiums and fees receivable 3,168 21,044
Deferred income taxes 49,989 21,541
Amounts recoverable from reinsurers 302,607 253,651
Present value of future profits of insurance acquired 113,851 45,539
Property and equipment, net 45,609 59,503
Other assets 57,507 133,702
Closed block assets 3,424,481 -
Separate account assets 404,030 283,948
- ----------------------------------------------------------------------------------------------------------------
Total assets $ 9,355,484 $ 9,205,772
================================================================================================================
LIABILITIES:
Policy benefit liabilities $ 731,006 $ 3,907,114
Policyholders' accounts 3,258,761 3,348,132
Policyholders' deposits 42,468 38,520
Policy claims payable 16,419 31,900
Policyholders' dividends 325 54,757
Amounts payable to reinsurers 19,213 35,481
Collateral held on loaned securities 48,375 193,491
Other liabilities and accrued expenses 275,893 307,036
Debt 76,092 78,088
Closed block liabilities 3,698,746 -
Separate account liabilities 400,867 264,421
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 8,568,165 8,258,940
- ----------------------------------------------------------------------------------------------------------------
MINORITY INTERESTS 12,331 64,529
STOCKHOLDER'S EQUITY:
Common stock (authorized 2.5 million shares at $1 par value, 2.5 million
shares issued and outstanding) 2,500 -
Additional paid in capital 5,000 -
Retained earnings 825,188 776,060
Accumulated other comprehensive (loss) income (57,700) 106,243
- ----------------------------------------------------------------------------------------------------------------
Total stockholder's equity 774,988 882,303
- ----------------------------------------------------------------------------------------------------------------
Total liabilities, minority interests and equity $ 9,355,484 $ 9,205,772
================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 100
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------
(In Thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Insurance premiums $ 57,950 $ 386,260
Policy and contract charges 54,624 48,463
Net investment income 349,385 550,339
Net investment (losses) gains (5,580) 8,450
Mutual fund commission and fee income 56,232 49,670
Closed block income 24,371 -
Other income 19,862 17,271
- ----------------------------------------------------------------------------------------------------------------
Total revenue 556,844 1,060,453
- ----------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Increase in policy liabilities 46,599 98,252
Policy benefits 46,736 346,779
Policyholders' dividends (1,083) 107,102
Interest credited to policyholders' accounts 194,442 208,505
Operating expenses 147,505 141,242
Sales practice remediation costs - 40,575
Net deferral of policy acquisition costs 39,201 90,323
- ----------------------------------------------------------------------------------------------------------------
Total benefits and expenses 473,400 1,032,778
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interests 83,444 27,675
Income tax expense (benefit) 17,380 (1,020)
- ----------------------------------------------------------------------------------------------------------------
Income before minority interests 66,064 28,695
Minority interests 9,436 8,507
- ----------------------------------------------------------------------------------------------------------------
NET INCOME 56,628 20,188
OTHER COMPREHENSIVE (LOSS) INCOME, NET
Unrealized (losses) gains on securities, net (163,943) 21,226
- ----------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE (LOSS) INCOME $ (107,315) $ 41,414
================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE> 101
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------
(In Thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK:
Balance at January 1 $ - $ -
2.5 million shares at $1 par issued via equity transfer from retained
earnings pursuant to mutual holding company reorganization 2,500 -
- ----------------------------------------------------------------------------------------------------------------
Balance at December 31 $ 2,500 $ -
================================================================================================================
ADDITIONAL PAID IN CAPITAL:
Balance at January 1 $ - $ -
Capital contributed via equity transfer from retained earnings
pursuant to mutual holding company reorganization 5,000 -
- ----------------------------------------------------------------------------------------------------------------
Balance at December 31 $ 5,000 $ -
================================================================================================================
RETAINED EARNINGS:
Balance at January 1 $ 776,060 $ 755,872
Transfer to common stock pursuant to mutual holding company
reorganization (2,500)
Transfer to additional paid in capital pursuant to mutual holding company
reorganization (5,000)
Net income 56,628 20,188
- ----------------------------------------------------------------------------------------------------------------
Balance at December 31 $ 825,188 $ 776,060
================================================================================================================
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME:
Balance at January 1 $ 106,243 $ 85,017
Unrealized (losses) gains on available-for-sale securities, net (163,943) 21,226
- ----------------------------------------------------------------------------------------------------------------
Balance at December 31 $ (57,700) $ 106,243
================================================================================================================
TOTAL STOCKHOLDER'S EQUITY:
Balance at December 31 $ 774,988 $ 882,303
================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 102
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------
(In Thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 56,628 $ 20,188
Adjustments to reconcile net income to net cash provided by operations:
Change in:
Accrued investment income (67) 6,541
Policy liabilities (7,845) 87,367
Deferred policy acquisition costs (59,780) (7,580)
Policyholders' dividends 2,589 1,362
Deferred income taxes 21,134 (13,330)
Net realized investment gains 5,580 (8,450)
Depreciation 7,339 6,977
Other 9,463 12,714
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 35,041 105,789
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales, maturities and repayments of investments 1,063,475 2,020,526
Cost of available-for-sale investments acquired (1,241,086) (2,236,001)
Acquisition of remaining interest in LSWNH, Inc. (61,632) -
Other 2,648 14,656
- -------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (236,595) (200,819)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' deposits, including interest credited 558,115 563,606
Policyholders' withdrawals, including policy charges (379,233) (452,184)
Net decrease in borrowings under repurchase agreements - (234,570)
Net (decrease) increase in securities lending liabilities (126,342) 173,726
Other (906) 20,221
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 51,634 70,799
- -------------------------------------------------------------------------------------------------------------------
CLOSED BLOCK ACTIVITY, NET (24,544) -
- -------------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (174,464) (24,231)
CASH AND CASH EQUIVALENTS:
Beginning of year 347,949 372,180
- -------------------------------------------------------------------------------------------------------------------
End of year $ 173,485 $ 347,949
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE> 103
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
National Life Insurance Company and its subsidiaries and affiliates (the
Company) offer a broad range of financial products and services, including life
insurance, annuities, disability income insurance, mutual funds, and investment
advisory and administration services. The flagship company of the organization,
National Life Insurance Company (National Life), was chartered in 1848, and is
also known by its registered trade name "National Life of Vermont". The Company
employs about 900 people, primarily concentrated in Montpelier, Vermont and
Dallas, Texas. On January 1, 1999, pursuant to a mutual holding company
reorganization, National Life converted from a mutual to a stock life insurance
company. All of National Life's outstanding shares are currently held by its
parent, NLV Financial Corp, which is the wholly-owned subsidiary of National
Life Holding Company. See Note 13 for more information.
The insurance operations within the Company develop and distribute individual
life insurance and annuity products. The Company markets this diverse product
portfolio to small business owners, professionals and other middle to upper
income individuals. The Company provides financial solutions in the form of
estate, business succession and retirement planning, deferred compensation and
other key executive fringe benefit plans, and asset management. Insurance and
annuity products are primarily distributed through about 32 general agencies in
major metropolitan areas, a system of managing general agents, and independent
brokers throughout the United States. The Company has in excess of 300,000
policyholders and through its member companies is licensed to do business in all
50 states and the District of Columbia. About 26% of the Company's total
collected premiums and deposits are from residents of New York and California.
Members of the Company also distribute and provide investment advisory and
administrative services to the Sentinel Group Funds, Inc. The Sentinel Funds'
$3.1 billion of net assets represent fourteen mutual funds managed on behalf of
about 117,000 individual, corporate and institutional shareholders worldwide.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Company have been
prepared in conformity with accounting principles generally accepted in the
United States (GAAP).
The consolidated financial statements include the accounts of National Life and
its subsidiaries. All significant intercompany transactions and balances have
been eliminated in consolidation. Certain reclassifications have been made to
conform prior periods 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.
F-32
<PAGE> 104
Available-for-sale and trading debt 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 net investment losses.
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 investment 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.
Investments in joint ventures and limited partnerships are generally carried at
cost.
Net realized investment gains and losses are recognized using the specific
identification method and are reported as net investment gains and losses.
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. Changes in the fair value of
trading equity securities are reflected in net investment gains and losses.
POLICY ACQUISITION EXPENSES
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 other comprehensive income, net of related income
taxes.
Deferred policy acquisition costs for non-participating term life insurance and
disability income insurance are 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.
GOODWILL
Goodwill is amortized over 20 years using the straight line method and is
periodically evaluated for recoverability.
F-33
<PAGE> 105
PROPERTY AND EQUIPMENT
Property and equipment is reported at depreciated cost. Real property is
primarily depreciated over 39.5 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.
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. See additional information below
on dividends on contracts within the Closed Block.
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.
F-34
<PAGE> 106
FEDERAL INCOME TAXES
National Life Holding Company will file a consolidated tax return for the tax
year ended December 31, 1999. The income tax return will include all members
within the Company except Life Insurance Company of the Southwest (LSW) and
Insurance Investors Life Insurance Company (IIL). LSW and IIL will file a
separate tax return due to tax regulatory requirements. 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.
MINORITY INTERESTS
Minority interests at December 31, 1999 represent minority partners interests in
entities within the Company. Minority interests attributable to common
stockholders are carried on the equity method. Those attributable to preferred
stockholders are carried on the cost method, with dividends paid reflected as
minority interests within the consolidated financial statements.
CLOSED BLOCK
National Life established and began operating a closed block (the Closed Block)
on January 1, 1999. The Closed Block was established pursuant to regulatory
requirements as part of the reorganization into a mutual holding company
corporate structure. This Closed Block was established for the benefit of
policyholders of participating policies inforce at December 31, 1998. Included
in the block are traditional dividend paying life insurance policies, certain
participating term insurance policies, dividend paying flex premium annuities,
and other related liabilities. The Closed Block was established to protect the
policy dividend expectations related to these policies. The Closed Block is
expected to remain in effect until all policies within the Closed Block are no
longer inforce. Assets assigned to the Closed Block at January 1, 1999, together
with projected future premiums and investment returns, are reasonably expected
to be sufficient to pay out all future Closed Block policy benefits. Such
benefits include dividends paid out under the current dividend scale, adjusted
to reflect future changes in the underlying experience. See Note 11 for
additional information on the Closed Block's financial position and results of
operations.
F-35
<PAGE> 107
NOTE 3 - INVESTMENTS
DEBT AND EQUITY SECURITIES
The amortized cost and estimated fair values of available-for-sale debt and
equity securities at December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated Fair
1999 Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale (AFS) debt and equity securities:
U.S. government obligations $ 185,524 $ 2,768 $ 14,925 $ 173,367
Government agencies, authorities
and subdivisions 61,524 1,095 2,035 60,584
Public utilities 295,172 8,447 15,371 288,248
Corporate 1,611,713 9,845 70,987 1,550,571
Private placements 449,531 2,763 20,307 431,987
Mortgage-backed securities 686,868 656 20,840 666,684
- ------------------------------------------------------------------------------------------------------------------------
Total AFS debt securities 3,290,332 25,574 144,465 3,171,441
Preferred stocks 134,852 2,708 8,109 129,451
Common stocks 33,032 7,169 2,316 37,885
- ------------------------------------------------------------------------------------------------------------------------
Total AFS debt and equity securities $ 3,458,216 $ 35,451 $ 154,890 $ 3,338,777
========================================================================================================================
<CAPTION>
1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AFS debt and equity securities:
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
========================================================================================================================
</TABLE>
F-36
<PAGE> 108
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>
1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net unrealized (losses) gains on available-for-sale securities $ (399,066) $ 20,136
Net unrealized (losses) gains on separate accounts (2,652) 1,543
Related minority interests 8,672 (1,786)
Related deferred policy acquisition costs 116,725 17,139
Related present value of future profits of insurance acquired 16,353 (3,048)
Related deferred income taxes 96,025 (12,758)
- -----------------------------------------------------------------------------------------------------------------------
(Decrease) increase in net unrealized gains (163,943) 21,226
Balance, beginning of year 106,243 85,017
- -----------------------------------------------------------------------------------------------------------------------
Balance, end of year $ (57,700) $ 106,243
=======================================================================================================================
<CAPTION>
1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, end of year includes:
Net unrealized (losses) gains on available-for-sale securities $ (147,996) $ 251,070
Net unrealized gains on separate accounts 3,163 5,815
Related minority interests - (8,672)
Related deferred policy acquisition costs 39,186 (77,539)
Related present value of future profits on insurance acquired 14,806 (1,547)
Related deferred income taxes 33,141 (62,884)
- -----------------------------------------------------------------------------------------------------------------------
Balance, end of year $ (57,700) $ 106,243
=======================================================================================================================
</TABLE>
Net other comprehensive (loss) income for 1999 and 1998 of $(163.9) million and
$21.2 million is presented net of reclassifications to net income for gross
gains realized during the period of $13.9 million and $9.0 million and net of
tax and deferred acquisition cost offsets of $9.4 million and $6.6 million,
respectively.
The amortized cost and estimated fair values of debt securities by contractual
maturity at December 31, 1999 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 $ 93,726 $ 93,678
Due after one year through five years 1,035,774 1,003,721
Due after five years through ten years 1,043,650 997,356
Due after ten years 430,312 410,002
Mortgage-backed securities 686,870 666,684
- --------------------------------------------------------------------------------------------------------------
Total $ 3,290,332 $ 3,171,441
==============================================================================================================
</TABLE>
Information relating to available-for-sale debt security sale transactions for
the years ended December 31 is shown below (in thousands):
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Proceeds from sales $ 604,226 $ 1,167,190
Gross realized gains $ 25,885 $ 22,969
Gross realized losses $ 17,247 $ 16,578
</TABLE>
F-37
<PAGE> 109
On January 1, 1999, National Life Group reclassified certain mutual fund
investments from an available-for-sale to a trading classification. The
cumulative gross unrealized gain reclassified into net investment gains was $0.6
million. For the year ended December 31, 1999, these securities recorded $0.9
million net investment income and $(0.5) million investment losses. Cost of
trading securities held at December 31, 1999 was $12.1 million. National Life
Group held no securities classified as trading prior to January 1, 1999.
National Life Group 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 closed block assets) and the
corresponding liability for collateral held (closed block portion included in
closed block liabilities) were $115.5 million and $193.5 million at December 31,
1999 and 1998, respectively.
National Life Group 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, 1999 or 1998.
MORTGAGE LOANS AND REAL ESTATE
The distributions of mortgage loans and real estate at December 31 were as
follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------
<S> <C> <C>
GEOGRAPHIC REGION
- -----------------
New England 4.3% 3.8%
Middle Atlantic 10.7 9.7
East North Central 8.7 9.3
West North Central 2.8 4.5
South Atlantic 24.1 25.7
East South Central 7.0 5.0
West South Central 12.9 10.3
Mountain 15.1 17.7
Pacific 14.4 14.0
- -------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0%
===================================================================================================================
PROPERTY TYPE
- -------------
Residential 0.1% 0.2%
Apartment 19.7 24.2
Retail 9.5 12.2
Office Building 37.4 35.0
Industrial 29.4 26.2
Hotel/Motel 2.6 0.8
Other Commercial 1.3 1.4
- -------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0%
===================================================================================================================
Total mortgage loans and real estate
(in thousands) $ 867,973 $ 1,174,070
===================================================================================================================
</TABLE>
F-38
<PAGE> 110
Mortgage loans and related valuation allowances at December 31 were as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unimpaired loans $ 767,540 $ 1,077,637
Impaired loans without valuation allowances 6,943 11,757
- -----------------------------------------------------------------------------------------------------------------
Subtotal 774,483 1,089,394
- -----------------------------------------------------------------------------------------------------------------
Impaired loans with valuation allowances 10,600 10,244
Related valuation allowances (3,113) (1,134)
- -----------------------------------------------------------------------------------------------------------------
Subtotal 7,487 9,110
- -----------------------------------------------------------------------------------------------------------------
Total $ 781,970 $ 1,098,504
=================================================================================================================
Impaired loans:
Average recorded investment $ 19,771 $ 27,755
Interest income recognized $ 2,137 $ 3,124
Interest received $ 2,092 $ 2,818
</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>
1999 1998
============================================================================================================
<S> <C> <C>
Additions for impaired loans charged to realized losses $ 1,993 $ 1,564
Impairment losses charged to valuation allowances - (2,217)
Changes to previously established valuation allowances (14) (2,642)
- ------------------------------------------------------------------------------------------------------------
Increase/decrease in valuation allowances 1,979 (3,295)
Balance, beginning of year 1,134 4,429
- ------------------------------------------------------------------------------------------------------------
Balance, end of year $ 3,113 $ 1,134
============================================================================================================
</TABLE>
NET INVESTMENT INCOME
The components of net investment income for the years ended December 31 were as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Debt securities interest $ 255,721 $ 405,184
Equity securities dividends 2,385 6,380
Mortgage loan interest 63,196 90,991
Policy loan interest 6,426 47,189
Real estate income 11,698 12,802
Other investment income 29,915 12,363
- ------------------------------------------------------------------------------------------------------------
Gross investment income 369,341 574,909
Less: investment expenses 19,956 24,570
- ------------------------------------------------------------------------------------------------------------
Net investment income $ 349,385 $ 550,339
============================================================================================================
</TABLE>
F-39
<PAGE> 111
DERIVATIVES
The Company 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, the
Company's loss is the decrease in the fair value of futures and is limited to
the premium paid for the options.
The Company purchases options only from highly rated counterparties. However, in
the event a counterparty failed to perform, the Company'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>
1999 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Notional amounts:
Options $ 166,858 $ 79,754
Futures $ 5,439 $ 28,835
==============================================================================================================
Book values:
Options: Net amortized cost $ 17,800 $ 5,514
Intrinsic value 18,894 18,953
- --------------------------------------------------------------------------------------------------------------
Book value 36,694 24,467
Futures at fair value 890 463
- --------------------------------------------------------------------------------------------------------------
Net book value (included in other invested assets) $ 37,584 $ 24,930
==============================================================================================================
</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>
1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 173,485 $ 173,485 $ 347,949 $ 347,949
Available-for-sale debt and equity securities 3,338,777 3,338,777 5,438,784 5,438,784
Trading equity securities 11,793 11,793 - -
Mortgage loans 781,970 790,190 1,098,504 1,180,630
Policy loans 120,745 115,330 776,363 743,687
Derivatives 37,584 35,528 24,930 28,496
Investment products 2,600,657 2,578,402 2,507,012 2,522,940
Debt 76,092 62,615 78,088 75,141
</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.
F-40
<PAGE> 112
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).
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).
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
The Company reinsures certain risks assumed in the normal course of business.
For individual life products, The Company 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 agreements. Disability income products are
significantly reinsured under coinsurance and modified coinsurance agreements.
The Company remains liable in the event any reinsurer is unable to meet its
assumed obligations. The Company 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.
,
Transactions between the open and Closed Block (see Notes 11 and 13) have been
excluded from the following schedule. Reinsurance flows with outside parties
remain within the open block.
The effects of reinsurance for the years ended December 31 were as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Insurance premiums:
Direct premiums $ 114,117 $ 453,859
Reinsurance assumed 4,731 898
Reinsurance ceded (60,898) (68,497)
- ---------------------------------------------------------------------------------------------------------------
$ 57,950 $ 386,260
===============================================================================================================
Other income:
Direct $ 6,975 $ 3,694
Reinsurance ceded 12,887 13,577
- ---------------------------------------------------------------------------------------------------------------
$ 19,862 $ 17,271
===============================================================================================================
</TABLE>
F-41
<PAGE> 113
<TABLE>
<CAPTION>
1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in policy liabilities:
Direct increase in policy liabilities $ 63,124 $ 94,949
Reinsurance assumed - (4)
Reinsurance ceded (16,525) 3,307
- ---------------------------------------------------------------------------------------------------------------
$ 46,599 $ 98,252
===============================================================================================================
Policy benefits:
Direct policy benefits $ 109,618 $ 416,919
Reinsurance assumed (2,479) 1,286
Reinsurance ceded (60,403) (71,426)
- ---------------------------------------------------------------------------------------------------------------
$ 46,736 $ 346,779
===============================================================================================================
Policyholders' dividends:
Direct policyholders' dividends $ 2,852 $ 110,630
Reinsurance ceded (3,935) (3,528)
- ---------------------------------------------------------------------------------------------------------------
$ (1,083) $ 107,102
===============================================================================================================
</TABLE>
NOTE 5 - DEFERRED POLICY ACQUISITION COSTS
The following reflects the changes in the deferred policy acquisition costs
asset (in thousands):
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of year $ 416,733 $ 392,014
Acquisition costs deferred 73,648 57,318
Amortization to expense during the year (36,791) (49,738)
Adjustment to equity during the year 116,725 17,139
Included in Closed Block assets (312,588) -
Purchase GAAP effect on purchase of LSWNH (Note 12) (32,188) -
- ----------------------------------------------------------------------------------------------
Balance, end of year $ 225,539 $ 416,733
==============================================================================================
</TABLE>
NOTE 6 - FEDERAL INCOME TAXES
The components of federal income taxes and a reconciliation of the expected and
actual federal income taxes and income tax rates for the years ended December 31
were as follows ($ in thousands):
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current $ 7,497 $ 17,144
Deferred 9,883 (18,164)
- ------------------------------------------------------------------- --------------------
Income taxes $ 17,380 $ (1,020)
=================================================================== ====================
Expected income taxes $ 29,206 35.0% $ 9,686 35.0%
Differential earnings amount (2,058) (2.5) (7,953) (28.7)
Affordable housing tax credit (6,509) (7.8) (6,638) (24.0)
Net change in tax reserves 2,033 2.4 5,035 18.2
Other, net (5,292) (6.3) (1,150) (4.2)
- ----------------------------------------------------------------------------------------------------------------------------------
Income taxes $ 17,380 $ (1,020)
=================================================================== ====================
Effective federal income tax rate 20.8% (3.7)%
==================================================== ===================== =====================
</TABLE>
F-42
<PAGE> 114
The Company received net federal income tax refunds of $9.4 million in 1999 and
paid federal income taxes of $13.3 million in 1998.
Components of net deferred income tax assets at December 31 were as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets:
Net unrealized loss on available-for-sale securities $ 29,383 -
Debt and equity securities 17,419 -
Policy liabilities 32,408 $ 185,294
Other liabilities and accrued expenses 51,609 67,291
Other 490 4,761
- --------------------------------------------------------------------------------------------------------------------------
Total deferred income tax assets 131,309 257,346
- --------------------------------------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Deferred policy acquisition costs 28,635 126,380
Present value of future profits of insurance acquired 37,908 17,683
Net unrealized gain on available-for-sale securities - 62,884
Debt and equity securities - 16,947
Other 14,777 11,911
- --------------------------------------------------------------------------------------------------------------------------
Total deferred income tax liabilities 81,320 235,805
- --------------------------------------------------------------------------------------------------------------------------
Net deferred income tax assets $ 49,989 $ 21,541
==========================================================================================================================
</TABLE>
Management believes it is more likely than not that the Company 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 National Life's tax returns through 1995 and is currently
examining the years 1996 - 1998. In management's opinion adequate tax
liabilities have been established for all open years.
NOTE 7 - 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 a group 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 Group
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
F-43
<PAGE> 115
the pro-rata recognition of actuarial gains on lump sum settlements of pension
benefit obligations. Some of the plan participants elected to defer their lump
sum payouts until 1998, which also deferred recognition of the related
settlement gain until 1998.
The status of the defined benefit plans at December 31 was as follows (in
thousands):
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
-----------------------------------------------------------------
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, beginning of year $ 189,524 $ 162,986 $ 27,883 $ 24,759
Service cost (benefits earned during the current period) 4,194 2,849 581 547
Interest cost on benefit obligation 12,260 11,430 1,876 1,699
Actuarial (gains) losses (26,832) 34,444 (3,937) 1,939
Benefits paid (12,002) (22,185) (1,170) (1,061)
- ---------------------------------------------------------------------------------------------------------------------------------
Benefit obligation, end of year $ 167,144 $ 189,524 $ 25,233 $ 27,883
=================================================================================================================================
CHANGE IN PLAN ASSETS:
Plan assets, beginning of year $ 100,045 $ 108,884
Actual return on plan assets 9,952 7,200
Benefits paid (5,747) (16,039)
- -----------------------------------------------------------------------------------------------
Plan assets, end of year $ 104,250 $ 100,045
===============================================================================================
</TABLE>
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
----------------------------------------------------------------------
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FUNDED STATUS:
Benefit obligation $ 167,144 $ 189,524 $ 25,233 $ 27,883
Plan assets (104,250) (100,045)
- ------------------------------------------------------------------------------------------------------------------------------
Benefit obligation in excess of plan assets 62,894 89,479 25,233 27,883
Unrecognized actuarial gains (losses) 18,309 (11,259) 6,397 2,526
Unrecognized prior service cost (1,080) (1,152)
----------------------------------------------------------------------
Accrued benefit cost at September 30 81,203 78,220 30,550 29,257
Payments subsequent to measurement date (1,638) (1,518)
- ------------------------------------------------------------------------------------------------------------------------------
Accrued benefit cost at December 31 $ 79,565 $ 76,702 $ 30,550 $ 29,257
==============================================================================================================================
</TABLE>
The components of net periodic benefit cost for the years ended December 31 were
as follows (in thousands):
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
----------------------------------------------------------------
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost (benefits earned during the current period) $ 4,194 $ 2,849 $ 581 $ 547
Interest cost on benefit obligation 12,260 11,430 1,876 1,699
Expected return on plan assets (8,745) (9,078)
Net amortization and deferrals 281 (1,167) (66) (83)
Amortization of prior service cost 72 72
Settlement gains from 1997 early retirement program (3,131)
- -----------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost (included in operating
expenses) $ 7,990 $ 903 $ 2,463 $ 2,235
=============================================================================================================================
</TABLE>
The total projected benefit obligation for non-qualified defined benefit pension
plans was $70.9 million and $81.4 million at December 31, 1999 and 1998,
respectively. The total accumulated benefit obligation (APBO) for these plans
was $67.7 million and $75.2 million at December 31, 1999 and 1998, respectively.
F-44
<PAGE> 116
The actuarial assumptions used in determining benefit obligations at December
31, were as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
----------------------------------------------------------------
1999 1998 1999 1998
- ------------------------------------------------------------------- -------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate 7.75% 6.75% 7.75% 6.75%
Rate of increase in future compensation levels 6.00% 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 $2.4 million and the 1999
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 $2.0 million and
the 1999 service and interest cost components of net periodic postretirement
benefit cost by about $0.1 million. National Life Group 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. Employees below specified levels of
compensation also receive a foundation contribution of 1.5% of compensation.
Additional employee voluntary contributions may be made to the plans up to a set
maximum. Vesting and withdrawal privilege schedules are attached to the
Company's contributions.
National Life also provides a 401(k) plan for it's regular full-time agents
whereby accumulated funds may be invested by the agent in a group annuity
contract with National Life or in mutual funds sponsored by an affiliate of
National Life. Total annual contributions can not exceed certain limits that
vary based on total agent compensation. No National Life contributions are made
to the plan.
Life Insurance Company of the Southwest (LSW), an indirectly held wholly-owned
subsidiary of National Life, provides a 401(k) to its employees. Additional
voluntary employee contributions may be made to the plan subject to certain
limits. LSW's contributions to these plans generally vest within two years.
NOTE 8 - DEBT
Debt consists of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
8.25% Surplus Notes: $ 69,692 $ 69,688
$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: 6,400 8,400
$6.4 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 $ 76,092 $ 78,088
=============================================================================================================================
</TABLE>
F-45
<PAGE> 117
The aggregate annual scheduled maturities of debt for the next five years are as
follows (in thousands):
2000 $ 2,000
2001 2,000
2002 2,400
2003 -
2004 -
Interest paid was $6.3 million and $6.2 million in 1999 and 1998, respectively.
NOTE 9 - CONTINGENCIES
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. Qualifying members may also
opt out of the class action and pursue litigation separately against National
Life. Most of the alternative dispute resolution cases were settled by December
31, 1999. Management believes that while the ultimate cost of this litigation
(including those opting out of the class action) is still uncertain, it is
unlikely, after considering existing provisions, to have a material adverse
effect on National Life's financial position.
In late 1999, two lawsuits were filed against National Life and the State of
Vermont in Vermont related to National Life's conversion to a mutual holding
company structure. National Life and the State of Vermont specifically deny any
wrongdoing and intend to defend these cases vigorously. In the opinion of
National Life Group's management, based on advice from legal counsel, the
ultimate resolution of these lawsuits will not have a material effect on
National Life Group's financial position. However, liabilities related to these
lawsuits could be established in the near term if estimates of the ultimate
resolution of these proceedings are revised.
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 was originally effective for fiscal years beginning after June 15,
1999. In June, 1999 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133 (FAS 137). FAS 137 requires the application of FAS 133 for fiscal years
beginning after June 15, 2000. The Company is currently assessing the impact of
the adoption of FAS 133.
F-46
<PAGE> 118
NOTE 11 - CLOSED BLOCK
The Closed Block was established on January 1, 1999 as part of the conversion to
a mutual holding company corporate structure (see Note 13).
Summarized financial information for the Closed Block effects as of December 31,
1999 and for the year then ended is as follows (in thousands):
<TABLE>
<CAPTION>
1999
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Cash and cash equivalents $ 122,982
Available-for-sale debt securities (amortized cost of $1,800.1 million) 1,771,494
Mortgage loans 380,986
Policy loans 640,490
Accrued investment income 53,387
Premiums and fees receivable 18,864
Deferred policy acquisition costs 312,588
Other assets 123,690
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 3,424,481
==================================================================================================================================
LIABILITIES:
Policy liabilities and accruals $ 3,629,560
Other liabilities 69,186
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities $ 3,698,746
==================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1999
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
REVENUES:
Premiums and other income $ 325,445
Net investment income 216,432
Realized investment gain 8,720
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenues 550,597
- ----------------------------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Increase in policy liabilities 66,324
Policy benefits 283,598
Policyholders' dividends 107,941
Interest credited to policyholders' accounts 13,294
Operating expenses 17,407
Policy acquisition expenses, net 37,662
- ----------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 526,226
- ----------------------------------------------------------------------------------------------------------------------------------
Pre-tax contribution from the Closed Block $ 24,371
==================================================================================================================================
</TABLE>
There were no mortgage valuation allowances on Closed Block mortgage loans at
December 31, 1999. Many expenses related to Closed Block operations are charged
to operations outside the Closed Block; accordingly, the contribution from the
Closed Block does not represent the actual profitability of the Closed Block
operations. Operating costs and expenses outside the Closed Block are therefore
disproportionate to the actual business outside the Closed Block.
F-47
<PAGE> 119
The Consolidated Statement of Cash Flows for 1999 is presented net of cash flows
and adjustments to operating cash flows attributable to the Closed Block cash
and short term investments of $(24.5) million. The Closed Block was initially
funded on January 1, 1999 with cash and securites totalling $2.2 billion.
NOTE 12 - ACQUISITION
On July 2, 1999, the Company acquired the outstanding one-third interest in LSW
National Holdings, Inc., (LSWNH) the parent of Dallas, Texas-based Life
Insurance Company of the Southwest (LSW), a financial services company
specializing in the sale of annuities. The Company had previously purchased a
two-thirds interest in the company in February, 1996.
The purchase price was $61.6 million in cash. Purchasing the remaining one-third
interest eliminated the ongoing provision for minority interests for the last
six months of 1999. The effect of the cash purchase on the consolidated
financial statements was to reduce minority interests by $39.7 million and
record net purchase GAAP adjustments of $21.9 million, which included intangible
assets for the present value of future profits of insurance acquired of $59.4
million and goodwill of $3.0 million.
Had the one-third purchase been made at January 1, 1998, pro-forma consolidated
net income would have increased by about $3.1 million and $2.2 million in 1999
and 1998, respectively. These pro-forma consolidated results are not necessarily
indicative of the actual results which might have occurred had the Company owned
all of LSWNH since that date. (unaudited)
NOTE 13 - REORGANIZATION INTO A MUTUAL HOLDING COMPANY
CORPORATE STRUCTURE
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, a mutual insurance holding company created for this purpose.
National Life Holding Company currently owns all the outstanding shares of NLV
Financial, a stock holding company created for this purpose, which in turn
currently owns all the outstanding shares of National Life. National Life
Holding Company currently has no other assets, liabilities or operations other
than that related to its ownership of NLV Financial's outstanding stock.
Similarly, NLV Financial currently has no other assets, liabilities or
operations other than that related to its ownership of National Life's
outstanding stock. Under the terms of the reorganization, National Life Holding
Company must always hold a majority of the voting shares of NLV Financial.
This reorganization was approved by policyowners of National Life and was
completed with the approval of the Commissioner of the Vermont Department of
Banking, Insurance, Securities, and Health Care Administration (the
"Commissioner").
Under the provisions of the reorganization, National Life issued 2.5 million
common stock $1 par shares to its parent, NLV Financial as a transfer from
retained earnings and also transferred $5 million from retained earnings into
additional paid in capital. There were no dividends paid or declared in 1999 by
National Life. Dividends declared by National Life in excess of ten percent of
statutory surplus (see Note 14 for statutory information) require pre-approval
by the Commissioner.
F-48
<PAGE> 120
NOTE 14 - 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's statutory surplus to GAAP equity at December
31 and statutory net income to GAAP net income for the years ended December 31
were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------------------------
Surplus/ Surplus/
Equity Net Income Equity Net Income
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Statutory surplus/net income $ 408,086 $ 25,923 $ 373,063 $ 67,841
Asset valuation reserve 79,207 69,994
Interest maintenance reserve 58,507 5,681 52,826 (4,114)
Surplus notes (70,716) (70,700)
Non-admitted assets 2,101 17,033
Investments 30,149 5,916 650 (4,471)
Deferred policy acquisition costs 445,704 17,250 428,453 (9,479)
Deferred income taxes 45,587 (3,837) 74,132 15,555
Policy liabilities (202,061) 10,063 (203,832) (6,476)
Policyholders' dividends 67,494 3,289 64,205 529
Benefit plans (29,475) (1,571) (27,904) 6,730
Sales remediation costs (40,575)
Other comprehensive income, net (57,700) 106,243
Other changes, net (1,895) (6,086) (1,860) (5,352)
- -----------------------------------------------------------------------------------------------------------------------------
GAAP equity/net income $ 774,988 $ 56,628 $ 882,303 $ 20,188
=============================================================================================================================
</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.
In 1998, the National Association of Insurance Commissioners (NAIC) adopted the
Codification of Statutory Accounting Principles guidance (Codification), which
will replace the current Accounting Practices and Procedures manual as the
NAIC's primary guidance on statutory accounting. The NAIC has recommended an
effective date of January 1, 2001. The Codification provides guidance for areas
which promulgated statutory accounting principles had not previously addressed,
and changes current promulgated guidance in other areas.
The Vermont Department of Banking, Insurance, Securities, and Health Care
Administration has adopted Codification effective January 1, 2001. The
Department may make changes to the promulgated guidance prior to the effective
date. National Life has not estimated the potential effect of the Codification
guidance on its reported results.
F-49
<PAGE> 121
NATIONAL VARIABLE
ANNUITY ACCOUNT II
FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1999
F-50
<PAGE> 122
[PRICEWATERHOUSECOOPERS LLP LETTERHEAD]
- --------------------------------------------------------------------------------
PricewaterhouseCoopers LLP
160 Federal Street
Boston MA 02110
Telephone (617) 439 4390
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, 1999,
and the results of each of their operations and the changes in each of their
net assets for the years ended December 31, 1999 and 1998 and for the period
from June 20, 1997 through December 31, 1997, in conformity with accounting
principles generally accepted in the United States. 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 auditing standards generally accepted in the United States
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, 1999 by
correspondence with the funds, provide a reasonable basis for the opinion
expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
March 31, 2000
F-51
<PAGE> 123
NATIONAL VARIABLE ANNUITY ACCOUNT II
(A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF NET ASSETS
DECEMBER 31, 1999
<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 (874,549.32 units at $10.95 per unit) $ 9,580,043
Market Street Fund Growth (1,054,556.24 units at $12.14 per unit) 12,804,406
Market Street Fund Aggressive Growth (95,953.53 units at $13.07 per unit) 1,253,932
Market Street Fund Managed (555,721.09 units at $11.74 per unit) 6,526,156
Market Street Fund Bond (454,241.28 units at $10.60 per unit) 4,817,114
Market Street Fund International (182,285.50 units at $13.19 per unit) 2,403,509
Market Street Fund Sentinel Growth (351,289.99 units at $17.40 per unit) 6,112,101
Strong Opportunity Fund 11(200,977.44 units at $16.63 per unit) 3,341,274
Strong Variable Insurance Funds Mid Cap Growth (318,571.77 units at $26.76 per unit) 8,525,921
Van Eck Worldwide Insurance Trust Worldwide Bond Fund (39,146.49 units at $10.36 per unit) 405,485
VIPF Equity Income (704,688.26 units at $12.51 per unit) 8,815,020
VIPF Overseas (238,593.17 units at $14.78 per unit) 3,525,682
VIPF Growth (558,722.01 units at $19.97 per unit) 11,160,270
VIPF High Income (398,908.66 units at $10.90 per unit) 4,348,229
VIPF Index 500 (1,479,593.66 units at $16.37 per unit) 24,218,055
VIPF Contrafund (495.264.94 units at $17.20 per unit) 8,519,936
Alger American Fund Growth (620,992.78 units at $20.51 per unit) 12,738,432
Alger American Fund Small Capitalization (243,152.97 units at $17.73 per unit) 4,310,751
American Century Variable Portfolios VP Value (63,007.27 units at $10.18 per unit) 641,148
American Century Variable Portfolios VP Income & Growth (185,236.09 units at $12.76 per unit) 2,363,799
JP Morgan Series Trust II International Opportunities (25,477.52 units at $13.06 per unit) 332,709
JP Morgan Series Trust II Small Company (30,934.44 units at $14.21 per unit) 439,716
Neuberger Berman Partners Portfolio (47,306.25 units at $10.79 per unit) 510,454
Goldman Sachs Variable Insurance Trust International Equity (26,305.66 units at $13.14 per unit) 345,775
Goldman Sachs Variable Insurance Trust Global Income (12,012.86 units at $10.15 per unit) 121,873
Goldman Sachs Variable Insurance Trust CORE Small Cap Equity (8,929.81 units at $10.96 per unit) 97,847
Goldman Sachs Variable Insurance Trust Mid Cap Value (30,896.13 units at $9.65 per unit) 298,146
----------------
TOTAL NET ASSETS $ 138,557,783
================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE> 124
NATIONAL VARIABLE ANNUITY ACCOUNT II
(A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<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 $ 403,964 $ 187,211 $ 102,794 $ 218,814 $ 70,689
EXPENSES:
Mortality and expense risk
and administrative charges 115,308 142,226 13,481 67,828 48,544
--------------------------------------------------------------------
Net investment (loss) income 288,656 44,985 89,313 150,986 22,145
--------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from
shares sold - 64,517 130,080 35,685 (47,668)
Net unrealized appreciation
(depreciation) on investments - (11,284) (7,752) (216,962) (130,037)
--------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments - 53,233 122,328 (181,277) (177,705)
--------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 288,656 $ 98,218 $ 211,641 $ (30,291) $ (155,560)
====================================================================
</TABLE>
<TABLE>
<CAPTION>
STRONG VARIABLE
MARKET STREET FUND STRONG INSURANCE FUNDS
---------------------------- ----------------------------
SENTINEL OPPORTUNITY
INTERNATIONAL GROWTH FUND II MID CAP GRWOTH
------------- ------------ ----------- ----------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 84,874 $ 98,065 $ 185,848 $ 2,364
EXPENSES:
Mortality and expense risk
and administrative charges 22,073 45,290 29,786 41,616
----------------------------------------------------------
Net investment (loss) income 62,801 52,775 156,062 (39,252)
----------------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from
shares sold 911 40,182 8,109 227,143
Net unrealized appreciation
(depreciation) on investments 362,211 1,292,502 496,697 2,499,941
----------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 363,122 1,332,684 504,806 2,727,084
----------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 425,923 $ 1,385,459 $ 660,868 $ 2,687,832
==========================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE> 125
NATIONAL VARIABLE ANNUITY ACCOUNT II
(A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
VAN ECK WORLDWIDE
INSURANCE TRUST VIPF
----------------- --------------------------------------------------------
WORLDWIDE EQUITY HIGH
BOND INCOME OVERSEAS GROWTH INCOME
----------------- ----------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 6,479 $ 261,584 $ 62,437 $ 254,340 $ 332,014
EXPENSES:
Mortality and expense risk
and administrative charges 3,412 99,111 28,939 73,605 55,282
--------------------------------------------------------------------------
Net investment (loss) income 3,067 162,473 33,498 180,735 276,732
--------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from
shares sold (3,685) 108,107 27,988 234,913 (171,740)
Net unrealized appreciation
(depreciation) on investments (18,268) (60,792) 828,494 1,676,651 123,757
--------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (21,953) 47,315 856,482 1,911,564 (47,983)
--------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ (18,886) $ 209,788 $ 889,980 $ 2,092,299 $ 228,749
==========================================================================
</TABLE>
<TABLE>
<CAPTION>
VIPF ALGER AMERICAN FUND
------------------------------ ----------------------------
INDEX
500 CONTRAFUND GROWTH SMALL CAP
--------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 166,341 $ 142,338 $ 482,583 $ 231,811
EXPENSES:
Mortality and expense risk
and administrative charges 211,323 74,488 93,493 35,473
-----------------------------------------------------------
Net investment (loss) income (44,982) 67,850 389,090 196,338
-----------------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from
shares sold 321,968 179,054 508,295 839,950
Net unrealized appreciation
(depreciation) on investments 2,649,576 1,020,367 1,378,591 163,104
-----------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 2,971,544 1,199,421 1,886,886 1,003,054
-----------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 2,926,562 $ 1,267,271 $2,275,976 $ 1,199,392
===========================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE> 126
NATIONAL VARIABLE ANNUITY ACCOUNT II
(A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
AMERICAN CENTURY NEUBERGER
VARIABLE PORTFOLIOS JP MORGAN SERIES TRUST II BERMAN
----------------------------- ---------------------------- ----------------
VP INCOME & INTERNATIONAL SMALL PARTNERS
VP VALUE GROWTH OPPORTUNITIES COMPANY PORTFOLIO
----------------- ----------- ------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 1,247 $ 148 $ 9,458 $ 7,975 $ 2,774
EXPENSES:
Mortality and expense risk
and administrative charges 2,709 16,839 1,451 2,703 3,126
---------------------------------------------------------------------------
Net investment (loss) income (1,462) (16,691) 8,007 5,272 (352)
---------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from
shares sold (752) 23,281 879 4,694 4,706
Net unrealized appreciation
(depreciation) on investments (29,794) 235,156 37,900 96,045 7,258
---------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (30,546) 258,437 38,779 100,739 11,964
---------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ (32,008) $ 241,746 $ 46,786 $ 106,011 $ 11,612
============================================================================
</TABLE>
<TABLE>
<CAPTION>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
------------------------------------------------------------
INTERNATIONAL GLOBAL CORE SMALL MID CAP
EQUITY INCOME CAP EQUITY VALUE TOTAL
--------------- -------------- ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 21,234 $ 3,702 $ 207 $ 2,276 $ 3,343,571
EXPENSES:
Mortality and expense risk
and administrative charges 1,981 677 539 1,773 1,233,076
----------------------------------------------------------------------------
Net investment (loss) income 19,253 3,025 (332) 503 2,110,495
----------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from
shares sold 2,942 (19) 77 2,977 2,542,594
Net unrealized appreciation
(depreciation) on investments 38,948 (3,774) 9,904 (11,930) 12,426,509
----------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 41,890 (3,793) 9,981 (8,953) 14,969,103
----------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 61,143 $ (768) $ 9,649 $ (8,450) $ 17,079,598
=============================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-55
<PAGE> 127
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
MARKET GROWTH GROWTH MANAGED BOND
-------------- --------------- ------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 185,319 $ 347,569 $ 11,494 $ 103,637 $ 35,475
EXPENSES:
Mortality and expense risk
and administrative charges 51,068 68,736 5,766 30,795 13,683
-----------------------------------------------------------------------------
Net investment income (loss) 134,251 278,833 5,728 72,842 21,792
-----------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized (loss) gain from
shares sold - (148,064) (540) 2,236 11,051
Net unrealized appreciation
on investments - 479,266 17,348 182,327 31,347
-----------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments - 331,202 16,808 184,563 42,398
-----------------------------------------------------------------------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 134,251 $ 610,035 $ 22,536 $ 257,405 $ 64,190
=============================================================================
</TABLE>
<TABLE>
<CAPTION>
STRONG VARIABLE
MARKET STREET FUND STRONG INSURANCE FUNDS
---------------------------- --------------- ----------------
SENTINEL OPPORTUNITY MID CAP
INTERNATIONAL GROWTH FUND II GROWTH
--------------- ------------ --------------- ----------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 44,221 $ 82,215 $ 98,918 $ 3
EXPENSES:
Mortality and expense risk
and administrative charges 13,805 21,509 14,172 7,793
-------------------------------------------------------------
Net investment income (loss) 30,416 60,706 84,746 (7,790)
-------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized (loss) gain from
shares sold (22,126) (61,135) (20,284) 6,111
Net unrealized appreciation
on investments 28,945 197,891 14,710 192,023
-------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 6,819 136,756 (5,574) 198,134
-------------------------------------------------------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 37,235 $ 197,462 $ 79,172 $ 190,344
=============================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-56
<PAGE> 128
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
WORLDWIDE VIPF
----------------- -------------------------------------------------------
WORLDWIDE EQUITY HIGH
BOND INCOME OVERSEAS GROWTH INCOME
----------------- ----------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 395 $ 116,499 $ 28,711 $ 35,223 $ 127,589
EXPENSES:
Mortality and expense risk
and administrative charges 733 48,110 12,936 12,021 27,538
-------------------------------------------------------------------------
Net investment (loss) income (338) 68,389 15,775 23,202 100,051
-------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from
shares sold 1,014 2,740 (2,727) 17,639 (90,962)
Net unrealized appreciation
(depreciation) on investments 5,116 201,202 32,101 302,409 (150,485)
-------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 6,130 203,942 29,374 320,048 (241,447)
-------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 5,792 $ 272,331 $ 45,149 $ 343,250 $ (141,396)
=========================================================================
</TABLE>
<TABLE>
<CAPTION>
VIPF ALGER AMERICAN FUND
------------------------------ ----------------------------
INDEX
500 CONTRAFUND GROWTH SMALL CAP
--------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ 64,307 $ 44,054 $ 156,792 $ 97,173
EXPENSES:
Mortality and expense risk
and administrative charges 68,068 24,781 16,948 12,814
-----------------------------------------------------------
Net investment (loss) income (3,761) 19,273 139,844 84,359
-----------------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from
shares sold 196,577 28,011 46,167 (150,917)
Net unrealized appreciation
(depreciation) on investments 930,496 430,650 342,232 241,928
-----------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 1,127,073 458,661 388,399 91,011
-----------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 1,123,312 $ 477,934 $ 528,243 $ 175,370
===========================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-57
<PAGE> 129
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>
JP MORGAN
AMERICAN CENTURY SERIES NEUBERGER GOLDMAN SACHS VARIABLE
VARIABLE PORTFOLIOS TRUST II BERMAN INSURANCE TRUST
-------------------------- ------------- ------------- --------------------------
VP INCOME & SMALL PARTNERS INTERNATIONAL MID CAP
VP VALUE GROWTH COMPANY PORTFOLIO EQUITY VALUE TOTAL
-------------- ----------- ------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and
capital gain distributions $ - $ 109 $ 2,520 $ - $ 387 $ 83 $ 1,582,693
EXPENSES:
Mortality and expense risk
and administrative charges 3 26 212 208 111 9 451,845
----------------------------------------------------------------------------------------------
Net investment (loss) income (3) 83 2,308 (208) 276 74 1,130,848
----------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from
shares sold - 377 1,220 37 2,080 - (181,495)
Net unrealized appreciation
(depreciation) on investments 155 1,347 7,460 6,843 2,672 (101) 3,497,882
----------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 155 1,724 8,680 6,880 4,752 (101) 3,316,387
----------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 152 $ 1,807 $ 10,988 $ 6,672 $ 5,028 $ (27) $ 4,447,235
==============================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-58
<PAGE> 130
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
===================================================================================
STRONG VARIABLE
MARKET STREET FUND STRONG INSURANCE FUNDS
-------------------------------- ------------------ ---------------------
SENTINEL OPPORTUNITY MID CAP
INTERNATIONAL GROWTH FUND II GROWTH
--------------- ------------- ------------------ ---------------------
<S> <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
-------------------------------------------------------------------------------
Net investment income (Loss) (1,416) (1,175) (441) 5,461
-------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized (loss) gain from
shares sold (630) 114 16 (35)
Net unrealized appreciation
(depreciation) on investments (17,374) 6.125 (192) (2,944)
-------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (18,004) 6,239 (176) (2,979)
-------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ (19,420) $ 5,064 $ (617) $ 2,482
===============================================================================
VAN ECK
WORLDWIDE
INSURANCE TRUST
----------------------
WORLDWIDE
BOND
----------------------
<S> <C>
INVESTMENT INCOME:
Dividend income and capital gain
distributions $ -
EXPENSES:
Mortality and expense risk and
administrative charges 76
----------------------
Net investment income (Loss) (76)
----------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized (loss) gain from
shares sold 98
Net unrealized appreciation
(depreciation) on investments 53
----------------------
Net realized and unrealized
gain (loss) on investments 151
----------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 75
======================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE> 131
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
INCOME OVERSEAS GROWTH HIGH INCOME
--------------- -------------- --------------- ----------------
<S> <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
------------------------------------------------------------------------
Net investment (loss) income (2,835) (761) (482) (1,462)
------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized (loss) gain from
shares sold (1,282) (1,122) (109) 286
Net unrealized appreciation
(depreciation) on investments 26,669 (5,590) (946) 8,486
------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS 25,387 (6,712) (1,055) 8,772
------------------------------------------------------------------------
Increase (decrease) in net assets
resulting from operations $ 22,552 $ (7,473) $ (1,537) $ 7,310
========================================================================
VIPF ALGER AMERICAN FUND
----------------------------------- --------------------------------------
INDEX
500 CONTRAFUND GROWTH SMALL CAP
--------------- --------------- ---------------- -----------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income and capital gain
distributions $ - $ - $ - $ -
EXPENSES:
Mortality and expense risk and
administrative charges 4,076 1,517 1,404 1,338
------------------------------------------------------------------------------
Net investment (loss) income (4,076) (1,517) (1,404) (1,338)
------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized (loss) gain from
shares sold 1,024 (283) (374) (200)
Net unrealized appreciation
(depreciation) on investments 39,925 4,881 (5,576) (9,910)
------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 40,949 4,598 (5,950) (10,110)
------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 36,873 $ 3,081 $ (7,354) $ (11,448)
==============================================================================
TOTAL
---------------
<S> <C>
INVESTMENT INCOME:
Dividend income and capital gain
distributions $ 79,415
Expenses:
Mortality and expense risk and
administrative charges 33,286
----------------
Net investment (loss) income 46,129
----------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized (loss) gain from
shares sold (5,406)
Net unrealized appreciation
(depreciation) on investments 105,858
----------------
Net realized and unrealized
gain (loss) on investments 100,452
---------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 146,581
================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE> 132
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, 1999
<TABLE>
<CAPTION>
MARKET STREET FUND
-----------------------------------------------------------------------------
MONEY AGGRESSIVE
MARKET GROWTH GROWTH MANAGED
--------------- --------------- ------------- ----------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 288,656 $ 98,218 $ 211,641 $ (30,291)
-----------------------------------------------------------------------------
ACCUMULATION UNIT TRANSACTIONS:
Participant deposits 26,288,659 2,990,919 234,820 2,330,507
Transfers between investment
sub-accounts and general account, net (21,394,377) 1,889,766 69,998 764,264
Surrenders and lapses (436,491) (317,144) (22,928) (196,938)
Contract benefits (62,247) - - (131,386)
Contract charges (23,269) (8,020) (906) (3,399)
Miscellaneous (653) 3,267 (4,945) (4,097)
-----------------------------------------------------------------------------
Total net accumulation unit transactions 4,371,622 4,558,788 276,039 2,758,951
-----------------------------------------------------------------------------
Increase in net assets 4,660,278 4,657,006 487,680 2,728,660
Net assets, beginning of period 4,919,765 8,147,400 766,252 3,797,496
-----------------------------------------------------------------------------
Net assets, end of period $ 9,580,043 $ 12,804,406 $ 1,253,932 $ 6,526,156
=============================================================================
<CAPTION>
MARKET STREET FUND STRONG
-------------------------------------------------------- -----------------
SENTINEL OPPORTUNITY
BOND INTERNATIONAL GROWTH FUND II
-------------------- ------------- --------------- -----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ (155,560) $ 425,923 $ 1,385,459 $ 660,868
-----------------------------------------------------------------------------
ACCUMULATION UNIT TRANSACTIONS:
Participant deposits 2,009,281 583,214 1,921,976 806,565
Transfers between investment
sub-accounts and general account, net 215,535 203,350 732,432 332,428
Surrenders and lapses (63,801) (21,296) (48,939) (26,099)
Contract benefits (62,633) - - -
Contract charges (2,037) (928) (4,223) (2,093)
Miscellaneous (1,439) (1,187) (1,674) 2,858
-----------------------------------------------------------------------------
Total net accumulation unit transactions 2,094,906 763,153 2,599,572 1,113,659
-----------------------------------------------------------------------------
Increase in net assets 1,939,346 1,189,076 3,985,031 1,774,527
Net assets, beginning of period 2,877,768 1,214,433 2,127,070 1,566,747
-----------------------------------------------------------------------------
Net assets, end of period $ 4,817,114 $ 2,403.509 $ 6,112,101 $ 3,341,274
=============================================================================
<CAPTION>
STRONG VARIABLE
INSURANCE
FUNDS
-----------------
MID CAP
GROWTH
-----------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 2,687,832
-----------------
ACCUMULATION UNIT TRANSACTIONS:
Participant deposits 2,336,701
Transfers between investment
sub-accounts and general account, net 2,449,942
Surrenders and lapses (66,583)
Contract benefits (4,434)
Contract charges (1,949)
Miscellaneous (5,324)
-----------------
Total net accumulation unit transactions 4,708,353
-----------------
Increase in net assets 7,396,185
Net assets, beginning of period 1,129,736
-----------------
Net assets, end of period $ 8,525,921
=================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE> 133
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, 1999
<TABLE>
<CAPTION>
VAN ECK
WORLDWIDE
INSURANCE TRUST VIPF
------------------ -------------------------------------------------------
WORLDWIDE EQUITY
BOND FUND INCOME OVERSEAS GROWTH
------------------ ------------------ --------------- -----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ (18,886) $ 209,788 $ 889,980 $ 2,092,299
----------------------------------------------------------------------------
ACCUMULATION UNIT TRANSACTIONS:
Participant deposits 226,732 2,371,079 890,534 3,633,682
Transfers between investment
sub-accounts and general account, net 135,114 1,133,237 352,462 3,646,267
Surrenders and lapses (39,396) (225,947) (46,181) (90,928)
Contract benefits - - - -
Contractcharges (181) (4,529) (1,603) (4,522)
Miscellaneous (90) 3,192 (565) (16,282)
----------------------------------------------------------------------------
Total net accumulation unit transactions 322,179 3,277,032 1,194,647 7,168,217
----------------------------------------------------------------------------
Increase in net assets 303,293 3,486,820 2,084,627 9,260,516
Net assets, beginning of period 102,192 5,328,200 1,441,055 1,899,754
----------------------------------------------------------------------------
Net assets, end of period $ 405,485 $ 8,815,020 $ 3,525,682 $ 11,160,270
============================================================================
<CAPTION>
ALGER AMERICAN
VIPF FUND
------------------------------------------------------- --------------------
HIGH INDEX
INCOME 500 CONTRAFUND GROWTH
------------- -------------------- ------------------ -------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 228,749 $ 2,926,562 $ 1,267,271 $ 2,275,976
-----------------------------------------------------------------------------
ACCUMULATION UNIT TRANSACTIONS:
Participant deposits 904,815 8,179,946 2,342,051 4,382,328
Transfers between investment
sub-accounts and general account, net 88,791 4,477,537 1,912,615 3,483,942
Surrenders and lapses (105,772) (225,373) (95,850) (129,324)
Contract benefits - - - -
Contract charges (1,680) (11,834) (4,506) (5,683)
Miscellaneous 258 (3,224) 558 15,354
-----------------------------------------------------------------------------
Total net accumulation unit transactions 886,412 12,417,052 4,154,868 7,746,617
-----------------------------------------------------------------------------
Increase in net assets 1,115,161 15,343,614 5,422,139 10,022,593
Net assets, beginning of period 3,233,068 8,874,441 3,097,797 2,715,839
-----------------------------------------------------------------------------
Net assets, end of period $ 4,348,229 $ 24,218,055 $ 8,519,936 $ 12,738,432
=============================================================================
<CAPTION>
ALGER AMERICAN
FUND
----------------
SMALL CAP
----------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 1,199,392
----------------
ACCUMULATION UNIT TRANSACTIONS:
Participant deposits 1,358,829
Transfers between investment
sub-accounts and general account, net (455,443)
Surrenders and lapses (48,607)
Contract benefits -
Contract charges (2,079)
Miscellaneous (9,708)
----------------
Total net accumulation unit transactions 842,992
----------------
Increase in net assets 2,042,384
Net assets, beginning of period 2,268,367
----------------
Net assets, end of period $ 4,310,751
================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE> 134
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, 1999
<TABLE>
<CAPTION>
NEUBERGER
AMERICAN CENTURY VARIABLE PORTFOLIOS JP MORGAN SERIES TRUST II BERMAN
------------------------------------ ----------------------------- ----------
INTERNATIONAL SMALL PARTNERS
VP VALUE VP INCOME & GROWTH OPPORTUNITIES COMPANY PORTFOLIO
------------ ------------------ --------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $ (32,008) $ 241,746 $ 46,786 $ 106,011 $ 11,612
--------------------------------------------------------------------------------
ACCUMULATION UNIT TRANSACTIONS:
Participant deposits 590,006 1,838,515 222,327 182,943 289,928
Transfers between investment
subaccounts and general account, net 79,342 295,118 64,288 46,188 117,414
Surrenders and lapses (415) (38,280) (614) (600) (4,580)
Contract benefits - - - - -
Contract charges (249) (1,335) (116) (108) (223)
Miscellaneous (527) (16) 38 (72) 58
--------------------------------------------------------------------------------
Total net accumulation unit transactions 668,157 2,094,002 285,923 228,351 402,597
--------------------------------------------------------------------------------
Increase in net assets 636,149 2,335,748 332,709 334,362 414,209
Net assets, beginning of period 4,999 28,051 - 105,354 96,245
--------------------------------------------------------------------------------
Net assets, end of period $ 641,148 $ 2,363,799 $ 332,709 $ 439,716 $ 510,454
================================================================================
</TABLE>
<TABLE>
<CAPTION>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
-------------------------------------------------------
INTERNATIONAL GLOBAL CORE SMALL MID CAP
EQUITY INCOME CAP EQUITY VALUE TOTAL
--------------- ------------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $ 61,143 (768) 9,649 $ (8,450) $ 17,079,598
------------------------------------------------------------------------------
ACCUMULATION UNIT TRANSACTIONS:
Participant deposits 214,185 72,261 86,608 234,338 67,523,749
Transfers between investment
subaccounts and general account, net 23,322 50,428 1,683 70,187 785,830
Surrenders and lapses (1,288) - (69) (8,000) (2,261,443)
Contract benefits - - - - (260,700)
Contract charges (98) (37) (11) (100) (85,718)
Miscellaneous 1 (11) (13) 199 (24,044)
------------------------------------------------------------------------------
Total net accumulation unit transactions 236,122 122,641 88,198 296,624 65,677,674
------------------------------------------------------------------------------
Increase in net assets 297,265 121,873 97,847 288,174 82,757,272
Net assets, beginning of period 48,510 - - 9,972 55,800,511
------------------------------------------------------------------------------
Net assets, end of period $ 345,775 121,873 97,847 $ 298,146 $ 138,557,783
==============================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<PAGE> 135
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 INTER- SENTINEL
MARKET GROWTH GROWTH MANAGED BOND NATIONAL GROWTH
------------ ------------ ----------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $ 134,251 $ 610,035 $ 22,536 $ 257,405 $ 64,190 $ 37,235 $ 197,462
---------------------------------------------------------------------------------------------
ACCUMULATION UNIT TRANSACTIONS:
Participant deposits 18,471,185 2,919,395 323,271 1,534,081 1,163,394 551,150 1,258,833
Transfers between investment
subaccounts and general account, net (14,985,342) 2,697,446 283,669 1,126,815 1,501,305 101,197 298,905
Surrenders and lapses (42,216) (189,398) (370) (44,969) (27,617) (30,653) (35,298)
Contract benefits - (6,019) - - - - -
Contract charges (19,023) (3,531) (397) (1,251) (453) (431) (1,889)
Miscellaneous 186 850 2,438 1,326 3,502 985 3,243
---------------------------------------------------------------------------------------------
Total net accumulation unit
transactions 3,424,790 5,418,743 608,611 2,616,002 2,640,131 622,248 1,523,794
---------------------------------------------------------------------------------------------
Increase in net assets 3,559,041 6,028,778 631,147 2,873,407 2,704,321 659,483 1,721,256
Net assets, beginning of period 1,360,724 2,118,622 135,105 924,089 173,447 554,950 405,814
---------------------------------------------------------------------------------------------
Net assets, end of period $ 4,919,765 $ 8,147,400 $ 766,252 $ 3,797,496 $2,877,768 $ 1,214,433 $2,127,070
=============================================================================================
</TABLE>
<TABLE>
<CAPTION>
STRONG VARIABLE
STRONG INSURANCE FUNDS
----------- -----------------
OPPORTUNITY MID CAP
FUND II GROWTH
----------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $ 79,172 $ 190,344
---------------------------------
ACCUMULATION UNIT TRANSACTIONS:
Participant deposits 1,072,615 376,539
Transfers between investment
subaccounts and general account, net 292,790 408,147
Surrenders and lapses (52,346) (114)
Contract benefits - -
Contract charges (1,066) (431)
Miscellaneous 1,544 5
---------------------------------
Total net accumulation unit
transactions 1,313,537 748,146
---------------------------------
Increase in net assets 1,392,709 974,490
Net assets, beginning of period 174,038 155,246
---------------------------------
Net assets, end of period $ 1,566,747 $ 1,129,736
=================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-64
<PAGE> 136
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
WORLDWIDE
INSURANCE
TRUST VIPF
------------- ------------------------------------------------------------------------------
WORLDWIDE EQUITY HIGH INDEX
BOND INCOME OVERSEAS GROWTH INCOME 500 CONTRAFUND
------------- ------------ ----------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $ 5,792 $ 272,331 $ 45,149 $ 343,250 $ (141,396) $ 1,123,312 $ 477,934
----------------------------------------------------------------------------------------------
ACCUMULATION UNIT TRANSACTIONS:
Participant deposits 17,867 2,615,694 502,113 682,403 1,694,141 4,148,335 1,210,839
Transfers between investment
subaccounts and general account, net 55,180 1,394,123 620,833 722,740 852,066 2,346,923 842,416
Surrenders and lapses (8,541) (110,956) (20,126) (63,100) (30,107) (66,786) (83,902)
Contract benefits - - - - - (6,390) -
Contract charges (80) (2,632) (852) (839) (1,027) (4,044) (1,422)
Miscellaneous (5) 8,112 96 (371) 438 (5,864) 5,199
----------------------------------------------------------------------------------------------
Total net accumulation unit
transactions 64,421 3,904,341 1,102,064 1,340,833 2,515,511 6,412,174 1,973,130
----------------------------------------------------------------------------------------------
Increase in net assets 70,213 4,176,672 1,147,213 1,684,083 2,374,115 7,535,486 2,451,064
Net assets, beginning of period 31,979 1,151,528 293,842 215,671 858,953 1,338,955 646,733
----------------------------------------------------------------------------------------------
Net assets, end of period $ 102,192 $ 5,328,200 $ 1,441,055 $ 1,899,754 $3,233,068 $ 8,874,441 $3,097,797
==============================================================================================
</TABLE>
<TABLE>
<CAPTION>
ALGER AMERICAN FUND
-----------------------------
GROWTH SMALL CAP
----------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $ 528,243 $ 175,370
-----------------------------
ACCUMULATION UNIT TRANSACTIONS:
Participant deposits 1,062,754 527,418
Transfers between investment
subaccounts and general account, net 753,387 609,911
Surrenders and lapses (15,519) (55,867)
Contract benefits - -
Contract charges (975) (788)
Miscellaneous 6,812 3,797
-----------------------------
Total net accumulation unit
transactions 1,806,459 1,084,471
-----------------------------
Increase in net assets 2,334,702 1,259,841
Net assets, beginning of period 381,137 1,008,526
-----------------------------
Net assets, end of period $2,715,839 $ 2,268,367
=============================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE> 137
NATIONAL VARIABLE ANNUITY ACCOUNT II
(A Separate Account of National Life Insurance Company)
STATEMENT IN CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
JP MORGAN SERIES NEUBERGER
AMERICAN CENTURY VARIABLE PORTFOLIOS TRUST II BERMAN
----------------------------------- --------------- --------------
VP INCOME & SMALL PARTNERS
VP VALUE GROWTH COMPANY PORTFOLIO
----------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 152 $ 1,807 $ 10,988 $ 6,672
--------------------------------------------------------------------------
ACCUMULATION UNIT TRANSACTIONS:
Participant deposits 4,500 13,665 76,493 69,096
Transfers between investment
sub-accounts and general account, net 355 12,598 17,925 20,000
Surrenders and lapses - (4) (50) (50)
Contract benefits - - - -
Contract charges (8) (9) (8) (18)
Miscellaneous - (6) 6 545
--------------------------------------------------------------------------
Total net accumulation unit transactions 4,847 26,244 94,366 89,573
--------------------------------------------------------------------------
Increase in net assets 4,999 28,051 105,354 96,245
Net assets, beginning of period - - - -
--------------------------------------------------------------------------
Net assets, end of period $ 4,999 $ 28,051 $ 105,354 $ 96,245
==========================================================================
</TABLE>
<TABLE>
<CAPTION>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
---------------------------------------
INTERNATIONAL MID CAP
EQUITY VALUE TOTAL
------------------- ------------------ ----------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 5,028 $ (27) $ 4,447,235
----------------------------------------------------------
ACCUMULATION UNIT TRANSACTIONS:
Participant deposits 34,293 10,000 40,340,074
Transfers between investment
sub-accounts and general account, net 9,113 - (17,498)
Surrenders and lapses - - (877,989
Contract benefits - - (12,409
Contract charges (9) - (41,183)
Miscellaneous 85 (1) 32,922
----------------------------------------------------------
Total net accumulation unit transactions 43,482 9,999 39,423,917
----------------------------------------------------------
Increase in net assets 48,510 9,972 43,871,152
Net assets, beginning of period - - 11,929,359
----------------------------------------------------------
Net assets, end of period $ 48,510 $ 9,972 $ 55,00,511
==========================================================
</TABLE>
F-66
<PAGE> 138
NATIONAL VARIABLE ANNUITY ACCOUNT II
(A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD JUNE 20, 1997 THROUGH DECEMBER 31, 1997
<TABLE>
<CAPTION>
MARKET STREET FUND
--------------------------------------------------------------------------------------
MONEY AGGRESSIVE SENTINEL
MARKET GROWTH GROWTH MANAGED BOND INTERNATIONAL GROWTH
----------- ----------- ----------- ----------- --------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 17,631 $ 66,683 $ 3,221 $ 26,731 $ 2,727 $ (19,420) $ 5,064
--------------------------------------------------------------------------------------
ACCUMULATION UNIT TRANSACTIONS:
Participant deposits 5,916,043 1,014,026 86,684 561,094 108,621 252,281 301,281
Transfers between investment
sub-accounts and general account, net (4,569,640) 1,078,365 45,231 355,723 62,194 327,246 99,612
Surrenders and lapses (55) (21,676) - (827) - (5,054) -
Contract benefits - (18,475) - (18,517) - - -
Contract charges (3,704) (802) (73) (201) (95) (215) (291)
Miscellaneous 449 501 42 86 - 112 273
--------------------------------------------------------------------------------------
Total net accumulation unit transactions 1,343,093 2,051,939 131,884 897,358 170,720 574,370 400,750
--------------------------------------------------------------------------------------
Increase in net assets 1,360,724 2,118,622 135,105 924,089 173,447 554,950 405,814
Net assets, beginning of period - - - - - - -
--------------------------------------------------------------------------------------
Net assets, end of period $1,360,724 $2,118,622 $ 135,105 $ 924,089 $173,447 $ 554,950 $ 405,814
======================================================================================
<CAPTION>
STRONG VARIABLE VAN ECK
STRONG INSURANCE FUNDS WORLDWIDE
---------- --------------- --------------
OPPORTUNITY MID CAP WORLDWIDE
FUND II GROWTH BOND
----------- ----------- -----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ (617) $ 2,482 $ 75
-------------------------------------------
ACCUMULATION UNIT TRANSACTIONS:
Participant deposits 116,713 99,710 10,931
Transfers between investment
sub-accounts and general account, net 57,931 53,827 21,188
Surrenders and lapses - - (202)
Contract benefits - - -
Contract charges (51) (63) (14)
Miscellaneous 62 (170) 1
-------------------------------------------
Total net accumulation unit transactions 174,655 152,764 31,904
-------------------------------------------
Increase in net assets 174,038 152,246 31,979
Net assets, beginning of period - - -
-------------------------------------------
Net assets, end of period $ 174,038 $ 152,246 $ 31,979
===========================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE> 139
NATIONAL VARIABLE ANNUITY ACCOUNT II
(A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY)
STATEMENTS 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 CONTRAFUND
----------- ----------- ----------- ----------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 22,552 $ (7,473) $ (1,537) $ 7,310 $ 36,873 $ 3,081
---------------------------------------------------------------------------
ACCUMULATION UNIT TRANSACTIONS:
Participant deposits 763,280 203,987 156,775 504,002 859,802 336,880
Transfers between investment
sub-accounts and general account, net 382,484 97,368 61,564 348,556 461,112 306,864
Surrenders and lapses (332) (37) - (40) (332) (122)
Contract benefits (18,516) - - - (18,673) -
Contract charges (375) (168) (144) (227) (515) (303)
Miscellaneous 2,435 165 (987) (648) 688 333
---------------------------------------------------------------------------
Total net accumulation unit transactions 1,128,976 301,315 217,208 851,643 1,302,082 643,652
---------------------------------------------------------------------------
Increase in net assets 1,151,528 293,842 215,671 858,953 1,338,955 646,733
Net assets, beginning of period - - - - - -
---------------------------------------------------------------------------
Net assets, end of period $1,151,528 $ 293,842 $ 215,671 $ 858,953 $1,338,955 $ 646,733
===========================================================================
<CAPTION>
ALGER AMERICAN FUND
--------------------------
GROWTH SMALL CAP TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ (7,354) $ (11,448) $ 146,581
-------------------------------------------
ACCUMULATION UNIT TRANSACTIONS:
Participant deposits 379,757 225,642 11,896,844
Transfers between investment
sub-accounts and general account, net 8,561 794,399 (7,415)
Surrenders and lapses - - (28,677)
Contract benefits - - (74,181)
Contract charges (295) (110) (7,646)
Miscellaneous 468 43 3,853
-------------------------------------------
Total net accumulation unit transactions 388,491 1,019,974 11,782,778
-------------------------------------------
Increase in net assets 381,137 1,008,526 11,929,359
Net assets, beginning of period - - -
-------------------------------------------
Net assets, end of period $ 381,137 $1,008,526 $ 11,929,359
===========================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-68
<PAGE> 140
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 Insurance Trust, Variable Insurance Products Fund
and Variable Insurance Products Fund II (VIPF), Alger American Fund, American
Century Variable Portfolios, JP Morgan Series Trust II, Neuberger Berman
Advisers Management Trust, and Goldman Sachs Variable Insurance Trust. 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. 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 accounting
principles generally accepted in the United States (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 Opportunity Fund II, Strong Variable
Insurance Funds Mid Cap Growth, Van Eck Worldwide Insurance Trust Worldwide Bond
Fund, VIPF Equity Income, VIPF Overseas, VIPF Growth, VIPF High Income, VIPF
Index 500, VIPF Contrafund, Alger American Fund Growth, Alger American Fund
Small Capitalization, American Century Variable Portfolios VP Value, American
Century Variable Portfolios VP Income & Growth, JP Morgan Series Trust II
International Opportunities, JP Morgan Series Trust II Small Company, Neuberger
Berman Advisers Management Trust Partners Portfolio, Goldman Sachs Variable
Insurance Trust International Equity, Goldman Sachs Variable Insurance Trust
Global Income, Goldman Sachs Variable Insurance Trust CORE Small Cap Equity and
Goldman Sachs Variable Insurance Trust Mid Cap Value (formerly Goldman Sachs
Variable Insurance Trust Mid Cap Equity) (the Portfolios). The assets of each
portfolio are held separate from the assets of the other portfolios and each has
different investment objectives and policies.
F-69
<PAGE> 141
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-70
<PAGE> 142
NOTE 4 - INVESTMENTS
The number of shares held and cost for each of the portfolios at December 31,
1999 are set forth below:
<TABLE>
<CAPTION>
<S> <C> <C>
Portfolio Shares Cost
--------- --------- ----------
Market Street Fund
Money Market 9,580,043 $9,580,043
Growth 676,051 12,306,208
Aggressive Growth 57,075 1,240,793
Managed 388,693 6,534,798
Bond 455,304 4,913,305
International 144,095 2,029,728
Sentinel Growth 343,570 4,615,584
Strong Opportunity Fund II 128,560 2,830,059
Strong Variable Insurance Funds
Mid Cap Growth 280,735 5,836,901
Van Eck Worldwide Insurance Trust
Worldwide Bond Fund 37,931 418,584
VIPF
Equity Income 342,863 8,647,941
Overseas 128,487 2,670,676
Growth 203,173 9,182,156
High Income 384,459 4,366,470
Index 500 144,663 20,598,058
Contrafund 292,279 7,064,038
Alger American Fund
Growth 197,863 11,023,185
Small Capitalization 78,164 3,915,631
American Century Variable Portfolios
VP Value 107,756 670,786
VP Income & Growth 295,475 2,127,296
JP Morgan Series Trust II
International Opportunities 24,057 294,809
Small Company 26,283 336,211
Neuberger Berman Partners Portfolio 25,991 496,353
Goldman Sachs Variable Insurance Trust
International Equity 23,896 304,155
Global Income 12,398 125,648
CORE Small Cap Equity 9,231 87,943
Mid Cap Value 35,409 310,177
--------------
Total $ 122,527,536
==============
</TABLE>
The cost also represents the aggregate cost for federal income tax purposes.
F-71
<PAGE> 143
NOTE 5 - PURCHASES AND SALES OF PORTFOLIO SHARES
Purchases and proceeds from sales of shares in the portfolios for the period
ended December 31, 1999 aggregated the following:
<TABLE>
<CAPTION>
Portfolio Purchases Proceeds
- --------- --------- --------
<S> <C> <C>
Market Street Fund
Money Market $ 85,829,500 $ 81,169,222
Growth 5,998,341 1,394,567
Aggressive Growth 5,726,656 5,361,304
Managed 4,642,407 1,732,470
Bond 3,798,063 1,681,012
International 1,117,701 291,746
Sentinel Growth 2,883,825 231,477
Strong Opportunity Fund II 1,644,758 375,037
Strong Variable Insurance Funds
Mid Cap Growth 5,288,992 619,891
Van Eck Worldwide Insurance Trust
Worldwide Bond Fund 411,384 86,138
VIPF
Equity Income 5,850,594 2,411,089
Overseas 1,553,566 325,422
Growth 8,736,603 1,387,651
High Income 2,634,971 1,471,827
Index 500 14,547,016 2,174,947
Contrafund 5,158,298 935,581
Alger American Fund
Growth 30,004,379 21,868,673
Small Capitalization 28,948,745 27,909,413
American Century Variable Portfolios
VP Value 686,877 20,183
VP Income & Growth 2,392,118 314,808
JP Morgan Series Trust
International Opportunities 301,764 7,834
Small Company 257,088 23,465
Neuberger Berman Partners Portfolio 468,912 66,667
Goldman Sachs Variable Insurance Trust
International Equity 275,962 20,588
Global Income 126,468 801
CORE Small Cap Equity 90,903 3,037
Mid Cap Value 360,073 62,947
</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.
F-72
<PAGE> 144
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-73
<PAGE> 145
PART C
OTHER INFORMATION
<PAGE> 146
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, 1999 and 1998.
Consolidated Statements of Operations and Policyholder's
Equity (GAAP basis) for the years ended December 31, 1999
and 1998.
Consolidated Statements of Cash Flows (GAAP Basis) for the
years ended December 31, 1999 and 1998.
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 Statements
(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> 147
(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 (1).
Robert E. Boardman
Earle H. Harbison, Jr.
A. Gary Shilling
(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> 148
(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> 149
<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 Executive 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-Marketing
Development and Operations
Wade H. Mayo Senior Vice President
Joseph A. Miller Senior Vice President
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> 150
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 March 31, 2000, 2,992 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> 151
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 Chief Executive Officer and Director
Kenneth R. Ehinger President & Chief Operating Officer
John M. Grab, Jr. Senior Vice President & Chief Financial Officer
Stephen A. Englese Senior 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> 152
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> 153
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. 6 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
28th day of April, 2000.
NATIONAL VARIABLE ANNUITY ACCOUNT II
(Registrant)
By: NATIONAL LIFE INSURANCE COMPANY
Attest: /s/ Lisa A. Pettrey By: /s/ Patrick E. Welch
--------------------------- ---------------------------------
Lisa A. Pettrey Patrick E. Welch, Chairman
Assistant Secretary of the Board and Chief Executive
Officer
By: NATIONAL LIFE INSURANCE COMPANY
(Depositor)
Attest: /s/ Lisa A. Pettrey By: /s/ Patrick E. Welch
--------------------------- ---------------------------------
Lisa A. Pettrey 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.4 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 28, 2000
- ----------------------------- and Chief Executive Officer,
Patrick E. Welch and Director
C-8
<PAGE> 154
/s/ Thomas H. MacLeay President & Chief Operating April 28, 2000
- ----------------------------- Officer, and Director
Thomas H. MacLeay
/s/ William A. Smith Executive Vice President & April 28, 2000
- ----------------------------- Chief Financial Officer
William A. Smith
/s/ Robert E. Boardman* Director April 28, 2000
- ----------------------------
Robert E. Boardman
/s/ Earle H. Harbison, Jr.* Director April 28, 2000
- -----------------------------
Earle H. Harbison, Jr.
/s/ A. Gary Shilling* Director April 28, 2000
- -----------------------------
A. Gary Shilling
C-9
<PAGE> 155
*By /s/ Patrick E. Welch April 28 ,2000
----------------------
Patrick E. Welch
Pursuant to Power of Attorney
<PAGE> 1
April 28, 2000
The Board of Directors
National Life Insurance Company
National Life Drive
Montpelier, Vermont 05604
Re: Variable Annuity Registration Statement
Post-Effective Amendment No. 6
Ladies and Gentlemen:
With reference to the Post-Effective Amendment No. 6 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 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 existing 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. 6 to the 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]
May 1, 2000
VIA EDGARLINK
Board of Directors
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 Statement of Additional Information filed as part of
Post-Effective Amendment No. 6 to the registration statement on Form N-4 for
National Variable Annuity Account II (File No. 333-19583). 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
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 6 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 10, 2000
relating to the consolidated financial statements of National Life Holding
Company, of our report dated March 10, 2000 relating to the consolidated
financial statements of National Life Insurance Company and our report dated
March 31, 2000 relating to the financial statements of the National Variable
Annuity Account II, all 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 28, 2000
