<PAGE> 1
January 15, 1996
P R O S P E C T U S
NML
Variable
Annuity
Account B
- - I N D I V I D U A L R E T I R E M E N T A N N U I T I E S
- - T A X D E F E R R E D A N N U I T I E S
- - N O N T A X - Q U A L I F I E D A N N U I T I E S
[NORTHWESTERN MUTUAL LIFE LOGO]
<PAGE> 2
P R O S P E C T U S
NML VARIABLE ANNUITY ACCOUNT B
This prospectus describes individual variable annuity contracts (the
"Contracts") offered by The Northwestern Mutual Life Insurance Company
("Northwestern Mutual Life"). The Contracts are offered for use in situations
which do not qualify for special treatment under the Internal Revenue Code of
1986, as amended (the "Code"). The Contracts are also offered as individual
retirement annuities pursuant to the provisions of Section 408 of the Code,
including those established by employer contributions under a simplified
employee pension arrangement, and as tax-deferred annuities, pursuant to
Section 403(b) of the Code, for employees of public school systems and
tax-exempt organizations described in Section 501(c)(3). The Contracts may also
be used to fund deferred compensation plans for public employees established
pursuant to Section 457 of the Code. In addition, the Contracts may be
purchased by individuals who have received fixed dollar annuities as
distributions of termination benefits from tax-qualified corporate or HR-10
plans or trusts and want to exchange their policies for the Contracts.
The Contracts contemplate periodic purchase payments until a selected
maturity date--usually retirement--after which the benefits under the Contracts
become payable. Purchase payments which are to be accumulated on a variable
basis or applied to provide variable benefits are credited by Northwestern
Mutual Life to NML Variable Annuity Account B (the "Account") and allocated
among one or more of the nine Divisions of the Account as directed by the
individual Contract owners. The Contracts also permit accumulation of funds on
a fixed basis, at rates of interest declared periodically by Northwestern
Mutual Life. This prospectus describes only the Account and the variable
provisions of the Contracts except where there are specific references to the
fixed provisions.
The assets of the Account are maintained separately from the general assets
of Northwestern Mutual Life. Assets of each Division of the Account are
invested entirely in shares of a corresponding Portfolio of Northwestern Mutual
Series Fund, Inc. (the "Fund"). The Fund is currently comprised of the Index
500 Stock, Select Bond, Money Market, Balanced, Growth and Income Stock, Growth
Stock, Aggressive Growth Stock, High Yield Bond and International Equity
Portfolios.
The value of interests in each Division before annuity benefits become
payable will vary continuously to reflect the investment performance of the
Portfolio selected by the Contract owner. When annuity benefits become payable
the Contracts provide lifetime annuity payments or other annuity payment plans
on either a variable or fixed basis. If a variable payment plan is selected the
annuity payments will continue to increase or decrease to reflect the
investment experience of the Portfolios for the Divisions to which Contract
values have been allocated. If a fixed payment plan is selected the amount of
annuity payments will remain fixed, except as they may be increased by
dividends.
Two versions of the Contracts are offered: Front Load Contracts and Back
Load Contracts. (See "Expense Table", p. 2, and "Deductions", p. 15.)
This prospectus sets forth concisely the information about the Contracts
that a prospective investor ought to know before investing. Additional
information about the Contracts and the Account has been filed with the
Securities and Exchange Commission in a Statement of Additional Information
which is incorporated herein by reference. The Statement of Additional
Information is available upon written or oral request and without charge from
The Northwestern Mutual Life Insurance Company, 720 East Wisconsin Avenue,
Milwaukee, Wisconsin, 53202, Telephone Number (414) 271-1444. The table of
contents for the Statement of Additional Information is found on page 18 of
this prospectus.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUS
FOR NORTHWESTERN MUTUAL SERIES FUND, INC. WHICH IS ATTACHED HERETO, AND
SHOULD BE RETAINED FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
The Date of the Statement of Additional Information is January 15, 1996
<PAGE> 3
INDEX OF SPECIAL TERMS
The following special terms used in this prospectus are discussed at the
pages indicated.
<TABLE>
<CAPTION>
TERM PAGE TERM PAGE
- ---- ---- ---- ----
<S> <C> <C> <C>
ACCUMULATION UNIT . . . . . . . . . . . . . . 9 ANNUITANT . . . . . . . . . . . . . . . . 11
ANNUITY (or ANNUITY PAYMENTS) . . . . . . . . 10 MATURITY DATE . . . . . . . . . . . . . . 10
NET INVESTMENT FACTOR . . . . . . . . . . . . 9 OWNER . . . . . . . . . . . . . . . . . . 11
PAYMENT PLANS . . . . . . . . . . . . . . . . 10 WITHDRAWAL AMOUNT . . . . . . . . . . . . . 9
</TABLE>
SYNOPSIS
THE CONTRACTS The Contracts are individual variable annuity contracts offered
for use under certain tax qualified plan and in non-tax qualified situations.
(See "Qualified and Non-Tax Qualified Plans", p. 13.) The Contracts provide for
accumulation of funds on a variable or fixed or combination basis until a
selected maturity date -- usually retirement -- and payment of annuity
benefits on either a variable or fixed basis. (See "Description of Payment
Plans", p. 10.) Two versions of the Contracts are offered: Front Load
Contracts and Back Load Contracts. See the Expense Table below, and
"Deductions", p. 15.
THE FUND The Account is comprised of nine Divisions which invest in the
corresponding Portfolios of Northwestern Mutual Series Fund, Inc. For more
information regarding the Fund and its Portfolios, including information about
their investment objectives and expenses, see "The Fund", p. 8 and the attached
Fund Prospectus.
DEDUCTIONS AND CHARGES For the Front Load Contract there is a maximum sales
load of 4% of purchase payments, reduced when cumulative purchase payments
exceed $100,000. For the Back Load Contract there is no deduction from purchase
payments for sales expenses, but a withdrawal charge of 0%-8% applies, depending
on the length of time funds have been held under the Contract and the Contract
size. The assets of the Account bear a charge for mortality and expense risks
assumed by Northwestern Mutual Life under the Contract. This charge is at the
annual rate of .40% for the Front Load Contract and 1.25% for the Back Load
Contract. In addition, the annual Contract fee is $30.00. For more information
about these and other expenses, see the Expense Table below and "Deductions", p.
15. Expenses of the Fund are described in the attached Prospectus for the
Fund.
RIGHT TO EXAMINE DEFERRED CONTRACT During the 10 days following the
delivery of a Contract the Owner may return it to Northwestern Mutual Life, by
mail or in person, if for any reason the Owner has changed his mind. On return
of the Contract, Northwestern Mutual Life will pay to the Owner the value of
Accumulation Units credited to the Contract determined as of the valuation next
following receipt of a written request at the Home Office of Northwestern Mutual
Life.
PENALTY TAX ON PREMATURE PAYMENTS Premature payment of benefits under an
annuity contract may cause a penalty tax to be incurred. (See "Taxation of
Contract Benefits", p. 14.)
EXPENSE TABLE
<TABLE>
FRONT LOAD CONTRACT
TRANSACTION EXPENSES FOR CONTRACTOWNERS ANNUAL EXPENSES OF THE ACCOUNT
--------------------------------------- ------------------------------
<S> <C> <C> <C>
Maximum Sales Load (as a percentage (AS A PERCENTAGE OF ASSETS)
of purchase payments) . . . . . . . . . . . 4% ----------------------------
Mortality Rate and Expense Guarantee
Withdrawal Charge . . . . . . . . . . . . . None Charge . . . . . . . . . . . . . . . . . .40%
ANNUAL CONTRACT FEE
-------------------
$30; waived if the Contract Value equals
or exceeds $50,000
-----------------------------------------------------------------------------------------------------------
BACK LOAD CONTRACT
TRANSACTION EXPENSES FOR CONTRACTOWNERS ANNUAL EXPENSES OF THE ACCOUNT
--------------------------------------- ------------------------------
Sales Load (as a percentage of purchase (AS A PERCENTAGE OF ASSETS)
payments) . . . . . . . . . . . . . . . . . None ----------------------------
Withdrawal Charge for Sales Expenses Mortality Rate and Expense Guarantee
(as a percentage of amounts paid) . . . . . 0%-8% Charge . . . . . . . . . . . . . . . . . . 1.25%
ANNUAL CONTRACT FEE
-------------------
$30; waived if the Contract Value equals or exceeds
$50,000
</TABLE>
2
<PAGE> 4
ANNUAL EXPENSES OF THE PORTFOLIOS
(AS A PERCENTAGE OF THE ASSETS)
<TABLE>
<CAPTION>
Total Annual
Management Fees Custody Fees Other Expenses Expenses
--------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Index 500 Stock .20% .00% .01% .21%
Select Bond .30% .00% .00% .30%
Money Market .30% .00% .00% .30%
Balanced .30% .00% .00% .30%
Growth and Income Stock .65% .00% .04% .69%
Growth Stock .58% .00% .03% .61%
Aggressive Growth Stock .55% .00% .01% .56%
High Yield Bond .60% .00% .05% .65%
International Equity .68% .11% .06% .85%
</TABLE>
EXAMPLE
FRONT LOAD CONTRACT - You would pay the following expenses on each $1,000
investment, assuming 5% annual return:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------ ------- --------
<S> <C> <C> <C> <C>
Index 500 Stock $46 $63 $ 81 $134
Select Bond $47 $66 $ 86 $144
Money Market $47 $66 $ 86 $144
Balanced $47 $66 $ 86 $144
Growth and Income Stock $51 $77 $106 $187
Growth Stock $50 $75 $102 $178
Aggressive Growth Stock $49 $73 $ 99 $173
High Yield Bond $50 $76 $104 $183
International Equity $52 $82 $114 $204
</TABLE>
NOTE: THE MINIMUM INITIAL PURCHASE PAYMENT FOR A FRONT-LOAD CONTRACT IS
$10,000. THE NUMBERS ABOVE MUST BE MULTIPLIED BY 10 TO FIND THE EXPENSES FOR A
FRONT-LOAD CONTRACT OF MINIMUM SIZE.
EXAMPLE
BACK LOAD CONTRACT - You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2) surrender at the end of each
time period:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Index 500 Stock $ 95 $110 $128 $194
Select Bond $ 96 $113 $133 $204
Money Market $ 96 $113 $133 $204
Balanced $ 96 $113 $133 $204
Growth and Income Stock $100 $125 $153 $245
Growth Stock $ 99 $123 $149 $237
Aggressive Growth Stock $ 98 $121 $146 $232
High Yield Bond $ 99 $124 $151 $241
International Equity $101 $130 $161 $261
</TABLE>
You would pay the following expenses on the same $1,000 investment, assuming no
surrender or annuitization:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Index 500 Stock $15 $50 $ 88 $194
Select Bond $16 $53 $ 93 $204
Money Market $16 $53 $ 93 $204
Balanced $16 $53 $ 93 $204
Growth and Income Stock $20 $65 $113 $245
Growth Stock $19 $63 $109 $237
Aggressive Growth Stock $18 $61 $106 $232
High Yield Bond $19 $64 $111 $241
International Equity $21 $70 $121 $261
</TABLE>
The purpose of the table above is to assist a Contract Owner in
understanding the expenses paid by the Account and the Portfolios and borne by
investors in the Contracts. The sales load for a Front Load Contract depends on
the
3
<PAGE> 5
amount of cumulative purchase payments. For the Back Load Contract the
withdrawal charge depends on the length of time funds have been held under the
Contract and the amounts held. The Contracts provide for charges for transfers
between the Divisions of the Account and for premium taxes, but no such charges
are currently being made. See "Transfers Between Divisions and Payment Plans",
p. 11 and "Deductions", p. 15, for additional information about expenses for
the Contracts. The expenses shown in the table for the Portfolios show the
annual expenses for each of the Portfolios, as a percentage of the average net
assets of the Portfolio, based on 1995 operations for the Portfolios and their
predecessors. For additional information about expenses of the Portfolios, see
the prospectus for the Fund attached hereto. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN, SUBJECT TO THE GUARANTEES OF THE CONTRACTS.
The tables on the following pages present the accumulation unit values of
the nine Divisions of the Account for the Contracts, including Contracts
issued prior to the date of this prospectus. The Contracts issued
prior to March 31, 1995 are different in certain material respects from
Contracts offered currently, but the values shown below for Contracts issued
after December 16, 1981 and prior to March 31, 1995 are calculated on the same
basis as those for the Back Load Contracts described in this prospectus. The
Front Load Contracts described in this prospectus have a lower mortality rate
and expense guarantee charge than any of the Contracts issued prior to March
31, 1995.
4
<PAGE> 6
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED AFTER MARCH 31, 1995
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS ENDED
DECEMBER 31, 1995
-----------------
<S> <C>
Index 500 Stock Division
Accumulation Unit Value:
Front Load Version
Beginning of Period $1.00
End of Period $1.249
Back Load Version
Beginning of Period $1.637
End of Period $2.032
Number of Accumulation Units
Outstanding, End of Period
Front Load 4,355,530
Back Load 9,220,673
Select Bond Division
Accumulation Unit Value:
Front Load Version
Beginning of Period $1.00
End of Period $1.129
Back Load Version
Beginning of Period $5.471
End of Period $6.137
Number of Accumulation Units
Outstanding, End of Period
Front Load 1,883,453
Back Load 1,292,191
Money Market Division
Accumulation Unit Value:
Front Load Version
Beginning of Period $1.00
End of Period $1.040
Back Load Version
Beginning of Period $2.090
End of Period $2.161
Number of Accumulation Units
Outstanding, End of Period
Front Load 5,948,990
Back Load 5,318,088
Balanced Division
Accumulation Unit Value:
Front Load Version
Beginning of Period $1.00
End of Period $1.181
Back Load Version
Beginning of Period $3.673
End of Period $4.311
Number of Accumulation Units
Outstanding, End of Period
Front Load 6,896,744
Back Load 7,688,513
Growth and Income Stock Division
Accumulation Unit Value:
Front Load Version
Beginning of Period $1.00
End of Period $1.197
Back Load Version
Beginning of Period $1.083
End of Period $1.287
Number of Accumulation Units
Outstanding, End of Period
Front Load 3,530,232
Back Load 7,514,293
Growth Stock Division
Accumulation Unit Value:
Front Load Version
Beginning of Period $1.00
End of Period $1.209
Back Load Version
Beginning of Period $1.082
End of Period $1.300
Number of Accumulation Units
Outstanding, End of Period
Front Load 1,715,092
Back Load 3,952,191
Aggressive Growth Stock Division
Accumulation Unit Value:
Front Load Version
Beginning of Period $1.00
End of Period $1.305
Back Load Version
Beginning of Period $2.123
End of Period $2.753
Number of Accumulation Units
Outstanding, End of Period
Front Load 5,338,263
Back Load 8,294,210
High Yield Bond Division
Accumulation Unit Value:
Front Load Version
Beginning of Period $1.00
End of Period $1.112
Back Load Version
Beginning of Period $1.067
End of Period $1.178
Number of Accumulation Units
Outstanding, End of Period
Front Load 1,418,382
Back Load 2,700,647
International Equity Division
Accumulation Unit Value:
Front Load Version
Beginning of Period $1.00
End of Period $1.140
Back Load Version
Beginning of Period $1.218
End of Period $1.380
Number of Accumulation Units
Outstanding, End of Period
Front Load 2,784,309
Back Load 7,214,357
</TABLE>
5
<PAGE> 7
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED AFTER DECEMBER 16, 1981 AND PRIOR TO MARCH 31, 1995
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
---------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Index 500 Stock
Division
Accumulation
Unit Value:
Beginning of
Period* $1.499 $1.500 $1.384 $1.306 $1.021 $1.000 --
End of Period $2.032 $1.499 $1.500 $1.384 $1.306 $1.021 --
Number of
Accumulation
Units
Outstanding,
End of Period 134,818,674 119,845,898 105,795,927 32,924,088 12,058,133 189,751 --
Select Bond
Division
Accumulation
Unit Value:
Beginning of
Period $5.217 $5.437 $4.990 $4.722 $4.091 $3.824 $3.401
End of Period $6.137 $5.217 $5.437 $4.990 $4.722 $4.091 $3.824
Number of
Accumulation
Units
Outstanding,
End of Period 21,048,883 20,642,740 21,874,778 15,399,609 10,692,797 6,997,013 5,553,863
Money Market
Division
Accumulation
Unit Value:
Beginning of
Period $2.067 $2.012 $1.980 $1.940 $1.859 $1.743 $1.619
End of Period $2.161 $2.067 $2.012 $1.980 $1.940 $1.859 $1.743
Number of
Accumulation
Units
Outstanding,
End of Period 34,040,829 31,466,730 24,431,865 27,773,056 24,758,592 27,363,279 20,510,416
Balanced Division
Accumulation
Unit Value:
Beginning of
Period $3.453 $3.497 $3.232 $3.107 $2.538 $2.544 $2.228
End of Period $4.311 $3.453 $3.497 $3.232 $3.107 $2.538 $2.544
Number of
Accumulation
Units
Outstanding,
End of Period 347,995,936 363,391,482 377,043,512 355,125,051 322,313,588 322,488,873 316,204,759
Growth and Income
Stock Division
Accumulation
Unit Value:
Beginning of
Period** $0.994 $1.000 -- -- -- -- --
End of Period $1.287 $0.994 -- -- -- -- --
Number of
Accumulation
Units
Outstanding,
End of Period 52,866,200 31,542,581 -- -- -- -- --
Growth Stock
Division
Accumulation
Unit Value:
Beginning of
Period** $1.006 $1.000 -- -- -- -- --
End of Period $1.300 $1.006 -- -- -- -- --
Number of
Accumulation
Units
Outstanding,
End of Period 24,827,801 12,213,322 -- -- -- -- --
Aggressive Growth
Stock Division
Accumulation
Unit Value:
Beginning of
Period* $2.001 $1.922 $1.634 $1.562 $1.014 $1.000 --
End of Period $2.753 $2.001 $1.922 $1.634 $1.562 $1.014 --
Number of
Accumulation
Units
Outstanding,
End of Period 147,960,662 123,249,312 77,246,018 53,918,035 19,966,511 205,590 --
High Yield Bond
Division
Accumulation
Unit Value:
Beginning of
Period** $1.022 $1.000 -- -- -- -- --
End of Period $1.178 $1.022 -- -- -- -- --
Number of
Accumulation
Units
Outstanding,
End of Period 13,474,146 7,229,418 -- -- -- -- --
International
Equity Division
Accumulation
Unit Value:
Beginning of
Period*** $1.220 $1.236 $1.000 -- -- -- --
End of Period $1.380 $1.220 $1.236 -- -- -- --
Number of
Accumulation
Units
Outstanding,
End of Period 179,261,185 186,097,279 74,174,799 -- -- -- --
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
-----------------------------------------
1988 1987 1986
---- ---- ----
<S> <C> <C> <C>
Index 500 Stock Division
Accumulation Unit Value:
Beginning of Period* -- -- --
End of Period -- -- --
Number of Accumulation
Units Outstanding,
End of Period -- -- --
Select Bond Division
Accumulation Unit Value:
Beginning of Period $3.175 $3.245 $2.805
End of Period $3.401 $3.175 $3.245
Number of Accumulation
Units Outstanding,
End of Period 4,236,105 3,349,440 3,462,289
Money Market Division
Accumulation Unit Value:
Beginning of Period $1.530 $1.457 $1.386
End of Period $1.619 $1.530 $1.457
Number of Accumulation
Units Outstanding,
End of Period 20,642,227 15,666,117 8,694,717
Balanced Division
Accumulation Unit Value:
Beginning of Period $2.070 $1.988 $1.731
End of Period $2.228 $2.070 $1.988
Number of Accumulation
Units Outstanding,
End of Period 307,488,444 290,102,949 186,218,711
Growth and Income Stock Division
Accumulation Unit Value:
Beginning of Period** -- -- --
End of Period -- -- --
Number of Accumulation
Units Outstanding,
End of Period -- -- --
Growth Stock Division
Accumulation Unit Value:
Beginning of Period** -- -- --
End of Period -- -- --
Number of Accumulation
Units Outstanding,
End of Period -- -- --
Aggressive Growth Stock Division
Accumulation Unit Value:
Beginning of Period* -- -- --
End of Period -- -- --
Number of Accumulation
Units Outstanding,
End of Period -- -- --
High Yield Bond Division
Accumulation Unit Value:
Beginning of Period** -- -- --
End of Period -- -- --
Number of Accumulation
Units Outstanding,
End of Period -- -- --
International Equity Division
Accumulation Unit Value:
Beginning of Period*** -- -- --
End of Period -- -- --
Number of Accumulation
Units Outstanding,
End of Period -- -- --
</TABLE>
* The initial investments in the Index 500 Stock Division and Aggressive
Growth Stock Division were made on December 12, 1990.
** The initial investments in the Growth and Income Stock Division,
Growth Stock Division and High Yield Bond Division were made on May
3, 1994.
*** The initial investment in the International Equity Division was made
on April 30, 1993.
6
<PAGE> 8
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED PRIOR TO DECEMBER 17, 1981
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
-----------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Index 500 Stock Division
Accumulation Unit Value:
Beginning of Period* $1.530 $1.523 $1.398 $1.313 $1.021 $1.000
End of Period $2.084 $1.530 $1.523 $1.398 $1.313 $1.021
Number of Accumulation Units
Outstanding, End of Period 13,256,279 14,230,394 15,442,799 317,023 326,395 4
Select Bond Division
Accumulation Unit Value:
Beginning of Period $5.569 $5.774 $5.273 $4.965 $4.280 $3.981
End of Period $6.583 $5.569 $5.774 $5.273 $4.965 $4.280
Number of Accumulation Units
Outstanding, End of Period 1,364,416 1,492,775 1,701,121 1,808,558 1,979,936 2,041,191
Money Market Division
Accumulation Unit Value:
Beginning of Period $2.206 $2.136 $2.092 $2.040 $1.945 $1.814
End of Period $2.317 $2.206 $2.136 $2.092 $2.040 $1.945
Number of Accumulation Units
Outstanding, End of Period 1,358,156 1,458,463 1,331,457 1,787,440 2,059,962 2,574,527
Balanced Division
Accumulation Unit Value:
Beginning of Period $3.685 $3.713 $3.414 $3.266 $2.655 $2.647
End of Period $4.623 $3.685 $3.713 $3.414 $3.266 $2.655
Number of Accumulation Units
Outstanding, End of Period 7,327,654 8,155,713 9,324,132 10,125,067 10,652,114 11,655,303
Growth and Income Stock Division
Accumulation Unit Value:
Beginning of Period** $0.997 -- -- -- -- --
End of Period $1.298 -- -- -- -- --
Number of Accumulation Units
Outstanding, End of Period 32,681 -- -- -- -- --
Growth Stock Division
Accumulation Unit Value:
Beginning of Period** $1.009 -- -- -- -- --
End of Period $1.311 -- -- -- -- --
Number of Accumulation Units
Outstanding, End of Period 19,315 -- -- -- -- --
Aggressive Growth Stock Division
Accumulation Unit Value:
Beginning of Period* $2.042 $1.952 $1.651 $1.570 $1.014 $1.000
End of Period $2.824 $2.042 $1.952 $1.651 $1.570 $1.014
Number of Accumulation Units
Outstanding, End of Period 1,617,883 1,474,133 969,604 833,606 534,196 22,431
High Yield Bond Division
Accumulation Unit Value:
Beginning of Period** $1.025 -- -- -- -- --
End of Period $1.188 -- -- -- -- --
Number of Accumulation Units
Outstanding, End of Period 58,755 -- -- -- -- --
International Equity Division
Accumulation Unit Value:
Beginning of Period*** $1.230 $1.240 $1.000 -- -- --
End of Period $1.398 $1.230 $1.240 -- -- --
Number of Accumulation Units
Outstanding, End of Period 2,141,462 2,642,855 1,802,948 -- -- --
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
---------------------------------------------
1989 1988 1987 1986
---- ---- ---- ----
<S> <C> <C> <C> <C>
Index 500 Stock Division
Accumulation Unit Value:
Beginning of Period* -- -- -- --
End of Period -- -- -- --
Number of Accumulation Units
Outstanding, End of Period -- -- -- --
Select Bond Division
Accumulation Unit Value:
Beginning of Period $3.522 $3.272 $3.328 $2.863
End of Period $3.981 $3.522 $3.272 $3.328
Number of Accumulation Units
Outstanding, End of Period 2,293,077 2,426,254 2,524,235 2,886,855
Money Market Division
Accumulation Unit Value:
Beginning of Period $1.677 $1.576 $1.494 $1.414
End of Period $1.814 $1.677 $1.576 $1.494
Number of Accumulation Units
Outstanding, End of Period 2,285,388 2,680,348 3,054,691 1,867,702
Balanced Division
Accumulation Unit Value:
Beginning of Period $2.307 $2.133 $2.038 $1.765
End of Period $2.647 $2.307 $2.133 $2.038
Number of Accumulation Units
Outstanding, End of Period 12,655,382 14,097,822 15,526,997 7,534,399
Growth and Income Stock Division
Accumulation Unit Value:
Beginning of Period** -- -- -- --
End of Period -- -- -- --
Number of Accumulation Units
Outstanding, End of Period -- -- -- --
Growth Stock Division
Accumulation Unit Value:
Beginning of Period** -- -- -- --
End of Period -- -- -- --
Number of Accumulation Units
Outstanding, End of Period -- -- -- --
Aggressive Growth Stock Division
Accumulation Unit Value:
Beginning of Period* -- -- -- --
End of Period -- -- -- --
Number of Accumulation Units
Outstanding, End of Period -- -- -- --
High Yield Bond Division
Accumulation Unit Value:
Beginning of Period** -- -- -- --
End of Period -- -- -- --
Number of Accumulation Units
Outstanding, End of Period -- -- -- --
International Equity Division
Accumulation Unit Value:
Beginning of Period*** -- -- -- --
End of Period -- -- -- --
Number of Accumulation Units
Outstanding, End of Period -- -- -- --
</TABLE>
* The initial investments in the Index 500 Stock Division and
Aggressive Growth Stock Division and were made on December 3, 1990.
** The initial investments in the Growth and Income Stock Division,
Growth Stock Division and High Yield Bond Division were made on May
3, 1994.
*** The initial investment in the International Equity Division was made
on April 30, 1993.
THE COMPANY
The Northwestern Mutual Life Insurance Company was organized by a special
act of the Wisconsin Legislature in 1857. It is the nation's sixth largest
life insurance company, based on total assets in excess of $53 billion on
September 30, 1995, and is licensed to conduct a conventional life insurance
business in the District of Columbia and in all states of the United States.
Northwestern Mutual Life sells life and disability income insurance policies
and annuity contracts through its own field force of approximately 6,000 full
time producing agents. The Home Office of Northwestern Mutual Life is located
at 720 East Wisconsin Avenue, Milwaukee, Wisconsin 53202.
7
<PAGE> 9
NML VARIABLE ANNUITY ACCOUNT B
The Account was established on February 14, 1968 by the Board of Trustees
of Northwestern Mutual Life in accordance with the provisions of the Wisconsin
insurance law to facilitate the issuance of the Contracts and is registered as
a unit investment trust under the Investment Company Act of 1940.
The Account has nine Divisions. Considerations paid to Northwestern Mutual
Life to provide variable benefits under the Contracts are allocated to one or
more of the Divisions as directed by the Owner of the Contract. Assets
allocated to the Index 500 Stock, Select Bond, Money Market, Balanced, Growth
and Income Stock, Growth Stock, Aggressive Growth Stock, High Yield Bond and
International Equity Divisions are simultaneously invested in shares of the
corresponding Portfolios of Northwestern Mutual Series Fund, Inc.
Under Wisconsin law, the income, gains or losses, realized or unrealized,
of the Account are credited to or charged against the Account in accordance
with the Contracts, without regard to other income, gains or losses of
Northwestern Mutual Life. The assets of the Account are owned by Northwestern
Mutual Life and it is not a trustee with respect thereto. However, such assets
are not chargeable with any liabilities arising out of any other separate
account or other business of Northwestern Mutual Life. All obligations arising
under the Contracts are general obligations of Northwestern Mutual Life.
THE FUND
Northwestern Mutual Series Fund, Inc. is a mutual fund of the series type
registered under the Investment Company Act of 1940 as an open-end diversified
management investment company. The Fund is composed of nine separate portfolios
which operate as separate mutual funds. The portfolios are the Index 500 Stock
Portfolio, the Select Bond Portfolio, the Money Market Portfolio, the Balanced
Portfolio, the Growth and Income Stock Portfolio, the Growth Stock Portfolio,
the Aggressive Growth Stock Portfolio, the High Yield Bond Portfolio and the
International Equity Portfolio. Shares of each Portfolio of the Fund are
purchased by the corresponding Division of the Account at net asset value, that
is, without any sales charge.
Northwestern Mutual Investment Services, Inc. ("NMIS"), a wholly-owned
subsidiary of Northwestern Mutual Life, is the investment adviser to the Fund.
Northwestern Mutual Life provides certain personnel and facilities utilized by
NMIS in performing its investment advisory functions, and Northwestern Mutual
Life is a party to the investment advisory agreement. Northwestern Mutual Life
and NMIS also perform certain administrative functions and act as co-depositors
of the Account. J.P. Morgan Investment Management, Inc. and Templeton
Investment Counsel, Inc. have been retained under investment sub-advisory
agreements to provide investment advice to the Growth and Income Stock
Portfolio and the International Equity Portfolio, respectively.
FOR MORE INFORMATION REGARDING THE FUND AND ITS PORTFOLIOS, INCLUDING
INFORMATION ABOUT THEIR INVESTMENT OBJECTIVES AND EXPENSES, SEE THE PROSPECTUS
FOR THE FUND ATTACHED HERETO. AN INVESTOR SHOULD READ THE FUND'S PROSPECTUS
CAREFULLY BEFORE INVESTING IN THE CONTRACTS.
THE CONTRACTS
PURCHASE PAYMENTS UNDER THE CONTRACTS
AMOUNT AND FREQUENCY Purchase payments may be paid monthly, quarterly,
semiannually, annually or on any other frequency acceptable to Northwestern
Mutual Life.
For Back Load Contracts the minimum amount for each purchase payment is $25
for Contracts issued as tax-deferred annuities or for use with either
simplified employee pensions or deferred compensation plans for public
employees. For other Back Load Contracts, including individual retirement
annuities and nontax-qualified plans, the minimum initial purchase payment is
$100, or $3,500 for Back Load Contracts purchased in exchange for fixed dollar
annuities received as distribution benefits from qualified plans or trusts.
(See "Qualified and Nontax-Qualified Plans", p. 13). For Front Load Contracts
the minimum initial purchase payment is $10,000. The minimum amount for each
subsequent purchase payment is $25 for all Contracts. Minimum amounts for
payments by preauthorized check depend on payment frequency. Northwestern
Mutual Life will accept larger purchase payments than due, or payments at other
times, but total purchase payments under any Contract may not exceed $5,000,000
without the consent of Northwestern Mutual Life.
Purchase payments may not exceed the applicable limits of the Code. (See
"Federal Income Taxes", p. 13.)
APPLICATION OF PURCHASE PAYMENTS Net purchase payments, after deduction of any
sales load, are credited by Northwestern Mutual Life to the Account and
allocated to one or more Divisions in accordance with the direction of the
Owner. Assets allocated to each Division will thereupon be invested in shares
of the Portfolio which corresponds to that Division.
8
<PAGE> 10
Purchase payments are applied to provide "Accumulation Units" in one or
more Divisions. Accumulation Units represent the interest of an Owner in the
Account. The number of Accumulation Units provided by each net purchase payment
is determined by dividing the amount of the purchase payment to be allocated to
a Division by the value of an Accumulation Unit in that Division, based upon
the valuation of the assets of the Division next following receipt of the
purchase payment at the Home Office of Northwestern Mutual Life. Receipt of
purchase payments at a lockbox facility designated by Northwestern Mutual Life
will be considered the same as receipt at the Home Office. Assets are valued as
of the close of trading on the New York Stock Exchange for each day the
Exchange is open, and at any other time required by the Investment Company Act
of 1940.
The number of an Owner's Accumulation Units will be increased by additional
purchase payments or transfers into the Account and decreased by withdrawals or
transfers out of the Account. The investment experience of the Account does not
change the number (as distinguished from the value) of Accumulation Units.
The value of an Accumulation Unit in each Division varies with the
investment experience of the Division (which in turn is determined by the
investment experience of the corresponding Portfolio of the Fund), and is
determined by multiplying the value on the immediately preceding valuation date
by the net investment factor for the Division. (See "Net Investment Factor",
below.) Since the Owner bears the investment risk, there is no guarantee as to
the aggregate value of Accumulation Units; such value may be less than, equal
to or more than the cumulative net purchase payments.
All or part of a purchase payment may be directed to the Guaranteed
Interest Fund and invested on a fixed basis. See "The Guaranteed Interest
Fund", page 13.
NET INVESTMENT FACTOR
For each Division the net investment factor for any period ending on a
valuation date is 1.000000 plus the net investment rate for the Division for
that period. Under the Contract the net investment rate is related to the
assets of the Division. However, since all amounts are simultaneously invested
in shares of the corresponding Portfolio when allocated to the Division,
calculation of the net investment rate for each of the Divisions may also be
based upon the change in value of a single share of the corresponding
Portfolio.
Thus, for example, in the case of the Balanced Division the net investment
rate is equal to (a) the change in the net asset value of a Balanced Portfolio
share for the period from the immediately preceding valuation date up to and
including the current valuation date, plus the per share amount of any
dividends and other distributions made by the Balanced Portfolio during the
valuation period, less a deduction for any applicable taxes or for any expenses
resulting from a substitution of securities, (b) divided by the net asset value
of a Balanced Portfolio share on the valuation date immediately preceding the
current valuation date, (c) less an adjustment to provide for the deduction for
mortality rate and expense risks assumed by Northwestern Mutual Life. (See
"Deductions", p. 15.)
Investment income and realized capital gains will be received in the form
of dividend and capital gain distributions upon Portfolio shares held by each
Division; such distributions will be reinvested in additional shares of the
same Portfolio. Unrealized capital gains and realized and unrealized capital
losses will be reflected by changes in the value of the shares held by the
Account.
BENEFITS PROVIDED UNDER THE CONTRACTS
The benefits provided under the Contracts consist of a withdrawal amount, a
death benefit and a maturity benefit. Subject to the restrictions noted below,
all of these benefits may be paid in a lump sum or under the payment plans
described below.
WITHDRAWAL AMOUNT On or prior to the maturity date the Owner is entitled to
withdraw the Accumulation Units credited to his Contract and receive the
value thereof less the applicable withdrawal charge. (See "Withdrawal Charge",
p. 15.) The value, which may be either greater or less than the amount paid by
the Owner, is determined as of the valuation date coincident with or next
following receipt by Northwestern Mutual Life of a written request for
withdrawal on a form provided by Northwestern Mutual Life. The forms are
available from the Home Office and agents of Northwestern Mutual Life. A
portion of the Accumulation Units may be withdrawn on the same basis, except
Northwestern Mutual Life will not grant a partial withdrawal which would result
in less than 100 Accumulation Units remaining; a request for such a partial
withdrawal will be treated as a request to surrender the entire Contract.
Amounts distributed to an Annuitant upon withdrawal of all or a portion of
Accumulation Units may be subject to federal income tax. (See "Federal Income
Taxes", p. 13.) A penalty tax will apply to premature payments of Contract
benefits. A penalty tax of 10% of the amount of the payment which is
includible in income will be imposed on non-exempt withdrawals under individual
retirement annuities, tax deferred annuities, nontransferable annuity Contracts
and nonqualified deferred annuities. Payments which are exempt from the
penalty tax include payments upon disability, after age 59-1/2 or as
substantially equal periodic payments for life.
9
<PAGE> 11
If annuity payments are being made under Payment Plan 1 the payee may
surrender the Contract and receive the value of the Annuity Units credited to
his Contract, less the applicable withdrawal charge. (See "Withdrawal Charge",
p. 15.) Upon death during the certain period of the payee under Plan 2 or both
payees under Plan 3, the beneficiary may surrender the Contract and receive the
withdrawal value of the unpaid payments for the certain period. The withdrawal
value is based on the Annuity Unit value on the withdrawal date, with the
unpaid payments discounted at the Assumed Investment Rate. (See "Description
of Payment Plans", below.)
DEATH BENEFIT Upon the death of the Annuitant prior to the maturity date,
Northwestern Mutual Life will pay to the direct beneficiary a death benefit
equal to the Contract value, as of the valuation date coincident with or
next following the date on which proof of death is received at the Home Office
of Northwestern Mutual Life or, if later, the date on which a method of payment
is elected. If death occurs prior to the Annuitant's 65th birthday the death
benefit, where permitted by state law, will be not less than the amount of
purchase payments received by Northwestern Mutual Life under the Contract, less
withdrawals. The death benefit may be paid either in a lump sum or under a
payment plan.
MATURITY BENEFIT Purchase payments under the Contract are payable until the
maturity date specified in the Contract. Any date up to age 90 may be selected
as the maturity date, subject to applicable requirements of the Code. On the
maturity date, if no other permissible payment plan has been elected, the
maturity date will be changed to the Contract anniversary nearest the
Annuitant's 90th birthday. On that date, if no other permissible payment plan
has been elected, the value of the Contract will be paid in monthly payments
for life under a variable payment plan with payments certain for ten years.
VARIABLE PAYMENT PLANS
Part or all of the benefits under a Contract may be paid under a variable
payment plan. Under a variable plan the payee bears the entire investment risk,
since no guarantees of investment return are made. Accordingly, there is no
guarantee of the amount of the variable payments, and the amount of such
payments can be expected to change from month to month.
For a discussion of tax considerations and limitations regarding the
election of payment plans, see "Federal Income Taxes", p. 13.
DESCRIPTION OF PAYMENT PLANS The following payment plans are available:
1. Payments for a Certain Period. An annuity payable monthly for a
specified period of five to 30 years.
2. Life Annuity with or without Certain Period. An annuity payable
monthly until the payee's death, or until the expiration of a selected
certain period, whichever is later. After the payee's death during the
certain period, if any, payments becoming due are paid to the designated
contingent beneficiary. A certain period of either 10 or 20 years may be
selected, or a plan with no certain period may be chosen.
3. Joint and Survivor Life Annuity with Certain Period. An annuity
payable monthly for a certain period of 10 years and thereafter to two
persons for their joint lives. On the death of either payee, payments
continue for the remainder of the 10 years certain or the remaining
lifetime of the survivor, whichever is longer.
Northwestern Mutual Life may limit the election of a payment plan to one
that results in payments of at least $20.
From time to time Northwestern Mutual Life may establish payment plan rates
with greater actuarial value than those stated in the Contract
and make them available at the time of settlement. Northwestern Mutual Life may
also make available other payment plans, with provisions and rates as published
by Northwestern Mutual Life for those plans. AMOUNT OF ANNUITY PAYMENTS The
amount of the first annuity payment will be determined on the basis of the
particular payment plan selected, the annuity payment rate and, for plans
involving life contingencies, the Annuitant's adjusted age and sex. (A Contract
with annuity payment rates that are not based on sex is also available. See
"Special Contract for Employers", p. 11.) Variable annuity payments after the
first will vary from month to month to reflect the fluctuating value of the
Annuity Units credited to the Contract. Annuity Units represent the interest of
the Contract in each Division of the Account after annuity payments begin.
ASSUMED INVESTMENT RATE The variable annuity rate tables for the Contracts are
based upon an Assumed Investment Rate of 3 1/2%. Variable annuity rate tables
based upon an Assumed Investment Rate of 5% are also available where permitted
by state law.
The Assumed Investment Rate affects both the amount of the first variable
payment and the amount by which subsequent payments increase or decrease. The
Assumed Investment Rate does not affect the actuarial value of the future
payments as of the date when payments begin, though it does affect the actual
amount which may be received by an individual Annuitant.
Over a period of time, if each Division achieved a net investment result
exactly equal to the Assumed Investment Rate applicable to a particular payment
plan, the amount of annuity payments would be level. However, if the Division
10
<PAGE> 12
achieved a net investment result greater than the Assumed Investment Rate, the
amount of annuity payments would increase. Similarly, if the Division achieved
a net investment result smaller than the Assumed Investment Rate, the amount of
annuity payments would decrease.
A higher Assumed Investment Rate will result in a larger initial payment
but more slowly rising and more rapidly falling subsequent payments than a
lower Assumed Investment Rate.
ADDITIONAL INFORMATION
TRANSFERS BETWEEN DIVISIONS AND PAYMENT PLANS The Contracts provide
considerable flexibility for Owners to change the allocation of purchase
payments among the Divisions and to transfer values from one Division to
another both before and after annuity payments begin. In order to take full
advantage of these features Owners should carefully consider, on a continuing
basis, which Division or apportionment is best suited to their long-term
investment needs.
A Contract Owner may at any time change the allocation of purchase payments
among the Divisions by written notice to Northwestern Mutual Life. Purchase
payments received at the Home Office of Northwestern Mutual Life on and after
the date on which the notice is received will be applied to provide
Accumulation Units in one or more Divisions on the basis of the new allocation.
Before the effective date of a payment plan the owner may, upon written
request, transfer Accumulation Units from one Division to another. After the
effective date of a payment plan the payee may transfer Annuity Units from one
Division to another. The number of Accumulation or Annuity Units to be credited
will be adjusted to reflect the respective value of the Accumulation and
Annuity Units in each of the Divisions. For Accumulation Units the minimum
amount which may be transferred is the lesser of $100 or the entire value of
the Accumulation Units in the Division from which the transfer is being made.
For each transfer beginning with the thirteenth in any Contract year a transfer
fee of $25 may be deducted from the amount transferred. No charge is currently
being made for transfers.
Owners who contemplate the transfer of funds from one Division to another
should consider the risk inherent in a switch from one investment medium to
another. In general, frequent transfers based on short-term expectations for
the stock and bond markets, especially transfers of large sums, will tend to
accentuate the danger that a transfer will be made at an inopportune time.
Amounts which have been invested on a fixed basis may be transferred to any
Division of the Account, and the value of Accumulation Units in any Division of
the Account may be transferred to the Guaranteed Interest Fund for investment
on a fixed basis, subject to the restrictions described in the Contract. See
"The Guaranteed Interest Fund", page 13.
After the effective date of a payment plan which does not involve a life
contingency (i.e., Plan 1) a payee may transfer to either form of life annuity
at no charge. The value of the remaining payments will be applied to the new
plan selected, with the amount of the first annuity payment under the new plan
being determined on the basis of the particular plan selected, the annuity
payment rate and the Annuitant's adjusted age and sex. Subsequent payments will
vary to reflect changes in the value of the Annuity Units credited.
Other transfers between payment plans are permitted subject to such
limitations as Northwestern Mutual Life may reasonably determine. Generally,
however, transfer is not permitted from a payment plan involving a life
contingency to a payment plan which does not involve the same life contingency.
Transfers from the Money Market Division may be made at any time while a
payment plan is in force. The Contracts provide that transfers between the
other Divisions and transfers between payment plans may be made after the
payment plan has been in force for at least 90 days and thereafter whenever at
least 90 days have elapsed since the date of the last transfer. At present
Northwestern Mutual Life permits transfers at any time but Northwestern Mutual
reserves the right to change this practice in the future. The transfer will be
made as of the close of business on the valuation date coincident with or next
following the date on which the request for transfer is received at the Home
Office of Northwestern Mutual Life, or at a later date if requested.
OWNERS OF THE CONTRACTS The Owner of the Contract has the sole right to
exercise all rights and privileges under the Contract, except as the Contract
otherwise provides. The Owner is ordinarily the Annuitant, but may be an
employer or other entity. The Annuitant is the person upon whose life the
Contract is issued and Contract benefits depend. Following the death of the
Annuitant any remaining Contract benefits are payable to a beneficiary or
contingent beneficiary named in the Contract.
SPECIAL CONTRACT FOR EMPLOYERS The annuity payment rates for payment plans
which involve a life contingency (i.e., Plans 2 and 3) are based, in part, on
the sex of the Annuitant. For certain situations where the Contracts are to be
used in connection with an employer sponsored benefit plan or arrangement,
federal law, and the laws of certain states, may require that purchase payments
and annuity payment rates be determined without regard to sex. A special
Contract is available for this purpose. Prospective purchasers of the Contracts
are urged to review any questions in this area with qualified counsel.
11
<PAGE> 13
DISABILITY PROVISION A Contract may include, as an optional benefit, a
provision under which Northwestern Mutual Life will continue to pay purchase
payments during the total disability of the Annuitant. Each Contract containing
this provision specifies the additional cost of such benefit.
DEFERMENT OF BENEFIT PAYMENTS Northwestern Mutual Life reserves the right to
defer determination of the withdrawal value of the Contracts, or the payment of
benefits under a variable payment plan, until after the end of any period
during which the right to redeem Fund shares is suspended, or payment of the
redemption value is postponed, pursuant to the provisions of the Investment
Company Act of 1940 because: (a) the New York Stock Exchange is closed, except
for holidays or weekends; (b) the Securities and Exchange Commission has
determined that trading on the New York Stock Exchange is restricted; (c) the
Securities and Exchange Commission permits suspension or postponement and so
orders; (d) an emergency exists, as defined by the Securities and Exchange
Commission, so that valuation of the assets of the Fund or disposal of
securities held by it is not reasonably practical; or (e) such suspension or
postponement is otherwise permitted by the Act.
DIVIDENDS The Contracts share in the divisible surplus of Northwestern Mutual
Life, except while payments are being made under a variable payment plan. The
divisible surplus of Northwestern Mutual Life is determined annually for the
following year. State law requires that the surplus be distributed equitably
among participating contracts. Distributions of divisible surplus are commonly
referred to as "dividends".
Northwestern Mutual Life is paying dividends on approximately 10% of its
inforce individual variable annuities in 1996. Dividends are not guaranteed to
be paid in future years. The dividend amount is volatile since it is based on
the average variable Contract value which is defined as the value of the
Accumulation units on the last Contract anniversary adjusted to reflect any
transactions since that date which increased or decreased the Contract's
interest in the Account.
Dividends on variable annuities arise principally as a result of more
favorable expense experience than that assumed in determining deductions. Such
favorable experience is generated primarily by older and/or larger Contracts.
In general, Contracts with an average variable Contract value of less than
$30,000 will not receive dividends, and only about half of those with a value
above $30,000 will receive them.
Any dividend for a Contract is paid on the anniversary date of that
Contract. The dividend is applied as a net purchase payment unless the Owner
elects to have the dividend paid in cash. In the case of a Contract purchased
as an individual retirement annuity pursuant to Section 408(b) of the Internal
Revenue Code, dividends cannot be paid in cash but must be applied as net
purchase payments under the Contract.
VOTING RIGHTS As long as the Account continues to be registered as a unit
investment trust under the Investment Company Act of 1940, and Account assets
are invested in shares of the Portfolios of the Fund, Northwestern Mutual Life
will vote such shares held in the Account in accordance with instructions
received from the Owners of Accumulation Units or payees receiving payments
under variable payment plans. Each such Owner or payee will receive periodic
reports relating to the Fund, proxy material and a form with which to give such
instructions with respect to the proportion of shares of each Portfolio of the
Fund held in the Account corresponding to the Accumulation Units credited to his
Contract, or the number of shares of each Portfolio of the Fund held in the
Account representing the actuarial liability under the variable annuity payment
plan, as the case may be. The number of shares will increase from year to year
as additional purchase payments are paid by the Contract Owner; after a variable
annuity payment plan is in effect the number of shares will decrease from year
to year as the remaining actuarial liability declines. Shares as to which no
instructions have been received will be voted in the same proportion as the
shares as to which instructions have been received.
SUBSTITUTION AND CHANGE Pursuant to a vote of the Owners of Contracts having an
interest in any of the Divisions or as otherwise may be permitted by applicable
insurance and securities laws, and with any required approval of the Securities
and Exchange Commission or other regulatory authority, (a) the assets of the
Division may be invested in securities other than Fund shares as a substitute
for such shares already purchased or as the securities to be purchased in the
future, (b) if deemed by the Board of Trustees of Northwestern Mutual Life to be
in the best interests of Contract owners, the Account or a Division may be
operated as a management company under the Investment Company Act of 1940 or in
any other form permitted by law, (c) the Account may be deregistered under the
Investment Company Act of 1940 in the event such registration is no longer
required, or (d) the provisions of such Contracts may be modified to assure
qualification for the benefits provided by the provisions of the Internal
Revenue Code relating to retirement annuity or variable annuity contracts, or to
comply with any other applicable federal or state laws. In the event of any such
substitution or change, Northwestern Mutual Life may make appropriate
endorsement on Contracts having an interest in the Account and take such other
action as may be necessary to effect the substitution or change.
FIXED ANNUITY PAYMENT PLANS Contract benefits may also be paid under fixed
annuity payment plans which are not described in this Prospectus. If a fixed
annuity is selected the Accumulation Units credited to a Deferred Contract will
12
<PAGE> 14
be cancelled, the withdrawal value of the Contract will be transferred to the
general account of Northwestern Mutual Life, and the payee will no longer have
any interest in the Account. A withdrawal charge may be applicable in
determining the withdrawal value. (See "Withdrawal Amount", p. 9, and
"Withdrawal Charge", p. 15.)
FINANCIAL STATEMENTS Financial statements of the Account and financial
statements of Northwestern Mutual Life appear in the Statement of Additional
Information.
THE GUARANTEED INTEREST FUND
Contract Owners may direct all or part of their purchase payments to the
Guaranteed Interest Fund for investment on a fixed basis. Amounts previously
invested in the Account Divisions may be transferred to the Guaranteed Interest
Fund, prior to the maturity date, and amounts in the Guaranteed Interest Fund
may be transferred to the Account Divisions subject, in each case, to the
restrictions described in the Contract.
Amounts invested in the Guaranteed Interest Fund become part of the
general assets of Northwestern Mutual Life. In reliance on certain exemptive
and exclusionary provisions, interests in the Guaranteed Interest Fund have not
been registered under the Securities Act of 1933 and the Guaranteed Interest
Fund has not been registered as an investment company under the Investment
Company Act of 1940. Accordingly, neither the Guaranteed Interest Fund nor any
interests therein are generally subject to these Acts. Northwestern Mutual Life
has been advised that the staff of the Securities and Exchange Commission has
not reviewed the disclosure in this prospectus relating to the Guaranteed
Interest Fund. This disclosure, 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.
Amounts invested in the Guaranteed Interest Fund earn interest at rates
declared by Northwestern Mutual Life from time to time. The interest rate will
be guaranteed for each amount for at least one year and will be at an annual
effective rate of not less than 3%. At the expiration of the period for which
the interest rate is guaranteed a new interest rate may apply. Interest is
credited and compounded daily. The effective date for a transaction involving
the Guaranteed Interest Fund is determined in the same manner as the effective
date for a transaction involving a Division of the Account.
Investments in the Guaranteed Interest Fund are subject to a maximum of
$1,000,000 without prior consent of Northwestern Mutual Life. To the extent
that a purchase payment or transfer from a Division of the Account causes the
Contract's interest in the Guaranteed Interest Fund to exceed $1,000,000, the
amount of the excess will be placed in the Money Market Division and will remain
there until the Contract Owner instructs otherwise.
Transfers from the Guaranteed Interest Fund to the Account Divisions are
subject to strict limits described in the Contract. After a transfer from the
Guaranteed Interest Fund no further transfers either to or from the Guaranteed
Interest Fund will be allowed for a period of 365 days. The maximum amount that
maybe transferred from the Guaranteed Interest Fund in one transfer is the
greater of (1) 20% of the amount that was invested in the Guaranteed Interest
Fund as of the last Contract anniversary preceding the transfer and (2) the
amount of the most recent transfer from the Guaranteed Interest Fund. But in no
event will this maximum transfer amount be less than $1,000 or more than
$50,000.
The deduction for mortality rate and expense risks, as described below,
is not assessed against amounts in the Guaranteed Interest Fund, and amounts in
the Guaranteed Interest Fund do not bear any expenses of Northwestern Mutual
Series Fund, Inc. Other charges under the Contracts apply for amounts in the
Guaranteed Interest Fund as they are described in this prospectus for amounts
invested on a variable basis. See "Deductions", page 15. For purposes of
allocating and deducting the annual Contract fee, any investment in the
Guaranteed Interest Fund is considered as though it were an investment of the
same amount in one of the Account Divisions.
FEDERAL INCOME TAXES
QUALIFIED AND NONTAX-QUALIFIED PLANS
The Contracts are offered for use under the tax-qualified plans (i.e.,
contributions are generally not taxable) identified below:
1. Individual retirement annuities pursuant to the provisions of Section
408 of the Code, including simplified employee pensions established under
Section 408(j) and (k).
2. Tax-deferred annuities pursuant to the provisions of Section 403(b) of
the Code for employees of public school systems and tax-exempt
organizations described in Section 501(c)(3).
3. Deferred compensation plans for public employees established pursuant
to Section 457 of the Code.
4. Nontransferable annuity contracts issued in exchange for fixed dollar
annuities previously issued by Northwestern Mutual Life or other
insurance companies as distributions of termination benefits from
tax-qualified pension or profit-sharing plans or trusts or annuity
purchase plans.
The Contracts are also offered for use in non tax-qualified situations
(i.e., contributions are taxable).
13
<PAGE> 15
TAXATION OF CONTRACT BENEFITS
For Contracts held by individuals, no tax is payable as a result of any
increase in the value of a Contract until benefits from the Contract are
received. Contract benefits will be taxable as ordinary income when received in
accordance with Section 72 of the Code.
Since purchase payments for Contracts purchased under tax-qualified plans
will ordinarily be paid with funds which have been excluded from the Owner's
gross income, benefits received as annuity payments or upon death or withdrawal
will be taxable as ordinary income when received.
Where nondeductible contributions are made to individual retirement
annuities and other tax-qualified plans, the Owner may exclude from income that
portion of each benefit payment which represents a return of the Owner's
"investment in the contract" as defined in Section 72 until the entire
"investment in the contract" is recovered. Benefits paid in a form other than
an annuity will be taxed as ordinary income when received except for that
portion of the payment which represents a return of the employee's "investment
in the contract." A 15% penalty may be imposed on aggregate payments from
individual retirement annuities, tax-deferred annuities and nontransferable
annuity Contracts in excess of certain annual limits and a 50% penalty may be
imposed on payments made from individual retirement annuities, tax-deferred
annuities, nontransferable annuity Contracts and Section 457 deferred
compensation plans to the extent the payments are less than certain required
minimum amounts. With certain limited exceptions, benefits from individual
retirement annuities, tax-deferred annuities and nontransferable annuity
Contracts are subject to the tax-free roll-over provisions of the Code.
Purchase payments for nontax-qualified Contracts will ordinarily be paid
with funds which have been included in the Owner's gross income. Therefore,
benefits received as annuity payments from these Contracts will be taxable as
ordinary income to the extent they exceed that portion of each payment which
represents a return of the "investment in the contract" as defined in Section
72 until the entire "investment in the contract" is recovered. Benefits
received in a lump sum from these Contracts will be taxable as ordinary income
to the extent they exceed the "investment in the contract." A partial
withdrawal or collateral assignment prior to the Maturity Date will result in
the receipt of gross income by the Owner to the extent that the amounts
withdrawn or assigned do not exceed the excess (if any) of the total value of
Accumulation Units over total purchase payments paid under the Contract less
any amounts previously withdrawn or assigned. Thus, any investment gains
reflected in the Contract values are considered to be withdrawn first and are
taxable as ordinary income. With respect to Contracts issued after October 21,
1988, investment gains will be determined by aggregating all nontax-qualified
deferred Contracts issued by Northwestern Mutual Life to the Owner during the
same calendar year.
A special rule applies to certain nonqualified Contracts not held by
individuals, such as Contracts purchased by corporate employers in connection
with deferred compensation plans. With respect to purchase payments paid after
February 28, 1986, these Contracts will not be taxed as annuity contracts and
increases in the value of the Contracts will be taxable in the year earned.
A penalty tax will apply to premature payments of Contract benefits. A
penalty tax of 10% of the amount of the payment which is includible in income
will be imposed on non-exempt withdrawals under individual retirement
annuities, tax deferred annuities, nontransferable annuity Contracts and
nonqualified deferred annuities. Payments which are exempt from the penalty tax
include payments upon disability, after age 59-1/2 or as substantially equal
periodic payments for life.
For a tax-deferred annuity (funded pursuant to a salary reduction
agreement) no amounts accruing after 1988 may be withdrawn before the Owner
attains age 59-1/2, separates from service, dies or becomes disabled. A limited
exception is provided for hardship. Benefit payments from tax-deferred
annuities and nontransferable annuity contracts will be subject to mandatory
20% withholding unless (1) the payments from the tax-deferred annuities are
rolled over directly to another tax-deferred annuity or an individual
retirement arrangement, or the payments from the nontransferable annuity
contracts are rolled over directly to another nontransferable annuity contract,
a tax-qualified plan or an individual retirement arrangement, (2) they are paid
in substantially equal installments over the life or life expectancy of the
employee (or of the employee and the employee's beneficiary) or over a period
of 10 years or more, or (3) they are "required minimum distributions" payable
after age 70-1/2.
A loan transaction, using a Contract purchased under a tax-qualified plan
as collateral, will generally have adverse tax consequences. For example, such
a transaction destroys the tax status of the individual retirement annuity and
results in taxable income equal to the Contract value.
14
<PAGE> 16
TAXATION OF NORTHWESTERN MUTUAL LIFE
Northwestern Mutual Life may charge the appropriate contracts with their
shares of any tax liability which may result from the maintenance or operation
of the Divisions of the Account. No charge is currently being made. (See "Net
Investment Factor", p. 9 and "Deductions", below.)
OTHER CONSIDERATIONS
It should be understood that the tax rules for annuities and qualified
plans are complex and cannot be readily summarized. The foregoing discussion
does not address special rules applicable in many situations, rules governing
Contracts issued or purchase payments made in past years, current legislative
proposals or state or other law. It is not intended as tax advice. Prospective
purchasers of the Contracts are advised to consult qualified tax counsel.
DEDUCTIONS
The following deductions will be made:
1. Sales Load. For the Front Load Contract a sales load is deducted
from all purchase payments received. The deduction is based on cumulative
purchase payments received and the rates in the table below:
<TABLE>
<CAPTION>
Cumulative Purchase Payments
Paid Under the Contract Rate
<S> <C>
First $100,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.0%
Next $400,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.0%
Next $500,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0%
Balance over $1,000,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.5%
</TABLE>
2. Deductions for Mortality Rate and Expense Risks. The net investment
factor (see "Net Investment Factor", p. 9) used in determining
the value of Accumulation and Annuity Units reflects a deduction on each
valuation date for mortality rate and expense risks assumed by Northwestern
Mutual Life. For the Front Load Contract, the deduction from Accumulation
Units is at a current annual rate of 0.4% of the assets of the Account,
while the deduction from Annuity Units is zero. For the Back Load Contract
the deduction is at a current annual rate of 1.25% of the assets of the
Account. The deduction may be increased or decreased by the Board of
Trustees of Northwestern Mutual Life, but in no event may the deduction
exceed an annual rate of .75% for the Front Load Contract and 1.50% for the
Back Load Contract. This deduction is the only expense item paid by the
Account to date. The Fund pays expenses which are described in the attached
prospectus for the Fund.
The risks assumed by Northwestern Mutual Life are (a) the risk that
annuity payments will continue for longer periods than anticipated because
the Annuitants as a group live longer than expected, and (b) the risk that
the charges made by Northwestern Mutual Life may be insufficient to cover
the actual costs incurred in connection with the Contracts. Northwestern
Mutual Life assumes these risks for the duration of the Contract.
The net investment factor also reflects the deduction of any
reasonable expenses which may result if there were a substitution of other
securities for shares of a Portfolio of the Fund as described under
"Substitution and Change", p. 12, and any applicable taxes, i.e., any tax
liability paid or reserved for by Northwestern Mutual Life resulting from
the maintenance or operation of a Division of the Account, other than
applicable premium taxes which may be deducted directly from
considerations. It is not presently anticipated that any deduction will be
made for federal income taxes (see "Federal Income Taxes", p. 13), nor is
it anticipated that maintenance or operation of the Account will give rise
to any deduction for state or local taxes. However, Northwestern Mutual
Life reserves the right to charge the appropriate Contracts with their
shares of any tax liability which may result under present or future tax
laws from the maintenance or operation of the Account or to deduct any such
tax liability in the computation of the net investment factor for such
Contracts.
3. Contract Fee. On each Contract anniversary prior to the maturity
date a deduction of $30 is made for administrative expenses relating to a
Deferred Contract during the prior year. The charge is made by reducing the
number of Accumulation Units credited to the Contract. For purposes of
allocating and deducting the annual Contract fee, any investment in the
Guaranteed Interest Fund is considered as though it were an investment of
the same amount in one of the Account Divisions. This charge may not be
increased, and is intended only to reimburse Northwestern Mutual Life for
its actual administrative expenses. The charge is currently being waived
if the Contract value on the Contract anniversary is $50,000 or more.
4. Withdrawal Charge. For the Back Load Contract if Accumulation Units
are withdrawn for cash a withdrawal charge for sales expenses will be
deducted. The withdrawal charge will be based on the Amount Categories and
the Rates in the table below. The amount in each Category is based on
cumulative purchase payments made and on the number of Contract
anniversaries that have occurred since each purchase payment was made.
15
<PAGE> 17
<TABLE>
<CAPTION>
AMOUNT AMOUNT
CATEGORY RATE CATEGORY RATE
-------- ---- -------- ----
<S> <C> <C> <C>
Eight . . . . . . . . . . . . . 8% Three . . . . . . . . . . . . . 3%
Seven . . . . . . . . . . . . . 7 Two . . . . . . . . . . . . . . 2
Six . . . . . . . . . . . . . . 6 One . . . . . . . . . . . . . . 1
Five . . . . . . . . . . . . . . 5 Zero . . . . . . . . . . . . . 0
Four . . . . . . . . . . . . . . 4
</TABLE>
The first $100,000 of total purchase payments paid over the life of the
Contract start out in Category Eight, the next $400,000 start out in
Category Four, the next $500,000 start out in Category Two, and all
additional purchase payments paid start out in Category One. As of each
Contract anniversary, any amount in a Category moves to the next lower
Category until the Contract anniversary on which that amount reaches
Category Zero. The total withdrawal charge will be the sum of all the
results calculated by multiplying the amount in each Category by the Rate
for that Category. The amounts used to calculate the withdrawal charge will
be limited to the value of the Contract benefits that are subject to the
withdrawal charge. The amounts used will be taken from those Categories
that produce the lowest withdrawal charge. However, any amounts used to
determine the charge for a partial withdrawal will not be used to determine
subsequent withdrawal charges. There is no withdrawal charge on the value
of Accumulation Units withdrawn in excess of the total purchase payments
paid under the Contract; but in the case of a partial withdrawal, the
purchase payments paid under the Contract are deemed to be withdrawn first,
except for amounts eligible for the withdrawal charge free amount described
in the next paragraph.
The withdrawal charge free amount is available on a Contract if the
Contract value is at least $10,000 on the Contract anniversary
preceding a withdrawal. For each Contract year, the withdrawal charge free
amount is equal to the lesser of 10% of the Contract value on the
last Contract anniversary, and the amount by which the Contract value
exceeds cumulative purchase payments as of the date of the withdrawal.
Eligible amounts withdrawn meeting these requirements will be taken first
from the portion of the Contract value that exceeds cumulative purchase
payments. The withdrawal charge for any amounts not included in the
withdrawal charge free amount will be based first on the purchase payments
that have been paid.
No withdrawal charge will be made upon the selection of a variable
payment plan. However, the withdrawal charge will be made if a withdrawal,
or partial withdrawal, is made within five years after the beginning of a
variable payment plan which is not contingent on the payee's life (Plan 1).
For fixed payment plans the Contract provides for deduction of the
withdrawal charge when the payment plan is selected. By current
administrative practice Northwestern Mutual Life will waive the withdrawal
charge upon selection of a fixed payment plan for a certain period of 12
years or more (Plan 1) or any fixed payment plan which involves a life
contingency (Plans 2 or 3) if the payment plan is selected after the
Contract has been in force for at least one full year.
The amount of withdrawal charges collected by Northwestern Mutual Life
from the Back Load Contracts as a group will depend on the volume and
timing of withdrawal transactions. Northwestern Mutual Life is unable to
determine in advance whether this amount will be greater or less than the
sales expenses incurred in connection with those Contracts, but based on
the information presently available Northwestern Mutual Life believes it is
more likely than not that the sales expenses Northwestern Mutual Life
incurs will be greater than the withdrawal charges Northwestern Mutual Life
receives. Northwestern Mutual Life bears this risk for the duration of the
Contracts. Any excess of sales expenses over withdrawal charges will be
paid from the general assets of Northwestern Mutual Life. These assets may
include proceeds from the charge for annuity rate and expense risks
described above.
5. Premium Taxes. The Contracts provide for the deduction of
applicable premium taxes, if any, from purchase payments or from Contract
benefits. Premium taxes are levied by various jurisdictions, and presently
range from 0% to 3.5% of total purchase payments. Many jurisdictions
presently exempt from premium taxes annuities such as the Contracts. As a
matter of current practice, Northwestern Mutual Life does not deduct
premium taxes from purchase payments received under the Contracts or from
Contract benefits. However, Northwestern Mutual Life reserves the right to
deduct premium taxes in the future.
CONTRACTS ISSUED PRIOR TO MARCH 31, 1995 For Contracts issued prior to March
31, 1995 and after December 16, 1981 there is no front-end sales load but there
is a surrender charge of 8% on the first $25,000 of considerations, 4% on the
next $75,000 and 2% on considerations in excess of $100,000, based on total
cumulative considerations paid under the Contract. The surrender charge
applicable for each consideration reduces by 1% on each Contract anniversary.
A surrender charge free corridor is available on the same basis described above
for the current Contracts. The charge for mortality and expense risks for
those Contracts is 1.25% of the assets of the Account. The annual Contract fee
is the lesser of $30 or 1% of the Contract value.
16
<PAGE> 18
CONTRACTS ISSUED PRIOR TO DECEMBER 17, 1981 For Contracts issued prior to
December 17, 1981 there is no surrender charge, but considerations are subject
to a deduction of 8% for sales expenses. The deduction is reduced to 4% on
considerations in excess of $5,000 received during a single Contract year as
defined in the Contract, 2% on the next $75,000 and 1% on the excess over
$100,000. The charge for mortality rate and expense risks for those
Contracts is .75% of the assets of the Account, which may be raised to a
maximum annual rate of 1%. There is no annual Contract fee.
CERTAIN NONTAX-QUALIFIED CONTRACTS For nontax-qualified Contracts issued after
December 16, 1981 and prior to May 1, 1983 considerations paid under the
Contract are subject to a deduction of 3% on the first $25,000 of
considerations, 2% on the next $75,000 and 1% on amounts in excess of $100,000,
based on total cumulative considerations paid under the Contract. The charge
for annuity rate and expense risks for these Contracts is .75% of the assets of
the Account, which may be raised to a maximum annual rate of 1%.
REDUCED CHARGES FOR EXCHANGE TRANSACTIONS As a matter of current practice,
owners of fixed dollar annuities previously issued by Northwestern Mutual Life
are permitted to exchange those contracts for Front Load or Back Load Contracts
without paying a second charge for sales expenses. This rule is subject to a
number of exceptions and qualifications and may be changed or withdrawn at any
time.
In general, a $25 administrative charge is made on these exchange
transactions and only one such transaction may be effected in any 12-month
period. Transactions on this basis are subject to a limit of 20% of the amount
held under the fixed annuity contract in any 12-month period, but this limit is
presently being waived.
Amounts exchanged from a fixed contract which provides for a surrender
charge are not charged for sales expenses when the exchange is effected and are
placed in the same withdrawal charge category under the new Back Load Contract
as they were before.
Exchange proceeds from fixed contracts which have no surrender charge
provisions are placed in the 0% withdrawal charge category. As an alternative,
exchange proceeds from such a fixed contract may be added to a Front Load
Contract or to a Deferred Contract issued prior to December 17, 1981 without
any deduction for sales expenses.
Fixed annuity contracts (which are not described in this prospectus) are
available in exchange for the Contracts on a comparable basis.
DISTRIBUTION OF THE CONTRACTS
The Contracts will be sold through individuals who, in addition to being
licensed insurance agents of Northwestern Mutual Life, are registered
representatives of Northwestern Mutual Investment Services, Inc., a
wholly-owned subsidiary of Northwestern Mutual Life and a registered
broker-dealer under the Securities Exchange Act of 1934, and a member of the
National Association of Securities Dealers. Where state law requires, such
agents will also be licensed securities salesmen. Commissions paid to the
agents on sales of the Contracts will not exceed 4% of purchase payments.
17
<PAGE> 19
TABLE OF CONTENTS FOR THIS PROSPECTUS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEX OF SPECIAL TERMS . . . . . . . . . . 2
SYNOPSIS . . . . . . . . . . . . . . . . . 2
The Contracts . . . . . . . . . . . . . 2
The Fund . . . . . . . . . . . . . . . . 2
Deductions and Charges . . . . . . . . . 2
Right to Examine Deferred Contract . . . 2
Penalty Tax on Premature Payments . . . 2
EXPENSE TABLE . . . . . . . . . . . . . . . 2
ACCUMULATION UNIT VALUES . . . . . . . . . 5
THE COMPANY . . . . . . . . . . . . . . . . 7
NML VARIABLE ANNUITY
ACCOUNT B . . . . . . . . . . . . . . . 8
THE FUND . . . . . . . . . . . . . . . . . 8
THE CONTRACTS . . . . . . . . . . . . . . . 8
Purchase Payments Under the Contracts . 8
Amount and Frequency . . . . . . . . 8
Application of Purchase Payments . . 8
Net Investment Factor . . . . . . . . . 9
Benefits Provided Under the Contracts . 9
Withdrawal Amount . . . . . . . . . 9
Death Benefit . . . . . . . . . . . 10
Maturity Benefit . . . . . . . . . 10
Variable Payment Plans . . . . . . . 10
Description of Payment Plans . . . 10
Amount of Annuity Payments . . . . 10
Assumed Investment Rate . . . . . . . 10
Additional Information . . . . . . . 11
Transfers Between Divisions and
Payment Plans . . . . . . . . . . 11
Owners of the Contracts . . . . . . 11
Special Contract for Employers . . 11
Disability Provision . . . . . . . 12
Deferment of Benefit Payments . . . 12
Dividends . . . . . . . . . . . . . 12
Voting Rights . . . . . . . . . . . 12
Substitution and Change . . . . . . 12
Fixed Annuity Payment Plans . . . . 12
Financial Statements . . . . . . . 13
THE GUARANTEED INTEREST FUND . . . . . . . 13
FEDERAL INCOME TAXES . . . . . . . . . . . 13
Qualified and Nontax-Qualified Plans . 13
Taxation of Contract Benefits . . . . . 14
Taxation of Northwestern Mutual Life . 15
Other Considerations . . . . . . . . . 15
DEDUCTIONS . . . . . . . . . . . . . . . . 15
Contracts Issued Prior to
March 31, 1995 . . . . . . . . . . . 16
Contracts Issued Prior to
December 17, 1981 . . . . . . . . . . 17
Certain Nontax-Qualified Contracts . . 17
Reduced Charges for Exchange
Transactions . . . . . . . . . . . . 17
DISTRIBUTION OF THE CONTRACTS . . . . . . . 17
</TABLE>
TABLE OF CONTENTS FOR STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DISTRIBUTION OF THE
CONTRACTS . . . . . . . . . . . . . . . . B-2
DETERMINATION OF ANNUITY
PAYMENTS . . . . . . . . . . . . . . . . B-2
Amount of Annuity Payments . . . . . . B-2
Annuity Unit Value . . . . . . . . . . B-3
Illustrations of Variable Annuity
Payments . . . . . . . . . . . . . . B-3
VALUATION OF ASSETS OF THE
ACCOUNT . . . . . . . . . . . . . . . . . B-4
TRANSFERABILITY RESTRICTIONS . . . . . . . B-4
EXPERTS . . . . . . . . . . . . . . . . . . B-4
FINANCIAL STATEMENTS OF THE
ACCOUNT (for the six months ended June
30, 1995 -- unaudited) . . . . . . . . . B-5
FINANCIAL STATEMENTS OF THE
ACCOUNT (for the year ended December
31, 1994) . . . . . . . . . . . . . . . . B-11
REPORT OF INDEPENDENT
ACCOUNTANTS (for year ended
December 31, 1994) . . . . . . . . . . B-16
FINANCIAL STATEMENTS OF
NORTHWESTERN MUTUAL LIFE (for
the three years ended
December 31, 1994) . . . . . . . . . . . B-17
REPORT OF INDEPENDENT
ACCOUNTANTS (for the three years
ended December 31, 1994) . . . . . . . . B-29
</TABLE>
18
<PAGE> 20
This Prospectus sets forth concisely the information about NML Variable
Annuity Account B that a prospective investor ought to know before investing.
Additional information about Account B has been filed with the Securities and
Exchange Commission in a Statement of Additional Information which is
incorporated herein by reference. The Statement of Additional Information is
available upon request and without charge from The Northwestern Mutual Life
Insurance Company. To receive a copy, return the request form to the address
listed below, or telephone (414) 271-1444.
TO: The Northwestern Mutual Life Insurance Company
Equity Services Division/Agency Department
720 East Wisconsin Avenue
Milwaukee, WI 53202
Please send a Statement of Additional Information for NML Variable
Annuity Account B to:
Name _______________________________________________________________________
Address ____________________________________________________________________
____________________________________________________________________________
City ___________________________________State ___________ Zip ______________
19
<PAGE> 21
N O R T H W E S T E R N M U T U A L L I F E
VARIABLE ANNUITY CONTRACTS
For Individual Retirement Annuities, Tax-Deferred Annuities, and
Nontax-Qualified Annuities
NML VARIABLE ANNUITY ACCOUNT B
NORTHWESTERN MUTUAL SERIES FUND, INC.
P R O S P E C T U S
<PAGE> 22
STATEMENT OF ADDITIONAL INFORMATION
VARIABLE ANNUITY CONTRACTS
(for Individual Retirement Annuities, Tax-Deferred Annuities
and Non-Qualified Plans)
NML VARIABLE ANNUITY ACCOUNT B
(the "Account"),
a separate investment account of
The Northwestern Mutual Life Insurance Company
("Northwestern Mutual Life")
This Statement of Additional Information is not a prospectus but
supplements and should be read in conjunction with the prospectus for
the Contracts. A copy of the prospectus may be obtained from The
Northwestern Mutual Life Insurance Company, 720 East Wisconsin Avenue,
Milwaukee, Wisconsin 53202, telephone number (414) 271-1444.
The Date of the Prospectus to which this Statement of
Additional Information Relates is January 15, 1996.
The Date of this Statement of Additional Information
is January 15, 1996.
B-1
<PAGE> 23
DISTRIBUTION OF THE CONTRACTS
The Contracts are offered on a continuous basis exclusively through
individuals who, in addition to being life insurance agents of Northwestern
Mutual Life, are registered representatives of Northwestern Mutual Investment
Services, Inc. ("NMIS").
NMIS may be considered the underwriter of the Contracts for purposes
of the federal securities laws. The following amounts of commissions were paid
on sales of the Contracts during each of the last three years:
<TABLE>
<CAPTION>
Year Amount
<S> <C>
1995 $8,794,356
1994 $6,815,893
1993 $7,638,503
</TABLE>
DETERMINATION OF ANNUITY PAYMENTS
The following discussion of the method for determining the amount of
monthly annuity payments under a variable payment plan is intended to be read
in conjunction with these sections of the prospectus for the Contracts:
"Variable Payment Plans", p. 10, including "Description of Payment Plans", p.
10, "Amount of Annuity Payments", p. 10, and "Assumed Investment Rate", p. 10;
"Dividends", p. 12; "Net Investment Factor", p. 9; and "Deductions", p. 15.
AMOUNT OF ANNUITY PAYMENTS The amount of the first annuity payment
under a variable Payment Plan will be determined on the basis of the particular
Payment Plan selected, the annuity payment rate and, for plans involving life
contingencies, the Annuitant's adjusted age and sex. The amount of the first
payment is the sum of the payments from each Division of the Account determined
by applying the appropriate annuity payment rate to the product of the number
of Accumulation Units in the Division on the effective date of the Payment Plan
and the Accumulation Unit value for the Division on that date. Annuity rates
currently in use are based on the 1983 a Table with Projection Scale G and age
adjustment.
Variable annuity payments after the first will vary from month to
month and will depend upon the number and value of Annuity Units credited to
the Annuitant. After the effective date of a Payment Plan a Contract will not
share in the divisible surplus of Northwestern Mutual Life.
The number of Annuity Units in each Division is determined by dividing
the amount of the first annuity payment from the Division by the value of an
Annuity Unit on the effective date of the Payment Plan. The number of Annuity
Units thus credited to the Annuitant in each Division remains constant
throughout the annuity period. However, the value of Annuity Units in each
Division will fluctuate with the investment experience of the Division.
The amount of each variable annuity payment after the first is the sum
of payments from each Division determined by multiplying this fixed number of
Annuity Units each month by the value of an Annuity Unit for the Division on
(a) the fifth valuation date prior to the payment due date if the payment due
date is a valuation date, or (b) the sixth valuation date prior to the payment
due date if the payment due date is not a valuation date. To illustrate, if a
payment due date falls on a Friday, Saturday or Sunday, the amount of the
payment will normally be based upon the Annuity Unit value calculated on the
preceding Friday. The preceding Friday would be the fifth valuation date prior
to the
B-2
<PAGE> 24
Friday due date, and the sixth valuation date prior to the Saturday or Sunday
due dates.
ANNUITY UNIT VALUE The value of an Annuity Unit for each Division
was established at $1.00 as of the date operations began for that Division.
The value of an Annuity Unit on any later date varies to reflect the investment
experience of the Division, the Assumed Investment Rate on which the annuity
rate tables are based, and the deduction for mortality rate and expense risks
assumed by Northwestern Mutual Life.
The Annuity Unit value for each Division on any valuation date is
determined by multiplying the Annuity Unit value on the immediately valuation
date by two factors: (a) the net investment factor for the current period for
the Division; and (b) an adjustment factor to neutralize the Assumed Investment
Rate used in calculating the annuity rate tables.
ILLUSTRATIONS OF VARIABLE ANNUITY PAYMENTS To illustrate the manner
in which variable annuity payments are determined consider this example. Item
(4) in the example shows the applicable monthly payment rate for a male,
adjusted age 65, who has elected a life annuity Payment Plan with a certain
period of 10 years with an Assumed Investment Rate of 3-1/2% (Plan 2, as
described in the prospectus).
(1) Assumed number of Accumulation Units in
Balanced Division on maturity date. . . . . . . . .25,000
(2) Assumed Value of an Accumulation Unit in
Balanced Division at maturity . . . . . . . . . . .$2.000000
(3) Cash Value of Contract at maturity, (1) X (2) . . .$50,000
(4) Assumed applicable monthly payment rate per
$1,000 from annuity rate table. . . . . . . . . . .$5.44
(5) Amount of first payment from Balanced Division,
(3) X (4) divided by $1,000 . . . . . . . . . . . .$272.00
(6) Assumed Value of Annuity Unit in
Balanced Division at maturity . . . . . . . . . . .$1.500000
(7) Number of Annuity Units credited in
Balanced Division, (5) divided by (6) . . . . . . .181.33
The $50,000 value at maturity provides a first payment from the Balanced
Division of $272.00, and payments thereafter of the varying dollar value of
181.33 Annuity Units. The amount of subsequent payments from the Balanced
Division is determined by multiplying 181.33 units by the value of an Annuity
Unit in the Balanced Division on the applicable valuation date. For example,
if that unit value is $1.501000, the monthly payment from the Division will be
181.33 multiplied by $1.501000, or $272.18.
However, the value of the Annuity Unit depends entirely on the
investment performance of the Division. Thus in the example above, if the net
investment rate for the following month was less than the Assumed Investment
Rate of 3-1/2%, the Annuity Unit would decline in value. If the Annuity Unit
value declined to $1.499000 the succeeding monthly payment would then be 181.33
X $1.499000, or $271.81.
B-3
<PAGE> 25
For the sake of simplicity the foregoing example assumes that all of
the Annuity Units are in the Balanced Division. If there are Annuity Units in
two or more Divisions, the annuity payment from each Division is calculated
separately, in the manner illustrated, and the total monthly payment is the sum
of the payments from the Divisions.
VALUATION OF ASSETS OF THE ACCOUNT
The value of Portfolio shares of the Fund held in each Division of the
Account at the time of each valuation is the redemption value of such shares at
such time. If the right to redeem shares of the Fund has been suspended, or
payment of redemption value has been postponed, for the sole purpose of
computing annuity payments the shares held in the Account (and Annuity Units)
may be valued at fair value as determined in good faith by the Board of
Trustees of Northwestern Mutual Life.
TRANSFERABILITY RESTRICTIONS
Ownership of a Contract purchased as a tax-deferred annuity pursuant
to Section 403(b) of the Internal Revenue Code of 1954, as amended (the "Code")
cannot be changed and the Contract cannot be sold, assigned or pledged as
collateral for a loan, or for any other purpose, to any person other than
Northwestern Mutual Life. Similar restrictions are applicable to Contracts
purchased in exchange transactions by persons who have received fixed dollar
policies as distributions of termination benefits from tax-qualified corporate
or HR-10 plans or trusts. Ownership of a Contract purchased as an individual
retirement annuity pursuant to Section 408(b) of the Code cannot be transferred
except in limited circumstances involving divorce.
EXPERTS
The financial statements of the Account as of December 31, 1994 and
for each of the two years in the period ended December 31, 1994 and of
Northwestern Mutual Life as of December 31, 1994 and 1993 and for each of the
three years in the period ended December 31, 1994 included in this Statement of
Additional Information have been so included in reliance on the reports of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting. Price Waterhouse LLP provides
audit services for the Account. The address of Price Waterhouse LLP is 100
East Wisconsin Avenue, Suite 1500, Milwaukee, Wisconsin 53202.
B-4
<PAGE> 26
NML VARIABLE ANNUITY ACCOUNT B
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1995
(IN THOUSANDS)
<TABLE>
<S> <C> <C>
ASSETS
Investments at Market Value:
Northwestern Mutual Series Fund, Inc.
Index 500 Stock
173,845 shares (cost $205,188)..................................... $ 261,636
Growth Stock
22,026 shares (cost $22,860)....................................... 24,998
Growth and Income Stock
49,881 shares (cost $51,450)....................................... 57,063
Aggressive Growth Stock
145,804 shares (cost $253,708)..................................... 335,057
International Equity
193,027 shares (cost $231,301)..................................... 247,268
Select Bond
116,565 shares (cost $133,975)..................................... 134,398
High Yield Bond
13,083 shares (cost $13,355)....................................... 13,645
Money Market
77,730 shares (cost $77,730)....................................... 77,730
Balanced
1,001,020 shares (cost $1,312,752)................................. 1,455,483 $ 2,607,278
----------
Due from Sale of Fund Shares............................................................ 4,514
Due from Northwestern Mutual Life Insurance Company..................................... 214
----------
Total Assets.................................................................... $ 2,612,006
==========
LIABILITIES
Due to Participants..................................................................... $ 1,401
Due to Northwestern Mutual Life Insurance Company....................................... 4,514
Due on Purchase of Fund Shares.......................................................... 214
----------
Total Liabilities............................................................... $ 6,129
----------
EQUITY (Note 7)
Contracts Issued Prior to December 17, 1981............................................. $ 80,061
Contracts Issued On or After December 17, 1981 and Before March 31, 1995................ 2,492,331
Contracts Issued On or After March 31, 1995:
Front Load Version................................................................... 8,642
Back Load Version.................................................................... 24,843
----------
Total Equity.................................................................... 2,605,877
----------
Total Liabilities and Equity.................................................... $ 2,612,006
==========
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements
(Prepared From Unaudited Figures)
B-5
<PAGE> 27
NML VARIABLE ANNUITY ACCOUNT B
STATEMENT OF OPERATIONS AND CHANGES IN EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
INDEX 500 GROWTH STOCK
COMBINED STOCK DIVISION DIVISION #
--------------------------- --------------------------- ---------------------------
EIGHT MONTHS
PERIOD ENDED YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED ENDED
JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31,
------------ ------------ ------------ ------------ ------------ ------------
1995 1994 1995 1994 1995 1994
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend Income................ $ 59,210 $ 219,223 $ 2,545 $ 9,672 $ 188 $ 165
Annuity Rate and Expense
Guarantees................... 14,638 26,109 1,362 2,324 114 52
---------- ---------- -------- -------- ------- -------
Net Investment Income (Loss)... 44,572 193,114 1,183 7,348 74 113
---------- ---------- -------- -------- ------- -------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Realized Gain on Investments... 1,864 17,722 221 534 1 --
Unrealized Appreciation
(Depreciation) of Investments
During the Year.............. 256,626 (226,913) 39,099 (7,574) 2,278 (138)
---------- ---------- -------- -------- ------- -------
Net Gain (Loss) on
Investments.................. 258,490 (209,191) 39,320 (7,040) 2,279 (138)
---------- ---------- -------- -------- ------- -------
Increase (Decrease) in Equity
Derived from Investment
Activity..................... 303,062 (16,077) 40,503 308 2,353 (25)
---------- ---------- -------- -------- ------- -------
EQUITY TRANSACTIONS
Contract Owners' Net
Payments..................... 167,849 389,478 18,095 37,543 5,641 4,757
Annuity Payments............... (3,624) (4,241) (236) (476) (8) (1)
Surrenders and Other (net)..... (95,600) (121,978) (7,229) (8,669) (191) (85)
Transfers from Other
Divisions.................... 115,860 254,710 12,742 16,836 5,621 7,898
Transfers to Other Divisions... (115,860) (254,710) (7,576) (26,080) (804) (187)
---------- ---------- -------- -------- ------- -------
Increase (Decrease) in Equity
Derived from Equity
Transactions................... 68,612 263,259 15,796 19,154 10,259 12,382
---------- ---------- -------- -------- ------- -------
Net Increase (Decrease)
in Equity...................... 371,674 247,182 56,299 19,462 12,612 12,357
Equity
Beginning of Year.............. 2,234,203 1,987,021 205,214 185,752 12,357 0
---------- ---------- -------- -------- ------- -------
End of Year.................... $2,605,877 $2,234,203 $261,513 $205,214 $ 24,969 $ 12,357
========== ========== ======== ======== ======= =======
</TABLE>
# The initial investments in the Growth Stock and Growth and Income Stock
Divisions were made on May 3, 1994.
The Accompanying Notes are an Integral Part of the Financial Statements
(Prepared from Unaudited Figures)
B-6
<PAGE> 28
NML VARIABLE ANNUITY ACCOUNT B
STATEMENT OF OPERATIONS AND CHANGES IN EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
GROWTH & INCOME AGGRESSIVE GROWTH INTERNATIONAL EQUITY
STOCK DIVISION # STOCK DIVISION DIVISION SELECT BOND DIVISION
- ----------------------------- ----------------------------- ----------------------------- -----------------------------
EIGHT MONTHS
PERIOD ENDED ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED YEAR ENDED
JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31,
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
1995 1994 1995 1994 1995 1994 1995 1994
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 418 $ 513 $ 1,785 $ 1,607 $ 1,696 $ 6,775 $ 3,550 $ 16,145
269 132 1,763 2,503 1,449 2,224 754 1,513
------- ------- ------- -------- -------- -------- -------- --------
149 381 22 (896) 247 4,551 2,796 14,632
------- ------- ------- -------- -------- -------- -------- --------
10 -- 662 297 1,981 96 216 1,449
6,434 (820) 40,969 10,133 15,366 (9,711) 10,243 (21,331)
------- ------- ------- -------- -------- -------- -------- --------
6,444 (820) 41,631 10,430 17,347 (9,615) 10,459 (19,882)
------- ------- ------- -------- -------- -------- -------- --------
6,593 (439) 41,653 9,534 17,594 (5,064) 13,255 (5,250)
------- ------- ------- -------- -------- -------- -------- --------
10,703 12,083 30,652 61,047 20,970 76,394 8,563 25,069
(16) (5) (90) (114) (83) (120) (152) (382)
(561) (579) (7,917) (6,864) (8,103) (5,559) (5,644) (9,838)
10,798 21,072 29,037 51,753 12,568 86,072 5,652 7,671
(2,009) (534) (9,587) (15,127) (27,655) (14,282) (5,508) (30,044)
------- ------- ------- -------- -------- -------- -------- --------
18,902 32,037 42,095 90,695 (2,303) 142,505 2,911 (7,524)
------- ------- ------- -------- -------- -------- -------- --------
25,495 31,598 83,748 100,229 15,291 137,441 16,166 (12,774)
31,598 0 251,206 150,977 231,900 94,459 118,116 130,890
------- ------- ------- -------- -------- -------- -------- --------
$ 57,093 $ 31,598 $334,954 $251,206 $247,191 $231,900 $134,282 $118,116
======= ======= ======= ======== ======== ======== ======== ========
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements
(Prepared from Unaudited Figures)
B-7
<PAGE> 29
NML VARIABLE ANNUITY ACCOUNT B
STATEMENT OF OPERATIONS AND CHANGES IN EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH YIELD BOND
DIVISION# MONEY MARKET DIVISION BALANCED DIVISION
----------------------- ----------------------- -------------------------
PERIOD EIGHT MONTHS PERIOD PERIOD
ENDED ENDED ENDED YEAR ENDED ENDED YEAR ENDED
JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31,
-------- ------------ -------- ------------ ---------- ------------
1995 1994 1995 1994 1995 1994
-------- ------------ -------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend Income........................ $ 494 $ 408 $ 2,075 2,486 $ 46,459 $ 181,452
Annuity Rate and Expense Guarantees.... 63 35 440 750 8,424 16,576
------- ------ -------- -------- ---------- ----------
Net Investment Income.................. 431 373 1,635 1,736 38,035 164,876
------- ------ -------- -------- ---------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Realized Gain (Loss) on Investments.... 2 14 -- -- (1,229) 15,332
Unrealized Appreciation (Depreciation)
of Investments During the Year....... 624 (333) -- -- 141,613 (197,139)
------- ------ -------- -------- ---------- ----------
Net Gain (Loss) on Investments......... 626 (319) 0 0 140,384 (181,807)
------- ------ -------- -------- ---------- ----------
Increase (Decrease) in Equity Derived
from Investment Activity............. 1,057 54 1,635 1,736 178,419 (16,931)
------- ------ -------- -------- ---------- ----------
EQUITY TRANSACTIONS
Contract Owners' Net Payments.......... 3,158 3,137 15,914 35,360 54,152 134,088
Annuity Payments....................... (6) (2) (29) (54) (3,004) (3,087)
Surrenders and Other (net)............. (162) (245) (9,884) (11,859) (55,909) (78,280)
Transfers from Other Divisions......... 3,447 5,400 23,199 37,145 12,796 20,863
Transfers to Other Divisions........... (1,327) (882) (21,822) (46,086) (39,572) (121,488)
------- ------ -------- -------- ---------- ----------
Increase (Decrease) in Equity
Derived from Equity Transactions....... 5,110 7,408 7,378 14,506 (31,537) (47,904)
------- ------ -------- -------- ---------- ----------
Net Increase (Decrease) in Equity........ 6,167 7,462 9,013 16,242 146,882 (64,835)
Equity
Beginning of Year...................... 7,462 0 68,690 52,448 1,307,660 1,372,495
------- ------ -------- -------- ---------- ----------
End of Year............................ $ 13,629 $7,462 $ 77,703 $ 68,690 $1,454,542 $1,307,660
======= ====== ======== ======== ========== ==========
</TABLE>
# The initial investment in the High Yield Bond Division was made on May 3,
1994.
The Accompanying Notes are an Integral Part of the Financial Statements
(Prepared from Unaudited Figures)
B-8
<PAGE> 30
NML VARIABLE ANNUITY ACCOUNT B
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995
Note 1 -- NML Variable Annuity Account B (the "Account") is registered as a unit
investment trust under the Investment Company Act of 1940 and is a segregated
asset account of The Northwestern Mutual Life Insurance Company ("Northwestern
Mutual Life") used to fund variable annuity contracts for tax-deferred
annuities, individual retirement annuities and non-qualified plans. Principal
accounting policies are summarized below.
Note 2 -- All assets of each Division of the Account are invested in shares of
the corresponding Portfolio of Northwestern Mutual Series Fund, Inc. (the
"Fund"). The shares are valued at the Fund's offering and redemption price per
share.
The Fund is an open-end investment company registered under the Investment
Company Act of 1940.
Note 3 -- Annuity reserves are based on published annuity tables with age
adjustment and benefit payments which reflect actual investment experience. For
variable payment plans issued prior to January 1, 1974, annuity reserves are
based on the 1955 American Annuity Table with assumed interest rates of 3%,
3 1/2% or 5%. For variable payment plans issued on or after January 1, 1974 and
before January 1, 1985, annuity reserves are based on the 1971 Individual
Annuity Table with assumed interest rates of 3 1/2% or 5%. For variable payment
plans issued on or after January 1, 1985, annuity reserves are based on the 1983
Table a with assumed interest rates of 3 1/2% or 5%.
Note 4 -- Dividend income from the Fund is recorded on the record date of the
dividends. Transactions in Fund shares are accounted for on the trade date. The
basis for determining cost on sale of Fund shares is identified cost. Purchases
and sales of Fund shares for the period ended June 30, 1995 by each Division are
shown below:
<TABLE>
<CAPTION>
PURCHASES SALES
------------ -----------
<S> <C> <C>
Index 500 Stock
Division.............. $ 19,502,770 $ 2,470,889
Growth Stock Division... 10,360,006 8,658
Growth & Income Stock
Division.............. 19,188,309 132,860
Aggressive Growth
Division.............. 43,574,848 1,497,660
International Equity
Division.............. 10,753,958 12,807,165
Select Bond Division.... 9,245,877 3,688,199
High Yield Bond
Division.............. 5,966,738 419,040
Money Market Division... 20,745,182 11,808,145
Balanced Division....... 59,419,477 53,152,385
</TABLE>
Note 5 -- A deduction for annuity rate and expense guarantees is determined
daily and paid to Northwestern Mutual Life as compensation for assuming the risk
that annuity payments will continue for longer periods than anticipated because
the annuitants as a group live longer than expected, and the risk that the
charges made by Northwestern Mutual Life may be insufficient to cover the actual
costs incurred in connection with the contracts.
For contracts issued on or after March 31, 1995, for the Front Load Version and
the Back Load Version, the deduction for annuity rate and expense guarantees is
determined daily at annual rates of 4/10 of 1% and 1 1/4%, respectively, of the
net assets of each Division attributable to these contracts and is paid to
Northwestern Mutual Life. For these contracts, the rates may be increased or
decreased by the Board of Trustees of Northwestern Mutual Life not to exceed
3/4 of 1% and 1 1/2%, respectively.
Generally, for contracts issued on or after December 17, 1981, and before March
31, 1995, the deduction is at an annual rate of 1 1/4% of the net assets of each
Division attributable to these contracts. For these contracts, the rate may be
increased or decreased by the Board of Trustees of Northwestern Mutual Life not
to exceed a 1 1/2% annual rate.
Generally, for contracts issued prior to December 17, 1981, the deduction is at
an annual rate of 3/4 of 1% of the net assets of each Division attributable to
these contracts. For these contracts, the rate may be increased or decreased by
the Board of Trustees of Northwestern Mutual Life not to exceed a 1% annual
rate.
Note 6 -- Northwestern Mutual Life is taxed as a "life insurance company" under
the Internal Revenue Code and the operations of the Account form a part of and
are taxed with those of Northwestern Mutual Life. Currently, no charges for
taxes have been made by Northwestern Mutual Life to the Account. Accordingly, no
provision for any such liability has been made.
B-9
<PAGE> 31
NML VARIABLE ANNUITY ACCOUNT B
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995
(IN THOUSANDS)
Note 7 -- Equity Values by Division are shown below:
<TABLE>
<CAPTION>
CONTRACTS ISSUED:
CONTRACTS ISSUED: ON OR AFTER DECEMBER 17, 1981 AND
BEFORE DECEMBER 17, 1981 BEFORE MARCH 31, 1995
-------------------------------------- -----------------------------------------
ACCUMULATION UNITS ACCUMULATION UNITS
DIVISION UNIT VALUE OUTSTANDING EQUITY UNIT VALUE OUTSTANDING EQUITY
- ---------------------------------------- ------------ ----------- ------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Index 500 Stock......................... $ 1.828241 13,695 $25,038 $ 1.786947 127,397 $ 227,652
Growth Stock............................ N/A N/A N/A 1.144767 20,284 23,220
Growth & Income Stock................... N/A N/A N/A 1.157353 46,096 53,350
Aggressive Growth Stock................. 2.353161 1,655 3,894 2.999410 140,541 323,238
International Equity.................... 1.327032 2,481 3,292 1.312743 182,136 239,099
Select Bond............................. 6.204162 1,443 8,950 5.798055 20,881 121,068
High Yield Bond......................... N/A N/A N/A 1.132473 10,927 12,375
Money Market............................ 2.261796 1,277 2,888 2.114122 33,425 70,666
Balanced................................ 4.206261 7,795 32,789 3.932070 352,995 1,388,003
------- ----------
Equity................................ 76,851 33,660
Annuity Reserves...................... 3,210 2,458,671
------- ----------
Total Equity.......................... $80,061 $2,492,331
======= ==========
</TABLE>
<TABLE>
<CAPTION>
CONTRACTS ISSUED: CONTRACTS ISSUED:
ON OR AFTER MARCH 31, 1995 ON OR AFTER MARCH 31, 1995
FRONT LOAD VERSION BACK LOAD VERSION
-------------------------------------- -----------------------------------------
ACCUMULATION UNITS ACCUMULATION UNITS
DIVISION UNIT VALUE OUTSTANDING EQUITY UNIT VALUE OUTSTANDING EQUITY
- ---------------------------------------- ------------ ----------- ------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Index 500 Stock......................... $ 1.093889 881 $ 963 $ 1.751242 1,817 $ 3,247
Growth Stock............................ 1.059921 455 482 1.144767 848 970
Growth and Income Stock................. 1.071240 1,038 1,112 1.157353 1,778 2,058
Aggressive Growth Stock................. 1.085737 1,163 1,262 2.291539 1,948 4,480
International Equity.................... 1.080273 649 701 1.312743 1,722 2,261
Select Bond............................. 1.061944 374 397 5.742099 262 1,518
High Yield Bond......................... 1.063815 348 370 1.132473 612 693
Money Market............................ 1.013464 1,173 1,188 2.109535 1,213 2,564
Balanced................................ 1.072654 1,996 2,141 3.912731 1,774 6,976
------- ----------
Equity................................ 8,616 24,767
Annuity Reserves...................... 26 76
------- ----------
Total Equity.......................... $ 8,642 $ 24,843
======= ==========
</TABLE>
N/A -- Not Available. These divisions are currently not available to
contractholders on contracts issued before December 17, 1981.
B-10
<PAGE> 32
NML VARIABLE ANNUITY ACCOUNT B
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<S> <C> <C>
ASSETS
Investments at Market Value:
Northwestern Mutual Series Fund, Inc.
Index 500 Stock
162,024 shares (cost $187,936)................................................. $ 205,285
Aggressive Growth Stock
125,738 shares (cost $210,969)................................................. 251,350
International Equity
194,773 shares (cost $231,373)................................................. 231,974
Select Bond
111,779 shares (cost $128,193)................................................. 118,374
Money Market
68,781 shares (cost $68,781)................................................... 68,781
Balanced
996,826 shares (cost $1,307,713)............................................... 1,308,833
Growth Stock
12,382 shares (cost $12,508)................................................... 12,369
Growth and Income Stock
32,078 shares (cost $32,384)................................................... 31,564
High Yield Bond
7,695 shares (cost $7,805)..................................................... 7,472 $ 2,236,002
----------
Due from Sale of Fund Shares....................................................................... 1,909
Due from Northwestern Mutual Life Insurance Company................................................ 45
----------
Total Assets................................................................................ $ 2,237,956
==========
LIABILITIES
Due to Participants................................................................................ $ 1,799
Due to Northwestern Mutual Life Insurance Company.................................................. 1,909
Due on Purchase of Fund Shares..................................................................... 45
----------
Total Liabilities........................................................................... 3,753
----------
EQUITY
Contracts Issued Prior to December 17, 1981:
Division:
Index 500 Stock: 14,230 Accumulation Units @ $1.529784................ $ 21,769
Annuity Reserves..................................... 1,412 23,181
----------
Aggressive Growth Stock: 1,474 Accumulation Units @ $2.042483................. 3,011
Annuity Reserves..................................... 42 3,053
----------
International Equity: 2,643 Accumulation Units @ $1.229716................. 3,250
Annuity Reserves..................................... 43 3,293
----------
Select Bond: 1,493 Accumulation Units @ $5.569001................. 8,313
Annuity Reserves..................................... 360 8,673
----------
Money Market: 1,458 Accumulation Units @ $2.206112................. 3,218
Annuity Reserves..................................... 37 3,255
----------
Balanced: 8,156 Accumulation Units @ $3.685079................. 30,054
Annuity Reserves..................................... 1,038 31,092
----------
Contracts Issued On or After December 17, 1981:
Division:
Index 500 Stock: 119,846 Accumulation Units @ $1.498956............... $ 179,644
Annuity Reserves..................................... 2,389 182,033
----------
Aggressive Growth Stock: 123,249 Accumulation Units @ $2.001269............... 246,655
Annuity Reserves..................................... 1,498 248,153
----------
International Equity: 186,097 Accumulation Units @ $1.219510............... 226,947
Annuity Reserves..................................... 1,660 228,607
----------
Select Bond: 20,643 Accumulation Units @ $5.217451................ 107,702
Annuity Reserves..................................... 1,741 109,443
----------
Money Market: 31,467 Accumulation Units @ $2.067227................ 65,049
Annuity Reserves..................................... 386 65,435
----------
Balanced: 363,391 Accumulation Units @ $3.453452............... 1,254,955
Annuity Reserves..................................... 21,613 1,276,568
----------
Growth Stock: 12,213 Accumulation Units @ $1.006136................ 12,288
Annuity Reserves..................................... 69 12,357
----------
Growth and Income Stock: 31,543 Accumulation Units @ $0.994105................ 31,357
Annuity Reserves..................................... 241 31,598
----------
High Yield Bond: 7,229 Accumulation Units @ $1.021705................. 7,386
Annuity Reserves..................................... 76 7,462
---------- ----------
Total Equity................................................................................ 2,234,203
----------
Total Liabilities and Equity................................................................ $ 2,237,956
===========
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements
B-11
<PAGE> 33
NML VARIABLE ANNUITY ACCOUNT B
STATEMENT OF OPERATIONS AND CHANGES IN EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CAPITAL
APPRECIATION
STOCK INDEX 500
COMBINED DIVISION STOCK DIVISION
--------------------------- ------------ -----------------------
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
--------------------------- ------------ -----------------------
1994 1993 1993* 1994 1993
---------- ---------- ------------ -------- --------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend Income..................................... $ 219,223 $ 82,703 $ 2,838 $ 9,672 $ 1,094
Annuity Rate and Expense Guarantees................. 26,109 21,674 335 2,324 1,652
---------- ---------- -------- -------- --------
Net Investment Income (Loss)........................ 193,114 61,029 2,503 7,348 (558)
---------- ---------- -------- -------- --------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized Gain (Loss) on Investments................. 17,722 9,157 (13) 534 141
Unrealized Appreciation (Depreciation) of
Investments During the Year....................... (226,913) 85,412 (1,770) (7,574) 12,793
---------- ---------- -------- -------- --------
Net Gain (Loss) on Investments...................... (209,191) 94,569 (1,783) (7,040) 12,934
---------- ---------- -------- -------- --------
Increase (Decrease) in Equity Derived from
Investment Activity............................... (16,077) 155,598 720 308 12,376
---------- ---------- -------- -------- --------
EQUITY TRANSACTIONS
Contract Owners' Net Payments....................... 389,478 351,661 3,993 37,543 40,608
Annuity Payments.................................... (4,241) (2,615) (87) (476) (266)
Surrenders and Other (net).......................... (121,978) (84,382) (1,986) (8,669) (4,762)
Transfers from Other Divisions...................... 254,710 147,730 1,559 16,836 18,562
Transfers to Other Divisions........................ (254,710) (147,730) (1,962) (26,080) (17,154)
Transfers from Merger............................... -- -- (90,171) -- 90,171
---------- ---------- -------- -------- --------
Increase (Decrease) in Equity Derived from Equity
Transactions........................................ 263,259 264,664 (88,654) 19,154 127,159
---------- ---------- -------- -------- --------
Net Increase (Decrease) in Equity..................... 247,182 420,262 (87,934) 19,462 139,535
Equity
Beginning of Year................................... 1,987,021 1,566,759 87,934 185,752 46,217
---------- ---------- -------- -------- --------
End of Year......................................... $2,234,203 $1,987,021 $ 0 $205,214 $185,752
========== ========== ======== ======== ========
</TABLE>
* Represents operations through April 30, 1993 (see note 5).
** The initial investment in the International Equity Division was made on April
30, 1993.
The Accompanying Notes are an Integral Part of the Financial Statements
B-12
<PAGE> 34
NML VARIABLE ANNUITY ACCOUNT B
STATEMENT OF OPERATIONS AND CHANGES IN EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
AGGRESSIVE GROWTH INTERNATIONAL EQUITY BALANCED
STOCK DIVISION DIVISION** SELECT BOND DIVISION MONEY MARKET DIVISION DIVISION
--------------------- ----------------------------- --------------------- --------------------- ----------
EIGHT MONTHS YEAR ENDED
YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED DECEMBER
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 31,
--------------------- ------------ ------------ --------------------- --------------------- ----------
1994 1993 1994 1993 1994 1993 1994 1993 1994
-------- -------- ------------ ------------ -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 1,607 $ 2,358 $ 6,775 $ 776 $ 16,145 $ 6,286 $ 2,486 $ 1,597 $ 181,452
2,503 1,384 2,224 318 1,513 1,348 750 689 16,576
-------- -------- -------- ------- -------- -------- -------- -------- ----------
(896) 974 4,551 458 14,632 4,938 1,736 908 164,876
-------- -------- -------- ------- -------- -------- -------- -------- ----------
297 996 96 -- 1,449 294 -- -- 15,332
10,133 18,522 (9,711) 10,312 (21,331) 3,690 -- -- (197,139)
-------- -------- -------- ------- -------- -------- -------- -------- ----------
10,430 19,518 (9,615) 10,312 (19,882) 3,984 -- -- (181,807)
-------- -------- -------- ------- -------- -------- -------- -------- ----------
9,534 20,492 (5,064) 10,770 (5,250) 8,922 1,736 908 (16,931)
-------- -------- -------- ------- -------- -------- -------- -------- ----------
61,047 37,426 76,394 30,342 25,069 38,454 35,360 29,078 134,088
(114) (79) (120) (14) (382) (224) (54) (57) (3,087)
(6,864) (4,177) (5,559) 193 (9,838) (4,412) (11,859) (6,526) (78,280)
51,753 24,001 86,072 53,717 7,671 13,402 37,145 12,487 20,863
(15,127) (16,476) (14,282) (549) (30,044) (13,023) (46,086) (42,645) (121,488)
-- -- -- -- -- -- -- -- --
-------- -------- -------- ------- -------- -------- -------- -------- ----------
90,695 40,695 142,505 83,689 (7,524) 34,197 14,506 (7,663) (47,904)
-------- -------- -------- ------- -------- -------- -------- -------- ----------
100,229 61,187 137,441 94,459 (12,774) 43,119 16,242 (6,755) (64,835)
150,977 89,790 94,459 -- 130,890 87,771 52,448 59,203 1,372,495
-------- -------- -------- ------- -------- -------- -------- -------- ----------
$251,206 $150,977 $231,900 $ 94,459 $118,116 $130,890 $ 68,690 $ 52,448 $1,307,660
======== ======== ======== ======= ======== ======== ======== ======== ==========
<CAPTION>
1993
----------
<S> <C>
$ 67,754
15,948
----------
51,806
----------
7,739
41,865
----------
49,604
----------
101,410
----------
171,760
(1,888)
(62,712)
24,002
(55,921)
--
----------
75,241
----------
176,651
1,195,844
----------
$1,372,495
==========
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements
B-13
<PAGE> 35
NML VARIABLE ANNUITY ACCOUNT B
STATEMENT OF OPERATIONS AND CHANGES IN EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
GROWTH AND HIGH YIELD
GROWTH STOCK INCOME STOCK BOND
DIVISION# DIVISION# DIVISION#
------------ ------------ ------------
EIGHT MONTHS EIGHT MONTHS EIGHT MONTHS
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1994 1994
------------ ------------ ------------
<S> <C> <C> <C>
INVESTMENT INCOME
Dividend Income...................................... $ 165 $ 513 $ 408
Annuity Rate and Expense Guarantees.................. 52 132 35
------- ------- ------
Net Investment Income................................ 113 381 373
------- ------- ------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized Gain (Loss) on Investments.................. -- -- 14
Unrealized Depreciation of Investments
During the Year.................................... (138) (820) (333)
------- ------- ------
Net Loss on Investments.............................. (138) (820) (319)
------- ------- ------
Increase (Decrease) in Equity Derived from Investment
Activity........................................... (25) (439) 54
------- ------- ------
EQUITY TRANSACTIONS
Contract Owners' Net Payments........................ 4,757 12,083 3,137
Annuity Payments..................................... (1) (5) (2)
Surrenders and Other (net)........................... (85) (579) (245)
Transfers from Other Divisions....................... 7,898 21,072 5,400
Transfers to Other Divisions......................... (187) (534) (882)
Transfers from Merger................................ -- -- --
------- ------- ------
Increase in Equity Derived from Equity
Transactions......................................... 12,382 32,037 7,408
------- ------- ------
Net Increase in Equity................................. 12,357 31,598 7,462
Equity
Beginning of Year.................................... -- -- --
------- ------- ------
End of Year.......................................... $ 12,357 $ 31,598 $7,462
======= ======= ======
</TABLE>
#The initial investments in the Growth Stock, Growth and Income Stock, and High
Yield Bond Divisions were made on May 3, 1994.
The Accompanying Notes are an Integral Part of the Financial Statements
B-14
<PAGE> 36
NML VARIABLE ANNUITY ACCOUNT B
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
Note 1 -- NML Variable Annuity Account B (the "Account") is registered as a unit
investment trust under the Investment Company Act of 1940 and is a segregated
asset account of The Northwestern Mutual Life Insurance Company ("Northwestern
Mutual Life") used to fund variable annuity contracts for tax-deferred
annuities, individual retirement annuities and non-qualified plans. Principal
accounting policies are summarized below.
Note 2 -- All assets of each Division of the Account are invested in shares of
the corresponding Portfolio of Northwestern Mutual Series Fund, Inc. (the
"Fund"). The shares are valued at the Fund's offering and redemption price per
share.
The Fund is an open-end investment company registered under the Investment
Company Act of 1940.
Note 3 -- Annuity reserves are based on published annuity tables with age
adjustment and benefit payments which reflect actual investment experience. For
variable payment plans issued prior to January 1, 1974, annuity reserves are
based on the 1955 American Annuity Table with assumed interest rates of 3%,
3 1/2% or 5%. For variable payment plans issued on or after January 1, 1974 and
before January 1, 1985, annuity reserves are based on the 1971 Individual
Annuity Table with assumed interest rates of 3 1/2% or 5%. For variable payment
plans issued on or after January 1, 1985, annuity reserves are based on the 1983
Table a with assumed interest rates of 3 1/2% or 5%.
Note 4 -- Dividend income from the Fund is recorded on the record date of the
dividends. Transactions in Fund shares are accounted for on the trade date. The
basis for determining cost on sale of Fund shares is identified cost. Purchases
and sales of Fund shares for the year ended December 31, 1994 by each Division
are shown below:
<TABLE>
<CAPTION>
PURCHASES SALES
------------ -----------
<S> <C> <C>
Division:
Index 500 Stock........ $ 34,522,998 $ 8,093,785
Aggressive Growth
Stock................ 90,670,578 755,487
International Equity... 147,639,155 538,574
Select Bond............ 26,050,454 18,832,067
Money Market........... 44,048,451 27,785,925
Balanced............... 206,651,719 90,245,163
Growth Stock........... 12,520,418 12,925
Growth and Income
Stock................ 32,636,141 252,130
High Yield Bond........ 8,401,679 610,349
</TABLE>
Note 5 -- On April 30, 1993, Northwestern Mutual Capital Appreciation Stock Fund
was merged into the Northwestern Mutual Index 500 Stock Fund in a tax-free
exchange of fund shares. 63,692,924 shares of Capital Appreciation Stock
Division were exchanged for 66,806,801 shares of Index 500 Stock Division. The
shares exchanged were valued at $90,211,524 for each Division.
Note 6 -- A deduction for annuity rate and expense guarantees is determined
daily and paid to Northwestern Mutual Life as compensation for assuming the risk
that annuity payments will continue for longer periods than anticipated because
the annuitants as a group live longer than expected, and the risk that the
charges made by Northwestern Mutual Life may be insufficient to cover the actual
costs incurred in connection with the contracts.
Generally, for contracts issued prior to December 17, 1981, the deduction is at
an annual rate of 3/4 of 1% of the net assets of each Division attributable to
these contracts. For these contracts, the rate may be increased or decreased by
the Board of Trustees of Northwestern Mutual Life not to exceed a 1% annual
rate.
Generally, for contracts issued on or after December 17, 1981, the deduction is
at an annual rate of 1 1/4% of the net assets of each Division attributable to
these contracts. For these contracts, the rate may be increased or decreased by
the Board of Trustees of Northwestern Mutual Life not to exceed a 1 1/2% annual
rate.
Note 7 -- Northwestern Mutual Life is taxed as a "life insurance company" under
the Internal Revenue Code and the operations of the Account form a part of and
are taxed with those of Northwestern Mutual Life. Currently, no charges for
taxes have been made by Northwestern Mutual Life to the Account. Accordingly, no
provision for any such liability has been made.
B-15
<PAGE> 37
[PRICE WATERHOUSE LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To The Northwestern Mutual Life Insurance Company and
Contract Owners of NML Variable Annuity Account B
In our opinion, the accompanying combined statement of assets and liabilities
and the related combined and separate statements of operations and changes in
equity present fairly, in all material respects, the financial position of NML
Variable Annuity Account B and the Index 500 Stock Division, Aggressive Growth
Stock Division, International Equity Division, Select Bond Division, Money
Market Division, Balanced Division, Growth Stock Division, Growth and Income
Stock Division and the High Yield Bond Division thereof at December 31, 1994,
the results of their operations and the changes in their equity for each of the
two years in the period then ended for NML Variable Annuity Account B and the
Index 500 Stock Division, Aggressive Growth Stock Division, Select Bond
Division, Money Market Division and Balanced Division, for the year ended
December 31, 1994 and for the period from April 30, 1993 (commencement of
operations) through December 31, 1993 for the International Equity Division, for
the period from May 3, 1994 (commencement of operations) through December 31,
1994 for the Growth Stock Division, Growth and Income Stock Division, and High
Yield Bond Division, and for the period ended April 30, 1993 (date of merger
with the Index 500 Stock Division) for the Capital Appreciation Stock Division,
all in conformity with generally accepted accounting principles. These financial
statements are the responsibility of The Northwestern Mutual Life Insurance
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the 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, which included
direct confirmation of the number of shares owned at December 31, 1994 with
Northwestern Mutual Series Fund, Inc., provide a reasonable basis for the
opinion expressed above.
[sig.]
Milwaukee, Wisconsin
January 25, 1995
B-16
<PAGE> 38
NORTHWESTERN MUTUAL LIFE
INSURANCE COMPANY AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
The following financial statements of Northwestern Mutual should be considered
only as bearing upon the ability of Northwestern Mutual Life to meet its
obligations under the Policies.
NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1993
----------------------
(In millions)
<S> <C> <C>
ASSETS
BONDS
United States Government $ 3,501 $ 2,372
Industrial and other 19,232 18,077
----------------------
22,733 20,449
----------------------
STOCKS
Common 2,192 2,091
Unconsolidated subsidiaries 504 416
Preferred 511 459
----------------------
3,207 2,966
----------------------
MORTGAGE LOANS 7,099 6,505
REAL ESTATE
Investment 1,072 1,068
Home office 141 148
----------------------
1,213 1,216
----------------------
LOANS ON POLICIES 6,144 5,846
OTHER INVESTMENTS 1,301 1,257
CASH AND TEMPORARY INVESTMENTS 803 783
DUE AND ACCRUED INVESTMENT INCOME 650 690
----------------------
Total invested assets 43,150 39,712
----------------------
SEPARATE ACCOUNT BUSINESS 3,806 3,483
OTHER ASSETS 1,156 866
----------------------
Total Assets $48,112 $ 44,061
======================
LIABILITIES AND RESERVES
LIABILITY FOR POLICY BENEFITS
Insurance and annuity reserves $36,124 $ 32,861
Policy benefits left for future payments 866 829
Premium deposits 419 403
Policy benefits in process of payment 138 108
Policyowner dividends payable 1,950 1,785
----------------------
39,497 35,986
----------------------
OTHER LIABILITIES
Interest maintenance reserve 11 279
Income taxes 561 411
Miscellaneous 822 645
----------------------
1,394 1,335
----------------------
SEPARATE ACCOUNT BUSINESS 3,806 3,483
----------------------
ASSET VALUATION RESERVE 1,190 1,227
----------------------
Total liabilities and asset valuation reserve 45,887 42,031
----------------------
GENERAL CONTINGENCY RESERVE 2,225 2,030
----------------------
Total Liabilities and Contingency Reserves $48,112 $ 44,061
======================
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-17
<PAGE> 39
FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL LIFE
NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
1994 1993 1992
----------------------------
(In millions)
<S> <C> <C> <C>
INCOME
PREMIUMS $ 5,743 $ 5,295 $ 4,889
NET INVESTMENT INCOME 3,106 2,913 2,753
POLICY BENEFITS LEFT WITH COMPANY
AND OTHER INCOME 636 570 523
----------------------------
Total income 9,485 8,778 8,165
----------------------------
DISPOSITION OF INCOME
COSTS
Agents' compensation 492 487 443
Other insurance costs 334 361 303
Premium and other taxes or assessments 120 116 112
----------------------------
946 964 858
----------------------------
BENEFITS TO POLICYOWNERS AND BENEFICIARIES
Death benefits 609 526 459
Matured endowments 54 44 49
Annuity benefits 94 85 75
Disability benefits 151 126 111
Surrender benefits 904 837 762
Payments from policy benefits
left with Company 568 498 482
Net transfers to separate accounts 344 302 258
Net additions to policy reserves 3,313 3,078 2,870
----------------------------
6,037 5,496 5,066
----------------------------
Total disposition of income 6,983 6,460 5,924
----------------------------
SAVINGS FROM OPERATIONS BEFORE
INCOME TAXES AND DIVIDENDS 2,502 2,318 2,241
INCOME TAX EXPENSE 281 208 242
----------------------------
SAVINGS FROM OPERATIONS BEFORE DIVIDENDS 2,221 2,110 1,999
POLICYOWNER DIVIDENDS 1,942 1,780 1,755
----------------------------
NET SAVINGS FROM OPERATIONS 279 330 244
NET REALIZED CAPITAL GAINS, LESS
TAX EXPENSE OF $85, $82, AND
$64 RESPECTIVELY 119 180 105
----------------------------
CONTRIBUTION TO GENERAL
CONTINGENCY RESERVE
FROM OPERATIONS $ 398 $ 510 $ 349
============================
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-18
<PAGE> 40
FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL LIFE
NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF GENERAL CONTINGENCY RESERVE
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
1994 1993 1992
------------------------------------------
(IN MILLIONS)
<S> <C> <C> <C>
BEGINNING OF YEAR BALANCE $ 2,030 $ 1,850 $ 1,655
Contribution to general contingency
reserve from operations 398 510 349
Net unrealized capital losses (242) (89) (110)
Change in asset valuation reserve 37 (157) (119)
Transfer from voluntary investment reserve -- -- 106
Other -- net 2 (84) (31)
--------------------------------------
END OF YEAR BALANCE $ 2,225 $ 2,030 $ 1,850
======================================
</TABLE>
NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
1994 1993 1992
-----------------------------------------
(IN MILLIONS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Insurance premiums, annuities
and other considerations $ 6,299 $ 5,777 $ 5,342
Net investment income received 3,013 2,813 2,666
Net loans on policies (297) (143) (159)
Benefits paid to policyholders and
beneficiaries (2,357) (2,116) (1,927)
Net transfers to separate accounts (344) (302) (258)
Policyowner dividends paid (1,777) (1,759) (1,596)
Expenses and taxes (1,033) (1,135) (1,071)
Other -- net 89 (81) 45
--------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,593 3,054 3,042
CASH FLOWS FROM INVESTING ACTIVITIES
PROCEEDS FROM INVESTMENTS SOLD OR MATURED
Bonds 27,096 20,221 13,884
Stocks 1,469 1,122 1,027
Mortgage loans 512 394 300
Real estate 164 43 71
Other invested assets 213 132 24
Capital gain (tax) benefit 28 (124) (82)
--------------------------------------
29,482 21,788 15,224
COST OF INVESTMENTS ACQUIRED
Bonds 29,674 22,393 16,446
Stocks 1,606 1,288 755
Mortgage loans 1,356 970 510
Real estate 6 46 63
Other invested assets 413 152 238
--------------------------------------
33,055 24,849 18,012
NET CASH USED IN INVESTING ACTIVITIES (3,573) (3,061) (2,788)
--------------------------------------
NET INCREASE (DECREASE) IN CASH AND
TEMPORARY INVESTMENTS 20 (7) 254
CASH AND TEMPORARY INVESTMENTS,
BEGINNING OF YEAR 783 790 536
--------------------------------------
CASH AND TEMPORARY INVESTMENTS, END OF YEAR $ 803 $ 783 $ 790
======================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-19
<PAGE> 41
FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL LIFE
NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1993, AND 1992
NOTE 1 - PRINCIPAL ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of The
Northwestern Mutual Life Insurance Company (the "Company") and its wholly-owned
life insurance subsidiary. The consolidated financial statements have been
prepared using accounting policies prescribed or permitted by the Insurance
Departments of the states in which the Company and its subsidiary are
domiciled. These policies are considered generally accepted accounting
principles for mutual life insurance companies.
In April 1993, the Financial Accounting Standards Board issued Interpretation
No. 40, "Applicability of Generally Accepted Accounting Principles to Mutual
Life Insurance and Other Enterprises", which establishes a different definition
of generally accepted accounting principles for mutual life insurance
companies. Under the Interpretation, financial statements of mutual life
insurance companies for periods beginning after December 15, 1995 which are
prepared on the basis of statutory accounting will no longer be characterized
as in conformity with generally accepted accounting principles.
Management of the Company has not yet determined the effect on its December 31,
1994 financial statements of applying the Interpretation. The Company is
considering application of the accounting changes required to present its
financial statements in conformity with generally accepted accounting
principles. If the Company chooses to adopt the required accounting changes,
the effect of the changes would be reported retroactively through restatement
of all previously issued financial statements beginning with the earliest year
presented. The cumulative effect of adopting these changes would be included
in the earliest year presented.
INVESTMENTS
The Company's investments are valued on the following bases:
Bonds -Amortized cost using the interest method,
except for loan-backed and structured securities
which are amortized to estimated prepayment
dates using the prospective method
Common Stocks -Market value
Preferred Stocks -Cost
Unconsolidated
Subsidiaries -Equity in subsidiaries' net assets
Mortgage Loans -Amortized cost
Investment Real Estate -Lower of cost, less depreciation and
encumbrances, or estimated net realizable value
Home Office Real Estate -Cost, less depreciation
Loans on Policies -Cost
Other Investments-
Joint Ventures -Equity in ventures' net assets
B-20
<PAGE> 42
FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL LIFE
SEPARATE ACCOUNT BUSINESS
This business consists of annuities funded by specific assets held in separate
accounts. The assets in these accounts are carried at market value. The
policy values reflect the investment performance of the respective accounts.
INSURANCE, ANNUITY AND DISABILITY INCOME RESERVES
Life insurance reserves on substantially all policies issued since 1978 are
based on the Commissioner's Reserve Valuation Method with interest rates
ranging from 3-1/2% to 5-1/2%. Other policy reserves are based primarily on the
net level premium method employing various mortality tables at interest rates
ranging from 2% to 4-1/2%.
Deferred annuity reserves on policies issued since 1985 are valued using the
Commissioner's Annuity Reserve Valuation Method with interest rates ranging
from 3-1/2% to 6-1/4%. Other deferred annuity reserves are based on the
contract value. Immediate annuity reserves are present values of expected
benefit payments at interest rates ranging from 3-1/2% to 8-1/4%.
Active life reserves for disability income ("DI") policies issued since 1987
are primarily based on the two-year preliminary term method using a 4% interest
rate and the 1985 Commissioner's Individual Disability Table A ("CIDA") for
morbidity. Previous DI business used the net level premium method, using a 3%
or 4% interest rate and the 1964 Commissioner's Disability Table for morbidity.
Disabled life reserves for DI policies are based on the present values of
expected benefit payments using primarily the 1985 CIDA (modified for Company
experience in first two years of disability) with interest rates ranging from
3% to 5-1/2%.
INTEREST MAINTENANCE RESERVE
The Company is required to maintain an interest maintenance reserve ("IMR").
The IMR establishes a reserve for realized gains and losses, net of tax,
resulting from changes in interest rates on short and long-term fixed income
investments. Net realized gains and losses charged to the IMR are amortized
into investment income over the approximate remaining life of the investment
sold.
ASSET VALUATION RESERVE
The Company is also required to maintain an asset valuation reserve ("AVR").
The AVR establishes a reserve for certain invested assets held by the Company.
In the aggregate, AVR was 84% and 91% of the allowable maximum at December 31,
1994 and 1993, respectively.
PREMIUM INCOME
Life insurance premiums are recognized as income at the beginning of each
policy year.
REINSURANCE
In the normal course of business, the Company seeks to limit its exposure to
loss on any single insured and to recover a portion of benefits paid by ceding
reinsurance to other insurance enterprises or reinsurers under excess coverage
and co-insurance contracts.
B-21
<PAGE> 43
FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL LIFE
As of December 31, 1994 and 1993, total life insurance inforce approximated
$347 billion and $313 billion, respectively, of which approximately $104
billion and $96 billion, respectively, comprised principally of term insurance,
had been ceded to various reinsurers. The Company retains a maximum of $10
million of coverage per individual life.
OPERATING COSTS
Operating costs, including costs of acquiring new policies, are charged to
operations as incurred.
INCOME TAXES
Provisions for income taxes are based on current income tax returns without
recognition of deferred taxes due to timing differences. The portion of the
federal income tax based on mutual life insurance company equity is reflected
as a component of income tax expense, including related adjustments for prior
years.
The Company files a consolidated life-nonlife federal income tax return.
Federal income tax returns for years through 1988 are closed as to further
assessment of taxes. Adequate provision has been made in the financial
statements for any additional taxes which may become due with respect to the
open years.
The Company's effective tax rate on savings from operations before income tax
expense (after dividends) in 1994 was approximately 50.2%. Two significant
factors cause the Company's effective rate to exceed the federal corporate rate
of 35%. First, the Company pays "surplus tax", a tax that is assessed only on
mutual life insurance companies, which is an amount that proports to equate a
portion of policyholder dividends with nondeductible dividends paid to
shareholders of stock companies. Second, the Company must capitalize and
amortize (as opposed to immediately deducting) an amount deemed to represent
the cost of acquiring new business ("DAC tax").
POLICYOWNER DIVIDENDS
Dividends payable in the following year are charged to current operations.
NOTE 2 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following summarizes the bases used by the Company in estimating its fair
value disclosures for financial instruments:
BONDS AND PREFERRED STOCKS - Fair values are based upon quoted market
prices, if available. For securities not actively traded, fair values are
estimated using independent pricing services or internally developed
pricing models.
MORTGAGE LOANS - Fair values are derived by discounting the future
estimated cash flows using current interest rates for debt securities with
similar credit risk and maturities, or utilizing net realizable values.
LOANS ON POLICIES - The carrying amount reported in the statement of
financial position approximates fair value since loans on policies reduce
the amount payable at death or at surrender of the contract.
B-22
<PAGE> 44
FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL LIFE
CASH AND TEMPORARY INVESTMENTS AND DUE AND ACCRUED INVESTMENT INCOME - The
carrying amounts reported in the statement of financial position
approximate fair value.
ANNUITY RESERVES (without mortality/morbidity features) - Fair values are
derived by discounting the future estimated cash flows using current
interest rates with similar maturities.
OTHER DEPOSIT LIABILITIES - The carrying amounts reported in the statement
of financial position approximate fair value.
NOTE 3 - INVESTMENTS
NET INVESTMENT INCOME
The Company's net investment income for the years ended December 31, 1994, 1993
and 1992 consists of the following:
<TABLE>
<CAPTION>
(IN MILLIONS)
1994 1993 1992
----------------------------
<S> <C> <C> <C>
Interest, dividends, rents, equity
in unconsolidated subsidiaries'
earnings and joint venture income $ 3,395 $ 3,215 $ 3,039
Less: Investment expenses and
depreciation (289) (302) (286)
----------------------------
Net Investment Income $ 3,106 $ 2,913 $ 2,753
============================
</TABLE>
REALIZED GAINS AND LOSSES
During 1994, 1993 and 1992, the Company, in its normal course of business, sold
certain invested assets realizing gains and losses before transfer to the IMR
and capital gains tax from such sales as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1994 DECEMBER 31, 1993 DECEMBER 31, 1992
------------------------------- --------------------------------- ------------------------------
NET NET NET
REALIZED REALIZED REALIZED
REALIZED REALIZED GAINS REALIZED REALIZED GAINS REALIZED REALIZED GAINS
GAINS LOSSES (LOSSES) GAINS LOSSES (LOSSES) GAINS LOSSES (LOSSES)
----------------------------------------------------------------------------------------------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Bonds $171 $(535) $(364) $438 $(133) $305 $263 $ (90) $173
Stocks 499 (291) 208 297 (36) 261 266 (53) 213
Mortgage loans -- (37) (37) 1 (12) (11) -- (3) (3)
Real estate 16 (7) 9 13 (2) 11 15 (11) 4
Other invested assets 110 (98) 12 100 (54) 46 87 (131) (44)
----------------------------------------------------------------------------------------------------
$796 $(968) $(172) $849 $(237) $612 $631 $(288) $343
====================================================================================================
</TABLE>
B-23
<PAGE> 45
FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL LIFE
DEBT SECURITIES
Debt securities consist of all bonds, fixed maturity preferred stocks and short
term fixed income investments.
The statement values, which principally represent amortized cost, and estimated
market values of the Company's debt securities at December 31, 1994 and 1993
are as follows:
<TABLE>
<CAPTION>
December 31, 1994 RECONCILIATION TO ESTIMATED MARKET VALUE
- -------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
STATEMENT UNREALIZED UNREALIZED MARKET
VALUE APPRECIATION DEPRECIATION VALUE
- -------------------------------------------------------------------------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
US Government and
political obligations $ 3,334 $ 61 $ (41) $ 3,354
Mortgage-backed
securities 5,652 53 (321) 5,384
Corporate and other
debt securities 14,488 203 (515) 14,176
-----------------------------------------------------
23,474 317 (877) 22,914
Preferred stocks 71 1 (7) 65
-----------------------------------------------------
Total $23,545 $ 318 $ (884) $22,979
=====================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1993 RECONCILIATION TO ESTIMATED MARKET VALUE
- -------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
STATEMENT UNREALIZED UNREALIZED MARKET
VALUE APPRECIATION DEPRECIATION VALUE
- -------------------------------------------------------------------------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
US Government and
political obligations $ 3,005 $ 230 $ (8) $ 3,227
Mortgage-backed
securities 4,894 212 (22) 5,084
Corporate and other
debt securities 13,260 1,076 (46) 14,290
-----------------------------------------------------
21,159 1,518 (76) 22,601
Preferred stocks 91 3 (2) 92
-----------------------------------------------------
Total $21,250 $ 1,521 $ (78) $ 22,693
=====================================================
</TABLE>
The amortized cost and estimated market value of debt securities at December
31, 1994 and 1993, by contractual maturity, are shown below. 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.
B-24
<PAGE> 46
FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL LIFE
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
- --------------------------------------------------------------------------------
ESTIMATED ESTIMATED
STATEMENT MARKET STATEMENT MARKET
VALUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Due in one year or less $ 1,102 $ 1,100 $ 976 $ 981
Due after one year
through five years 4,491 4,444 3,568 3,804
Due after five years
through ten years 5,787 5,711 5,714 6,172
Due after ten years 6,513 6,340 6,098 6,652
------------------------------------------------------
17,893 17,595 16,356 17,609
Mortgage-backed
securities 5,652 5,384 4,894 5,084
------------------------------------------------------
$23,545 $22,979 $21,250 $22,693
======================================================
</TABLE>
The fair value of perpetual preferred stocks as of December 31, 1994 and 1993
approximates $440 million and $415 million, respectively, compared to the
statement values of $440 million and $368 million, respectively.
MORTGAGE LOANS
As of December 31, 1994 and 1993, the mortgage loan portfolio was distributed
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
- -------------------------------------------------------------------------------
STATEMENT % OF STATEMENT % OF
GEOGRAPHIC LOCATION VALUE TOTAL VALUE TOTAL
- -------------------------------------------------------------------------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Middle Atlantic $ 738 10.4% $ 518 8.0%
South Atlantic 1,943 27.4 1,492 22.9
North Central 1,289 18.2 1,341 20.6
South Central 921 13.0 1,014 15.6
Pacific Northwest 355 5.0 289 4.4
Pacific 1,531 21.5 1,508 23.2
Canada 322 4.5 343 5.3
------------------------------------------------------
$7,099 100.0% $6,505 100.0%
======================================================
PROPERTY TYPE
- --------------------------------------------------------------------------------
Retail $2,475 34.9% $2,561 39.4%
Office Building 2,176 30.6 2,079 32.0
Residential 1,526 21.5 1,013 15.5
Commercial 745 10.5 687 10.6
Other 177 2.5 165 2.5
------------------------------------------------------
$7,099 100.0% $6,505 100.0%
======================================================
</TABLE>
B-25
<PAGE> 47
FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL LIFE
The fair value of mortgage loans as of December 31, 1994 and 1993 approximates
$6,879 million and $6,900 million, respectively. Increases in current interest
rates were a major reason for the decline in fair value relative to statement
value in 1994. Loans with fair values that are less than statement values for
reasons other than changes in interest rates are adequately covered by normal
AVR reserves and by a $45 million special reserve established by the Company
for mortgage loans.
AFFILIATES
Since 1991, the Company has periodically sold shares of MGIC Investment
Corporation ("MGIC"), an affiliate. In 1992, the Company sold 6.6 million
shares of MGIC for $175 million, generating a realized capital gain of $88
million. In 1993, the Company sold 0.9 million shares for $52 million,
generating a realized capital gain of $38 million. In 1994, the Company sold
5.8 million shares for $51 million, generating a realized capital gain of $3
million. Of the shares sold in 1994, 5.7 million were sold to a subsidiary of
the Company in accordance with an option agreement with the subsidiary; no gain
or loss was realized on this sale. At December 31, 1994, the estimated market
value of the Company's remaining 19.96% investment in MGIC exceeded the
statement value by $214 million.
REAL ESTATE
For real estate and joint venture properties acquired subsequent to December
1990, the Company calculates depreciation using the straight-line method in
accordance with guidelines established by the National Association of Insurance
Commissioners. For properties acquired prior to December 1990, the Company
calculates depreciation using either the straight-line method or the
constant-yield method. Home office real estate is depreciated using the
straight-line method. At December 31, 1994 and 1993, investment real estate
includes $146 million and $126 million, respectively, of real estate acquired
through foreclosure.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company's current utilization of derivative financial instruments is
limited. Most of the Company's derivative transactions are used to reduce or
modify risks of volatility related to currency or interest rate movements.
These hedging strategies use forwards, futures and swaps. At December 31,
1994, the Company held foreign currency forward contracts with a notional value
of $605 million as a partial hedge against foreign currency exposure of foreign
denominated investments. Changes in the market value of these contracts offset
currency gains and losses on the hedged investments. The capital gains or
losses are unrealized before contract settlement and realized on settlement.
These currency hedges represent most of the Company's derivative positions.
The effect of derivative transactions is not significant to the Company's
results from operations or financial position.
NOTE 4 - ANNUITIES AND OTHER DEPOSIT LIABILITIES
The fair value of annuities and other deposit liabilities as of December 31,
1994 and 1993 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
- ---------------------------------------------------------------------------
STATEMENT FAIR STATEMENT FAIR
VALUE VALUE VALUE VALUE
- ---------------------------------------------------------------------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Annuities $2,474 $2,203 $2,263 $2,079
Other deposit liabilities 727 727 707 707
</TABLE>
B-26
<PAGE> 48
FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL LIFE
NOTE 5 - BENEFIT PLANS
The Company maintains non-contributory defined benefit retirement plans for all
eligible employees and agents as well as a non-contributory defined
contribution plan for all full-time agents. These plans are funded currently
and plan assets of $939 million at December 31, 1994 are primarily included in
the separate accounts of the Company. As of January 1, 1994, the most recent
actuarial valuation date available, the defined benefit plans were fully
funded.
In addition to pension benefits, the Company provides certain health care and
life insurance benefits ("postretirement benefits") for retired employees.
Substantially all employees may become eligible for these benefits if they
reach retirement age while working for the Company.
Postretirement benefit expenses, which includes the expected cost of
postretirement benefits for newly eligible and vested employees and interest
costs, was $7 million and $9 million for the years ended December 31, 1994 and
1993, respectively. At December 31, 1994 and 1993, the unfunded postretirement
benefit obligation for retirees and other fully eligible or vested employees
was $47 million and $50 million, respectively. The estimated postretirement
benefit obligation for active non-vested employees was $44 million and $45
million at December 31, 1994 and 1993, respectively. The discount rate used to
determine the postretirement benefit obligation was 8% and the health care cost
trend rate was 12% in 1994, declining by 1% per year to an ultimate rate of 6%
over 7 years. If the health care cost trend rate assumptions were increased by
1%, the postretirement benefit obligation as of December 31, 1994 would be
increased by $6 million.
At December 31, 1994 and 1993, plan assets attributable to postretirement
health care benefits totalled $25 million.
NOTE 6 - REINSURANCE
The amounts shown in the accompanying consolidated financial statements are net
of reinsurance activity. The effect of reinsurance on premiums and benefits
for the years ended December 31, 1994 and 1993 are as follows (in millions):
<TABLE>
<CAPTION>
1994 1993
----------------------
<S> <C> <C>
DIRECT PREMIUMS $5,977 $ 5,508
REINSURANCE CEDED (234) (213)
---------------------
NET PREMIUMS $5,743 $ 5,295
=====================
BENEFITS TO POLICYHOLDERS
AND BENEFICIARIES $6,178 $ 5,600
REINSURANCE RECOVERIES (141) (104)
---------------------
NET BENEFITS TO POLICYHOLDERS AND
BENEFICIARIES $6,037 $ 5,496
=====================
</TABLE>
In addition, during 1994 and 1993 the Company received credits of $63 million
and $59 million, respectively from reinsurers representing reimbursements of
commissions and other expenses. These credits are included in other income in
the consolidated summary of operations.
B-27
<PAGE> 49
FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL LIFE
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could result
in losses to the Company; consequently, allowances are established for amounts
deemed uncollectible. The Company evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk arising from similar
geographic regions, activities, or economic characteristics of the reinsurers
to minimize its exposure to significant losses from reinsurer insolvencies.
NOTE 7 - CONTINGENCIES
In the normal course of business, the Company enters into transactions to
reduce its exposure to fluctuations in interest rates and market volatility.
These instruments may involve credit risk and may also be subject to risk of
loss due to interest rate fluctuations.
The Company has guaranteed certain obligations of its affiliates. These
guarantees totalled approximately $83 million and $95 million at December 31,
1994 and 1993, respectively, and are generally supported by the underlying net
asset values of the affiliates.
The Company is engaged in various legal actions in the normal course of its
investment and insurance operations. In the opinion of management, any losses
resulting from such actions would not have a material effect on the Company's
financial condition.
B-28
<PAGE> 50
FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL LIFE
100 East Wisconsin Avenue Telephone 414 276 9500
Suite 1500
Milwaukee, WI 53202
[Price Waterhouse LLP Letterhead]
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Trustees and Policyowners of
The Northwestern Mutual Life Insurance Company
In our opinion, the accompanying consolidated statement of financial position
and the related consolidated statement of operations, statement of general
contingency reserve and statement of cash flows present fairly, in all material
respects, the financial position of The Northwestern Mutual Life Insurance
Company and its subsidiary at December 31, 1994 and 1993, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1994, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
Price Waterhouse LLP
January 25, 1995
B-29
<PAGE> 51
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DISTRIBUTION OF THE CONTRACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-2
DETERMINATION OF ANNUITY PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-2
Amount of Annuity Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-2
Annuity Unit Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-3
Illustrations of Variable Annuity Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-3
VALUATION OF ASSETS OF THE ACCOUNT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-4
TRANSFERABILITY RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-4
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-4
FINANCIAL STATEMENTS OF THE ACCOUNT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-5
(for the six months ended June 30, 1995 -- unaudited)
FINANCIAL STATEMENTS OF THE ACCOUNT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-11
(for year ended December 31, 1994)
REPORT OF INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-16
(for year ended December 31, 1994)
FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL LIFE . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-17
(for the three years ended December 31, 1994)
REPORT OF INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-29
(for the three years ended December 31, 1994)
</TABLE>
B-30
<PAGE> 52
[NORTHWESTERN MUTUAL LIFE LOGO]
NORTHWESTERN MUTUAL SERIES FUND, INC.
(Formerly Northwestern Mutual Variable Life Series Fund, Inc.)
A Series Fund Offering Nine Portfolios
INDEX 500 STOCK PORTFOLIO GROWTH AND INCOME STOCK PORTFOLIO
SELECT BOND PORTFOLIO GROWTH STOCK PORTFOLIO
MONEY MARKET PORTFOLIO AGGRESSIVE GROWTH STOCK PORTFOLIO
BALANCED PORTFOLIO HIGH YIELD BOND PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO
THIS PROSPECTUS SETS FORTH CONCISELY THE INFORMATION ABOUT THE FUND THAT A
PROSPECTIVE INVESTOR OUGHT TO KNOW BEFORE INVESTING. ADDITIONAL INFORMATION
ABOUT THE FUND HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IN A
STATEMENT OF ADDITIONAL INFORMATION WHICH IS INCORPORATED HEREIN BY REFERENCE.
THE STATEMENT OF ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST AND WITHOUT
CHARGE FROM THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY, 720 EAST WISCONSIN
AVENUE, MILWAUKEE, WISCONSIN 53202, TELEPHONE NUMBER (414) 271-1444.
SHARES OF THE FUND ARE OFFERED WITHOUT FEES OR CHARGES FOR SALES EXPENSES,
BUT THE SHARES ARE AVAILABLE ONLY FOR PURCHASE BY VARIABLE ANNUITY AND VARIABLE
LIFE INSURANCE SEPARATE ACCOUNTS OF THE NORTHWESTERN MUTUAL LIFE INSURANCE
COMPANY. ALL FEES AND CHARGES ASSOCIATED WITH THE VARIABLE ANNUITY CONTRACTS
OR VARIABLE LIFE INSURANCE POLICIES, INCLUDING CHARGES FOR SALES EXPENSES, ARE
DESCRIBED IN THE ATTACHED SEPARATE ACCOUNT PROSPECTUS.
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 $1.00 PER SHARE.
THIS PROSPECTUS SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Date of this Prospectus is March 31, 1995
The Date of the Statement of Additional Information is March 31, 1995
<PAGE> 53
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE
ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL INFORMATION.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE PAGE
---- ----
<S> <C> <C> <C>
Synopsis . . . . . . . . . . . . . . . . . . . 2 International Equity Portfolio . . . . . . . 11
Condensed Financial Information . . . . . . . . 3 Financial Futures Contracts . . . . . . . . 12
Financial Highlights . . . . . . . . . . . . . 4 Eurodollar Certificates of Deposit . . . . . 12
Investment Objectives and Policies . . . . . . 5 Repurchase Agreements and Warrants . . . . . 12
Index 500 Stock Portfolio . . . . . . . . . . 5 Investment Restrictions . . . . . . . . . . . 13
Select Bond Portfolio . . . . . . . . . . . . 5 Management of the Fund . . . . . . . . . . . 13
Money Market Portfolio . . . . . . . . . . . . 6 Portfolio Managers . . . . . . . . . . . . . 13
Balanced Portfolio . . . . . . . . . . . . . . 7 Investment Advisory Fees and Other Expenses 14
Growth and Income Stock Portfolio . . . . . . 8 Capital Stock . . . . . . . . . . . . . . . . 15
Growth Stock Portfolio . . . . . . . . . . . . 9 Taxes and Dividends . . . . . . . . . . . . . 16
Aggressive Growth Stock Portfolio . . . . . . 9 Offering and Redemption of Shares . . . . . . 16
High Yield Bond Portfolio . . . . . . . . . 10
</TABLE>
SYNOPSIS
Northwestern Mutual Series Fund, Inc. ("Fund") is an open-end diversified
management investment company. The Fund is composed of nine separate portfolios
which operate as separate mutual funds. The portfolios are the Index 500 Stock
Portfolio, the Select Bond Portfolio, the Money Market Portfolio, the Balanced
Portfolio, the Growth and Income Stock Portfolio, the Growth Stock Portfolio,
the Aggressive Growth Stock Portfolio, the High Yield Bond Portfolio and the
International Equity Portfolio ("Portfolios").
The investment objective of the Index 500 Stock Portfolio is to achieve
investment results that approximate the performance of the Standard & Poor's
500 Composite Stock Price Index ("S&P 500 Index"). The Portfolio will attempt
to meet this objective by investing in stocks included in the S&P 500 Index.
The primary investment objective of the Select Bond Portfolio is to provide
as high a level of long-term total rate of return as is consistent with prudent
investment risk. Total rate of return consists of current income, including
interest and discount accruals, and capital appreciation. A secondary objective
is to seek preservation of shareholders' capital. The Select Bond Portfolio's
assets will be invested primarily in bonds and other debt securities with
maturities generally exceeding one year.
The investment objective of the Money Market Portfolio is to realize
maximum current income consistent with liquidity and stability of capital. The
assets of the Money Market Portfolio will be invested in money market
instruments and other debt securities with maturities generally not exceeding
one year.
The investment objective of the Balanced Portfolio is to realize as high a
level of long-term total rate of return as is consistent with prudent
investment risk. Total rate of return consists of current income, including
dividends, interest and discount accruals, and capital appreciation. The assets
of the Balanced Portfolio will be invested in the stock, bond and money market
sectors as described above for the other Portfolios and the mix of investments
among the three market sectors will be adjusted continuously.
The investment objectives of the Growth and Income Stock Portfolio are
long-term growth of capital and income. Ordinarily the Portfolio pursues its
investment objectives by investing primarily in dividend-paying common stock.
The investment objective of the Growth Stock Portfolio is long-term growth
of capital; current income is secondary. The Portfolio will seek to achieve
this objective by selecting investments in companies which have above average
earnings growth potential.
2
<PAGE> 54
The investment objective of the Aggressive Growth Stock Portfolio is to
achieve long-term appreciation of capital primarily by investing in the common
stocks of companies which can reasonably be expected to increase their sales
and earnings at a pace which will exceed the growth rate of the nation's
economy over an extended period.
The investment objective of the High Yield Bond Portfolio is to achieve
high current income and capital appreciation by investing primarily in fixed
income securities that are rated below investment grade by the major rating
agencies. High yield fixed income securities are commonly known as "junk
bonds".
The investment objective of the International Equity Portfolio is long-term
capital growth. It pursues its objective through a flexible policy of
investing in stocks and debt securities of companies and governments outside
the United States.
There can be no assurance that the investment objectives of any of the
Portfolios will be realized. See "Investment Objectives and Policies", p. 5.
The Fund issues a separate class of common stock for each Portfolio. Shares
of the Fund are presently offered only to The Northwestern Mutual Life
Insurance Company ("Northwestern Mutual Life") and its separate investment
accounts created (or to be created in the future) pursuant to Wisconsin
insurance laws. Shares of each Portfolio are both offered and redeemed at their
net asset value without the addition of any sales load or redemption charge.
See "Offering and Redemption of Shares", p. 16.
The investment adviser to the Fund is Northwestern Mutual Investment
Services, Inc. ("NMIS"), a wholly-owned subsidiary of Northwestern Mutual Life.
Northwestern Mutual Life provides personnel and facilities utilized by NMIS in
performing its investment advisory functions, and is a party to the investment
advisory agreement between NMIS and the Fund. NMIS is paid a monthly investment
advisory fee based on the average daily net asset value of each Portfolio. The
Fund also pays all interest charges, brokerage commissions, taxes, and
extraordinary expenses incurred in connection with the operation of the Fund.
Six of the Portfolios bear their own expenses for audit and custodial services.
See "Management of the Fund", p. 13.
CONDENSED FINANCIAL INFORMATION
The following information on financial highlights as it relates to each of
the years in the five-year period ended December 31, 1994 has been audited by
Price Waterhouse, independent accountants. This information should be read in
conjunction with the financial statements and notes thereto which appear in the
Statement of Additional Information. Further information about the performance
of the Fund is contained in the Fund's annual report to shareholders which may
be obtained without charge.
3
<PAGE> 55
FINANCIAL HIGHLIGHTS
[For a share outstanding throughout the year)
<TABLE>
<CAPTION>
Ratio of Number
Net Distri- Ratio Net of
Realized Total butions of Invest- Shares
Net and from from Net Net Expenses ment Out-
Asset Net Unrealized Invest- Dividends Realized Asset to Income Standing,
Value, Invest- Gain ment from Net Gain on Value, Average to Portfolio End of
Beginning ment (Loss) on Opera- Investment Invest- End Total Net Average Turnover Year
of Year Income Investments tions Income ments of Year Return+ Assets Net Assets Rate (thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Index 500 Stock Portfolio
*1985 . . $1.07 $.0531 $.1866 $ .2397 $(.0249) $(.0148) $1.27 22.94% 0.30% 4.62% 133.24% 4,980
*1986 . . 1.27 .0472 .1488 .1960 (.0507) (.1053) 1.31 15.36 0.30 3.51 109.94 5,679
*1987 . . 1.31 .0426 .0750 .1176 (.0804) (.3472) 1.00 8.21 0.30 3.24 99.72 9,755
*1988 . . 1.00 .0396 .0486 .0882 (.0382) -- 1.05 8.83 0.30 3.76 106.31 10,872
*1989 . . 1.05 .0387 .1472 .1859 (.0437) (.0722) 1.12 18.29 0.30 3.34 152.13 8,742
1990 . . 1.12 .0395 (.0812) (.0417) (.0383) -- 1.04 (4.23) 0.30 3.70 80.07 9,155
1991 . . 1.04 .0347 .2685 .3032 (.0332) -- 1.31 29.78 0.30 2.88 40.16 10,753
1992 . . 1.31 .0340 .0316 .0656 (.0325) (.0131) 1.33 4.54 0.30 2.61 39.93 13,035
1993 . . 1.33 .0352 .0947 .1299 (.0325) (.1374) 1.29 9.90 0.30 2.55 62.69 19,785
1994 . . 1.29 .0260 .0052 .0208 (.0259) (.0106) 1.27 1.21 0.24 3.10 5.59 249,684
- -----------------------------------------------------------------------------------------------------------------------------------
Select Bond Portfolio
*1985 . . $1.10 $.1163 $.1268 $.2431 $(.0523) $(.0008) $1.29 23.16% 0.30% 10.14% 169.44% 4,968
*1986 . . 1.29 .1145 .1043 .2188 (.1161) (.0727) 1.32 18.68 0.30 8.43 58.97 5,775
*1987 . . 1.32 .1021 (.1043) (.0022) (.1998) (.0480) 1.07 (1.05) 0.30 8.66 91.92 7,679
*1988 . . 1.07 .0917 (.0010) .0907 (.0907) -- 1.07 8.22 0.30 8.35 113.31 8,635
*1989 . . 1.07 .0951 .0499 .1450 (.0899) (.0151) 1.11 13.83 0.30 8.51 131.41 10,134
1990 . . 1.11 .0928 (.0107) .0821 (.0932) (.0089) 1.09 8.10 0.30 8.50 33.14 11,129
1991 . . 1.09 .0923 .0900 .1823 (.0918) (.0005) 1.18 17.32 0.30 8.11 60.88 12,458
1992 . . 1.18 .0882 (.0045) .0837 (.0881) (.0356) 1.14 7.74 0.30 7.52 63.29 13,859
1993 . . 1.14 .0766 .0540 .1306 (.0775) (.0431) 1.15 10.81 0.30 6.40 67.69 15,260
1994 . . 1.15 .0559 (.0847) (.0288) (.0562) (.0049) 1.06 -2.28 0.30 7.02 108.00 149,626
- -----------------------------------------------------------------------------------------------------------------------------------
Money Market Portfolio
*1985 . . $1.00 $.0785 $(.0014) $(.0771) $(.0785) $(.0003) $1.00 8.11% 0.30% 7.86% --% 10,010
*1986 . . 1.00 .0630 .0010 .0640 (.0630) (.0009) 1.00 6.73 0.30 6.30 -- 10,052
*1987 . . 1.00 .0645 .0003 .0648 (.0649) (.0001) 1.00 6.64 0.30 6.46 -- 11,801
*1988 . . 1.00 .0724 .0001 .0725 (.0725) -- 1.00 7.47 0.30 7.24 -- 12,960
*1989 . . 1.00 .0882 -- .0882 (.0882) -- 1.00 9.18 0.30 8.82 -- 12,889
1990 . . 1.00 .0793 -- .0793 (.0793) -- 1.00 8.23 0.30 7.93 -- 13,365
1991 . . 1.00 .0571 -- .0571 (.0571) -- 1.00 5.85 0.30 5.71 -- 12,787
1992 . . 1.00 .0340 .0002 .0342 (.0340) (.0002) 1.00 3.49 0.30 3.40 -- 14,091
1993 . . 1.00 .0287 -- .0287 (.0287) -- 1.00 2.88 0.30 2.87 -- 12,657
1994 . . 1.00 .0464 -- .0464 (.0464) -- 1.00 4.03 0.30 4.64 -- 104,233
- -----------------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio
*1985 . . $1.07 $.0758 $.1653 $.2411 $(.0344) $(.0067) $1.27 23.12% 0.30% 6.73% 95.15% 10,109
*1986 . . 1.27 .0720 .1413 .2133 (.0723) (.0610) 1.35 16.96 0.30 5.26 71.56 12,780
*1987 . . 1.35 .0681 .0305 .0986 (.1126) (.1860) 1.15 7.15 0.30 5.06 77.97 28,647
*1988 . . 1.15 .0694 .0181 .0875 (.0675) -- 1.17 8.08 0.30 5.80 74.51 33,337
*1989 . . 1.17 .0741 .1108 .1849 (.0777) (.0372) 1.24 15.66 0.30 5.87 140.55 33,186
1990 . . 1.24 .0733 (.0515) .0218 (.0718) -- 1.19 1.53 0.30 6.07 72.89 36,022
1991 . . 1.19 .0672 .2083 .2755 (.0655) -- 1.40 23.33 0.30 5.11 55.46 40,981
1992 . . 1.40 .0622 .0086 .0708 (.0607) (.0201) 1.39 5.61 0.30 4.45 43.28 47,378
1993 . . 1.39 .0613 .0837 .1450 (.0651) (.1399) 1.33 9.91 0.30 4.24 70.91 51,955
1994 . . 1.33 .0404 (.0451) (.0047) (.0005) (.0149) 1.31 0.16 0.30 4.78 42.35 1,315,774
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Growth and Income Stock Portfolio
**1994 . . $1.00 $.0102 $(.0119) $(.0017) $(.0101) $(.0082) $0.98 0.34%++ 0.78%* 1.93%* 54.18% 65,757
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Growth Stock Portfolio
**1994 . . $1.00 $.0133 $.0011 $.0144 $(.0131) $(.0024) $1.00 1.55%++ 0.71%* 2.30%* 16.51% 41,908
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Aggressive Growth Stock Portfolio
*1990 . . $1.00 $.0050 $.0098 $.0148 $(.0048) $-- $1.01 1.89%++ 0.07% 0.50% -- % 10,367
*1991 . . 1.01 .0092 .5587 .5679 (.0077) (.0202) 1.55 56.00 0.84 0.69 44.28 34,687
*1992 . . 1.55 .0057 .0928 .0985 (.0049) (.0036) 1.64 5.95 0.75 0.39 81.96 78,232
*1993 . . 1.64 .0008 .3099 .3107 (.0007) (.0300) 1.92 19.11 0.66 0.05 63.63 102,186
**1994 . . 1.91 .0036 .0859 .0895 (.0005) -- 2.00 4.47++ 0.58* 0.29* 21.54 163,628
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High Yield Bond Portfolio
**1994 . . $1.00 $.0567 $(.0310) $.0257 $(.0562) $(.0028) $0.97 3.02%++ 0.73%* 9.40%* 130.78% 36,590
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International Equity Portfolio
*1993 . . $1.00 $.0126 $.2294 $.2420 $(.0105) $(.0015) $1.23 24.64%++ 0.70% 1.14% 3.62% 113,795
**1994 . . 1.22 .0182 (.0113) .0069 (.0209) (.0111) 1.19 0.11++ 0.87* 2.28* 10.97 245,609
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</TABLE>
*Not covered by current report of independent accountants.
**For the period of May 3, 1994 (commencement of operations) through December
31, 1994.
+Total Return includes deductions for management and other fund expenses;
excludes deductions for sales loads and account fees.
++Reflects total return for the period; not annualized.
*Computed on an annualized basis.
For the seven-day period ended on February 28, 1995, the Money Market
Portfolio's yield was 5.82% and was equivalent to a compound effective yield of
5.99%. This yield does not reflect charges imposed by Northwestern Mutual Life
under variable annuity contracts and variable life insurance policies and,
therefore, may be of limited comparative value. An explanation of the
calculation of the yield is included in the Statement of Additional
Information.
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<PAGE> 56
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and policies of each Portfolio are described
below. The investment objective of a Portfolio may be changed only with the
approval of the majority of the Portfolio's shares outstanding. The details of
the investment policies of a Portfolio may be changed by the Fund's Board of
Directors without a vote of the shareholders. For example, such details include
investments in new types of debt instruments which may be devised in the future
or which are presently in disuse but may become more prominent in the future
and minor changes in investment policies which may be made in response to
changes in regulatory requirements which are reflected in the Portfolio's
present policies.
There can be no assurance that the objectives of the Portfolios will be
realized. Investment in equity securities inherently involves the risks
associated with the affairs of each issuer of the securities as well as general
market risks. The same is true of investment in debt securities. Debt
securities tend to decline in value when interest rates rise; this effect is
greater for longer term bonds and relatively minor for short term cash
instruments which are about to mature. Investment in the Balanced Portfolio
necessarily involves the risks inherent in stocks and debt securities of
varying maturities, including the risk that the Balanced Portfolio may invest
too much or too little of its assets in each type of security at any particular
time. Investment in the International Portfolio involves an array of special
risk considerations. Some of these are briefly described below. A longer
description is included in the Statement of Additional Information.
Index 500 Stock Portfolio
The investment objective of the Index 500 Stock Portfolio is to achieve
investment results that approximate the performance of the Standard & Poor's
500 Composite Stock Price Index ("S&P 500 Index"). The Portfolio will attempt
to meet this objective by investing in stocks included in the S&P 500 Index in
proportion to their weighting in the index.
The S&P 500 Index is composed of 500 common stocks representing more than
70% of the total market value of all publicly-traded common stocks. "Standard
& Poor's(R)", "S&P(R)", "S&P 500(R)", "Standard & Poor's 500", and "500" are
trademarks of McGraw-Hill, Inc. and have been licensed for use by Northwestern
Mutual Life. The Fund is not sponsored, endorsed, sold or promoted by Standard
& Poor's and Standard & Poor's makes no representation regarding the
advisability of investing in the Fund.
The Index 500 Stock Portfolio will not be managed in the traditional sense
using economic, financial and market analysis. A computer program will be used
to determine which stocks are to be purchased or sold to achieve the
Portfolio's objective. The Portfolio will, to the extent feasible, remain
fully invested and will normally hold at least 450 of the 500 issues that
comprise the S&P 500 Index.
The Index 500 Stock Portfolio's ability to match the performance of the S&P
500 Index will be affected to some extent by the size and timing of cash flows
into and out of the Index 500 Stock Portfolio. The Portfolio will be managed
with a view to reducing such effects. A portion of the assets may at times be
invested in investment grade debt securities, short term commercial paper and
United States Treasury obligations, as well as option contracts, stock index
futures contracts, and repurchase agreements. See "Financial Futures
Contracts", p. 12 and "Repurchase Agreements and Warrants", p. 12.
Select Bond Portfolio
The primary investment objective of the Select Bond Portfolio is to provide
as high a level of long-term total rate of return as is consistent with prudent
investment risk. Total rate of return consists of current income, including
interest and discount accruals, and capital appreciation. A secondary objective
is to seek preservation of shareholders' capital.
The Select Bond Portfolio's assets will be invested in the following types
of securities:
1. publicly offered straight debt securities having a rating within
the four highest grades as determined by Moody's Investors Service,
Inc. (Aaa, Aa, A or Baa) or Standard & Poor's Corporation (AAA, AA, A
or BBB);
5
<PAGE> 57
2. obligations of or guaranteed by the United States Government or
its agencies;
3. obligations (payable in U.S. dollars) of or guaranteed by the
Government of Canada or of a Province of Canada or any instrumentality
or political subdivision thereof, provided such obligations have a
rating within the three highest grades as determined by Moody's
Investors Service, Inc. or Standard & Poor's Corporation and do not
exceed 10% of the Portfolio's total assets;
4. publicly offered straight debt securities issued or guaranteed
by a national or state bank or bank holding company (as defined in the
Federal Bank Holding Company Act, as amended) having a rating within
the two highest grades as determined by Fitch's Investor's Service,
Inc. (AAA or AA), and certificates of deposit of such banks or bank
holding companies;
5. commercial paper having a rating within the two highest
investment grades, as determined by Moody's Investors Service, Inc.
(P-1 or P-2) or Standard & Poor's Corporation (A-1 or A-2);
6. straight debt securities acquired directly from the issuers in
private placement transactions, which securities, in the judgment of
the Fund's Board of Directors, are of investment quality comparable to
publicly offered straight debt securities rated Baa by Moody's
Investors Service, Inc. or BBB by Standard & Poor's Corporation, or
better;
7. cash or cash equivalents; and
8. preferred stocks and obligations not described above, including
convertible securities, securities carrying warrants to purchase equity
securities and securities acquired directly from the issuers in private
placement transactions other than those securities described above.
A description of the ratings provided by Moody's Investors Service, Inc.,
Standard & Poor's Corporation and Fitch's Investor's Service, Inc. is included
in the Statement of Additional Information.
The Select Bond Portfolio will not invest in common stocks directly, but
may retain up to 10% of its total assets in common stocks acquired upon
conversion of debt securities or upon exercise of warrants acquired with debt
securities.
At least 70% of the Select Bond Portfolio's total assets will normally be
invested in bonds and debentures which have maturities of at least one year.
However, during periods of particular volatility or when an unusual decline in
the value of long-term obligations is anticipated, for temporary defensive
purposes the Select Bond Portfolio may place a larger portion of its assets in
cash and short-term obligations. During such periods the Select Bond
Portfolio's holdings of short-term obligations and equity securities may
temporarily exceed an aggregate total of 30% of the Select Bond Portfolio's
total assets.
The Select Bond Portfolio invests in obligations of a number of U.S.
Government agencies. Obligations of some agencies are supported by the full
faith and credit of the U.S. Treasury, others are supported only by the credit
of the agency. No assurance can be given that the U.S. Government would
provide financial support to any agency if it is not obligated to do so by law.
The Select Bond Portfolio will invest in the securities of a particular agency
only when the investment adviser is satisfied that the credit risk with respect
to such agency is minimal.
The Select Bond Portfolio may also invest in interest rate futures
contracts and repurchase agreements. See "Financial Futures Contracts", p. 12
and "Repurchase Agreements and Warrants", p. 12.
Money Market Portfolio
The investment objective of the Money Market Portfolio is to realize
maximum current income to the extent consistent with liquidity and stability of
capital.
The assets of the Money Market Portfolio will be invested in money market
instruments and other debt securities with maturities generally not exceeding
one year. Such instruments may include the following:
1. U.S. Treasury Bills and other obligations of or guaranteed by the U.S.
Government or its agencies;
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<PAGE> 58
2. obligations of or guaranteed by the Government of Canada or of a
Province of Canada or any instrumentality or political subdivision
thereof, provided such obligations do not exceed 10% of the Money
Market Portfolio's total assets;
3. obligations (including certificates of deposit, time deposits,
or bankers' acceptances) of U.S. or Canadian chartered banks having
total assets in excess of $1,000,000,000, U.S. branches of foreign
banks where said foreign banks have total assets in excess of
$10,000,000,000, and U.S. savings and loan associations having total
assets in excess of $1,000,000,000, and Eurodollar certificates of
deposit issued by foreign branches of U.S. banks where said banks have
total assets in excess of $1,000,000,000 (see "Eurodollar Certificates
of Deposit");
4. commercial paper, including variable amount master notes, having
a rating at the time of purchase within the two highest grades as
determined by Moody's Investors Service, Inc. (P-1 or P-2) or Standard
& Poor's Corporation (A-1 or A-2), or commercial paper or notes issued
by companies with an unsecured debt issue outstanding having a rating
at the time of purchase within the three highest grades as determined
by Moody's Investors Service, Inc. (Aaa, Aa, or A) or Standard & Poor's
Corporation (AAA, AA or A); and
5. publicly traded bonds, debentures and notes having a rating
within the four highest grades as determined by Moody's Investors
Service, Inc. (Aaa, Aa, A or Baa) or Standard & Poor's Corporation
(AAA, AA, A or BBB).
A glossary of the following terms is included in the Statement of
Additional Information: certificates of deposit, Eurodollar certificates of
deposit, time deposits, bankers' acceptances, variable amount master notes and
commercial paper. A description of the ratings provided by Moody's Investors
Service, Inc. and Standard & Poor's Corporation is also included in the
Statement of Additional Information.
The Money Market Portfolio will attempt to maximize its return by trading
to take advantage of changing money market conditions and trends. The Money
Market Portfolio will also trade to take advantage of what are believed to be
disparities in yield relationships between different money market instruments.
This procedure may increase or decrease the Portfolio's yield depending upon
management's ability to correctly time and execute such transactions. The Money
Market Portfolio intends to purchase only securities that mature within a year
except for securities which are subject to repurchase agreements. Accordingly,
the level of purchases will be relatively high. However, as transaction costs
on Money Market Portfolio investments are generally not substantial, the high
level of purchases will not adversely affect the Portfolio's net asset value or
net income.
U.S. Government and agency obligations held by the Money Market Portfolio
consist primarily of discounted or interest-bearing notes with average
maturities of ninety days or less. The Money Market Portfolio invests most
frequently in obligations of the following agencies of the U.S. Government:
Farm Credit System, Federal Home Loan Banks, Federal Home Loan Mortgage
Corporation and Federal National Mortgage Association. Obligations of some
agencies are supported by the full faith and credit of the U.S. Treasury,
others are supported by the right of the issuer to borrow from the Treasury,
others, such as those of the Federal National Mortgage Association, a private
corporation, are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations and others are supported only
by the credit of the agency. No assurance can be given that the U.S.
Government would provide financial support to any agency if it is not obligated
to do so by law. The Money Market Portfolio will invest in the securities of a
particular agency only when the investment adviser is satisfied that the credit
risk with respect to such agency is minimal.
The Money Market Portfolio may also invest in repurchase agreements. See
"Repurchase Agreements and Warrants", p. 12.
Balanced Portfolio
The investment objective of the Balanced Portfolio is to realize as high a
level of long-term total rate of return as is consistent with prudent
investment risk. Total rate of return consists of current income including
dividends, interest and discount accruals and appreciation.
7
<PAGE> 59
The assets of the Balanced Portfolio will be invested in the following three
market sectors:
1. Common stock and other equity securities including the
securities in which the Index 500 Stock Portfolio invests.
2. Bonds and other debt securities with maturities generally
exceeding one year including the securities in which the Select Bond
Portfolio invests.
3. Money market instruments and other debt securities with
maturities generally not exceeding one year including the securities in
which the Money Market Portfolio invests.
The Balanced Portfolio will continuously adjust the mix of investments
among the three market sectors to capitalize on perceived variations in return
potential produced by the interaction of changing financial markets and
economic conditions. Not more than 75% of the Balanced Portfolio's net assets
may be invested in either the stock sector or the bond sector. Up to 100% of
the Balanced Portfolio's net assets may be invested in money market
instruments. No minimum percentage has been established for any of the sectors.
Major changes in investment mix may occur several times within a year or over
several years depending upon market and economic conditions. The Balanced
Portfolio's investment objective is supplemented by investment objectives and
policies for the stock, bond and money market sectors. These are presently
substantially identical to those which have been established for the Index 500
Stock, Select Bond and Money Market Portfolios.
Growth and Income Stock Portfolio
The investment objectives of the Growth and Income Stock Portfolio are
long-term growth of capital and income. The Portfolio seeks to achieve these
objectives consistent with reasonable investment risk. Ordinarily, the
Portfolio pursues its investment objectives by investing primarily in
dividend-paying common stock. The Portfolio may also invest in other equity
securities, consisting of, among other things, nondividend-paying common stock,
preferred stock, and securities convertible into common stock, such as
convertible preferred stock and convertible bonds, and warrants. The Portfolio
may also invest in American Depositary Receipts (ADRs).
The Portfolio is not subject to any limit on the size of companies in which
it may invest, but intends, under normal circumstances, to be fully invested to
the extent practicable in the large- and medium-sized companies primarily
included in the S&P 500 Index. The Portfolio is designed for investors who
want an actively managed equity portfolio of selected equity securities that
seeks to outperform the total return of the S&P 500 Index. In managing the
Portfolio, the potential for appreciation and dividend growth is given more
weight than current dividends. Nonetheless, the manager of the Portfolio will
normally strive for gross income for the Portfolio at a level not less than 75%
of the dividend income generated on the stocks included in the S&P 500 Index,
although this income level is merely a guideline and there can be no certainty
that this income level will be achieved.
The Portfolio does not seek to achieve its objective with any individual
investment security, but rather it aims to manage all of its assets in such a
way as to achieve its objective. The Portfolio attempts to reduce risk by
investing in many different economic sectors, industries and companies. The
manager of the Portfolio may under- or over-weight selected economic sectors
against the sector weightings of the S&P 500 Index to seek to enhance the
Portfolio's total return or reduce fluctuations in market value relative to the
S&P 500 Index. In selecting securities, the manager may emphasize securities
that it believes to be undervalued. Securities of a company may be undervalued
for a variety of reasons such as an overreaction by investors to unfavorable
news about a company, an industry or the stock markets in general; or as a
result of a market decline, poor economic conditions, tax-loss selling, or
actual or anticipated unfavorable developments affecting a company.
During ordinary market conditions, the Portfolio will be as fully invested
as practicable in the equity securities described above. The Portfolio may
enter into firm commitment agreements, purchase securities on a "when-issued"
basis, and invest in various foreign securities if U.S. exchange-listed. The
Portfolio may also invest in money market instruments, including U.S.
Government securities, short term bank obligations that are rated in the
highest two rating categories by Moody's Investors Service, Inc. or Standard &
Poor's Corporation, or, if unrated, are determined to be of equal quality by
the manager of the Portfolio, certificates of deposit, time deposits and
banker's acceptances issued by U.S. and foreign banks and savings and loan
institutions with assets of at least $500 million as of the end of their most
recent fiscal year; and commercial paper and corporate obligations, including
variable rate demand notes, that are issued by U.S. and foreign issuers and
that are rated in the highest two rating categories by Moody's Investors
8
<PAGE> 60
Service, Inc. or Standard & Poor's Corporation, or if unrated, are determined
to be of equal quality by the manager of the Portfolio. A description of these
ratings is included in the Statement of Additional Information. Under normal
circumstances, the Portfolio will invest in such money market instruments to
invest temporary cash balances or to maintain liquidity to meet redemptions or
expenses. The Portfolio may also, however, invest in these instruments,
without limitation, as a temporary defensive measure taken during, or in
anticipation of, adverse market conditions.
Convertible bonds and other fixed income securities (other than money
market instruments) in which the Portfolio may invest will, at the time of
investment, be rated Baa or better by Moody's Investors Service, Inc. or BBB or
better by Standard & Poor's Corporation or, if not so rated, will be of
comparable quality as determined by the manager of the Portfolio. A
description of these ratings is included in the Statement of Additional
Information. In the event that an existing holding is downgraded below these
ratings, the Portfolio may nonetheless retain the security.
In pursuing its investment objective, the Portfolio may engage in the
purchase and writing of put and call options on securities and stock indexes
and may purchase or sell stock index futures contracts and options thereon.
These investment techniques may involve a greater degree of risk than those
inherent in more conservative investment approaches. See "Financial Futures
Contracts", p. 12 and the Statement of Additional Information for a description
of these techniques and their attendant risks.
Growth Stock Portfolio
The investment objective of the Growth Stock Portfolio is long-term growth
of capital; current income is secondary. The Portfolio will seek to achieve
this objective by selecting investments in companies which have above average
earnings growth potential.
The Growth Stock Portfolio invests primarily in common stocks of
well-established companies, with emphasis placed on high quality companies with
strong financial characteristics. The investment process is initiated with a
fundamental economic outlook. Further study of economic sectors leads to the
identification of growth-oriented industries, and to detailed studies of
individual companies. In evaluating individual companies, factors such as the
company management team, product outlook, global exposure, industry leadership
position, and financial characteristics are important variables used in the
analysis.
The market capitalization of companies the Portfolio may invest in is not
limited by size, but the Portfolio will generally invest in large- and
medium-sized companies. The aim of the Portfolio is to seek to reduce overall
risk by diversifying its assets in an appropriate manner. This diversification
will span economic sectors, industry groups, and companies, while emphasizing
high quality investments.
The Portfolio may invest in any of the securities in which the Growth and
Income Stock Portfolio or the Aggressive Growth Stock Portfolio may invest,
including, but not limited to, preferred stock, convertible bonds, short-term
commercial paper, and covered call options.
Portfolios emphasizing growth-oriented investments may experience above
average price volatility. An investment in the Growth Stock Portfolio can
present more risk than an investment in the Index 500 Stock Portfolio. The
Growth Stock Portfolio is designed for long-term investors seeking capital
appreciation.
Aggressive Growth Stock Portfolio
The investment objective of the Aggressive Growth Stock Portfolio is to
achieve long-term appreciation of capital primarily by investing in the common
stocks of companies which can reasonably be expected to increase their sales
and earnings at a pace which will exceed the growth rate of the nation's
economy over an extended period.
The assets of the Aggressive Growth Stock Portfolio will be invested
primarily in common stocks and other equity securities such as preferred stocks
and debt securities with conversion privileges or warrants. From time to time
assets may be invested in investment grade debt securities, short-term
commercial paper and United States Treasury obligations, or temporarily held in
cash uninvested for periods when the manager determines that economic
conditions call for such action. The Aggressive Growth Stock Portfolio may
also invest in covered call option contracts, stock index futures contracts,
including indexes on specific industries, repurchase agreements and warrants.
See "Financial Futures Contracts", p. 12 and "Repurchase Agreements and
Warrants", p. 12. A description of covered call options is included in the
Statement of Additional Information. Because the Aggressive Growth Stock
Portfolio will, for the
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<PAGE> 61
most part, be investing in stocks which possess substantial price volatility,
an investment in the Aggressive Growth Stock Portfolio will present more risk
than an investment in the Growth Stock Portfolio.
High Yield Bond Portfolio
The investment objective of the High Yield Bond Portfolio is to achieve
high current income and capital appreciation.
The High Yield Bond Portfolio seeks to achieve its objective by investing
primarily in a diversified selection of fixed income securities rated Ba1 or
lower by Moody's Investors Service, Inc. or BB+ or lower by Standard & Poor's
Corporation. A description of the ratings provided by the major rating
agencies is included in the Statement of Additional Information. The
Portfolio may also invest in nonrated securities.
The securities in which the High Yield Bond Portfolio will invest are
considered speculative and are sometimes known as "junk bonds". These
securities tend to offer higher yields than higher rated securities of
comparable maturities because the historical financial condition of the issuers
of these securities is usually not so strong as that of other issuers. High
yield fixed income securities usually present greater risk of loss of income
and principal than higher rated securities. Investors in these securities
should carefully consider these risks and should understand that high yield
fixed income securities are not appropriate for short-term investment purposes.
The primary investment strategy of the High Yield Bond Portfolio is to
invest in industries or individual companies which have stable or improving
fundamental financial characteristics. The success of this strategy depends on
the manager's analytical and portfolio management skills. These skills are
more important in the selection of high yield/high risk securities than would
be the case with a portfolio of high quality bonds. In selecting securities
for the High Yield Bond Portfolio the manager will consider the ratings
assigned by the major rating agencies, but primary reliance will be placed on
the manager's evaluation of credit and market risk in relationship to the
expected rate of return.
The risk that the issuer of a fixed income security may fail to pay
principal and interest when due is referred to as "credit risk". Price
volatility caused by such factors as interest rate fluctuation, market
perceptions of an issuer's creditworthiness and general liquidity in the
financial market is "market risk". The value of the securities held by the
High Yield Bond Portfolio will be directly affected by the market perception of
the creditworthiness of the securities' issuers and will fluctuate inversely
with changes in interest rates. Lower rated securities are more likely to
react to developments affecting market and credit risk than are more highly
rated securities, which react primarily to movements in the general level of
interest rates. For example, because investors generally perceive that there
are greater risks associated with investing in medium or lower rated
securities, the yields and prices of such securities may tend to fluctuate more
than those of higher rated securities. Moreover, in the lower quality segments
of the fixed income securities market, changes in perception of the
creditworthiness of individual issuers tend to occur more frequently and in a
more pronounced manner than do changes in higher quality segments of the fixed
income securities market. The yield and price of medium to lower rated
securities therefore may experience greater volatility than is the case with
higher rated securities. The manager of the Portfolio seeks to reduce
volatility through careful evaluation of credit risk and market risk and
diversification of the Portfolio's investments.
The secondary market for high yield/high risk securities, which is
concentrated in relatively few market makers, may not be as liquid as the
secondary market for more highly rated securities. Under adverse market or
economic conditions, the secondary market for high yield/high risk securities
could contract further, independent of any specific adverse changes in the
condition of a particular issuer. As a result, the High Yield Bond Portfolio
could find it more difficult to sell such securities or may be able to sell the
securities only at prices lower than if such securities were widely traded.
Prices realized upon the sale of such lower rated securities therefore may be
less than the prices used in calculating the Portfolio's net asset value. In
the absence of readily available market quotations, high yield/high risk
securities will be valued by the Fund's Directors using a method that, in the
good faith belief of the Directors, accurately reflects fair value. Valuing
such securities in an illiquid market is a difficult task. The Directors'
judgment plays a more significant role in valuing such securities than those
securities for which more objective market data are available.
In addition to notes and bonds, the High Yield Bond Portfolio may invest
in preferred stocks and convertible securities, including warrants or other
equity securities issued as part of a fixed income offering. The Portfolio may
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<PAGE> 62
purchase put and call options, on individual securities as well as indexes, and
may write covered call and secured put options. A description of put and call
options is included in the Statement of Additional Information. The Portfolio
may invest available temporary cash in short- term obligations, including those
in which the Money Market Portfolio may invest. The Portfolio may invest more
substantially in such short- term obligations or in investment grade securities
(rated Baa3 or higher by Moody's Investors Service, Inc. or BBB- or higher by
Standard & Poor's Corporation) when market conditions warrant a more defensive
investment posture.
The High Yield Bond Portfolio may invest in foreign securities consistent
with its investment objective. Some of the risks associated with investments
in foreign securities are briefly set forth in the description of the
International Equity Portfolio below. Such investments may be in United States
currency denominated debt issues or in debt securities in the currency of
other nations. The Portfolio may, but will not necessarily, attempt to hedge
its exposures by engaging in transactions in foreign currency futures
contracts. For a discussion of the risks involved in these contracts see
"Financial Futures Contracts", p. 12.
International Equity Portfolio
The International Equity Portfolio seeks long-term capital growth through a
flexible policy of investing in stocks and debt obligations of companies and
governments outside the United States. In pursuit of its investment objective,
the Portfolio will invest at least 65% of its assets in securities of issuers
in at least three countries outside the United States. Any income realized
will be incidental. Although the Portfolio generally invests in common stocks,
it may also invest in preferred stocks and certain debt securities such as
convertible bonds which are rated in any category by Moody's Investors Service,
Inc. or Standard & Poor's Corporation or which are unrated by any rating
agency. See Appendix in the Statement of Additional Information for a
description of the ratings presented by Moody's Investors Service, Inc. and
Standard & Poor's Corporation.
For temporary defensive purposes, the Portfolio may invest without limit in
commercial paper, certificates of deposit, bank time deposits in the currency
of any nation, bankers acceptances, U.S. Government securities, corporate debt
obligations, and repurchase agreements with respect to these securities.
The International Equity Portfolio may purchase and sell financial futures
contracts, stock index futures contracts, and foreign currency futures
contracts for hedging purposes only and not for speculation. It may engage in
such transactions only if the total contract value of the futures contracts
does not exceed 20% of the Portfolio's total assets. See "Financial Futures
Contracts", p. 12.
The International Equity Portfolio has an unlimited right to purchase
securities in any foreign country, developed or underdeveloped. An investor
should consider carefully the risks involved in investing in securities issued
by companies and governments of foreign nations, which are in addition to the
usual risks inherent in domestic investments. There is the possibility of
expropriation, nationalization or confiscatory taxation, taxation of income
earned in foreign nations (including withholding taxes) or other taxes imposed
with respect to investments in foreign nations, foreign exchange controls
(which may include suspension of the ability to transfer currency from a given
country), default in foreign government securities, political or social
instability or diplomatic developments which could affect investments in
securities or issuers in those nations. These considerations generally are
more of a concern in developing countries, where the possibility of political
instability (including revolution) and dependence on foreign economic
assistance may be greater than in developed countries. Investments in
companies domiciled in developing countries therefore may be subject to
potentially higher risks than investments in developed countries.
In many countries there is less publicly available information about
issuers than is available in reports about companies in the United States.
Foreign companies are not generally subject to uniform accounting and auditing
and financial reporting standards, and auditing practices and requirements may
not be comparable to those applicable to United States companies. It may be
more difficult to obtain or enforce judgments obtained against foreign
entities. Commission rates in foreign countries, which are generally fixed
rather than subject to negotiation as in the United States, are likely to be
higher. Further, the settlement period of securities transactions in foreign
markets may be longer than in domestic markets. In many foreign countries
there is less government supervision and regulation of business and industry
practices, stock exchanges, brokers and listed companies than in the United
States. Foreign securities transactions may be subject to higher brokerage
costs than domestic securities transactions. Foreign securities often trade
with less frequency and volume than domestic securities and are therefore less
liquid and more
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<PAGE> 63
volatile than securities of comparable domestic issuers. The International
Equity Portfolio may invest in Eastern Europe. This involves special risks
that are described in the Statement of Additional Information.
FINANCIAL FUTURES CONTRACTS
Each of the Portfolios (except the Select Bond, High Yield Bond and Money
Market Portfolios) may enter into stock index futures contracts, including
indexes on specific securities, as a hedge against changes in the market values
of common stocks. The Select Bond, High Yield Bond, Balanced and International
Equity Portfolios may enter into interest rate futures contracts as a hedge
against changes in prevailing levels of interest rates. In both cases, the
purpose is to establish more definitely the effective return on securities held
or intended to be acquired by the Portfolios. The Portfolios' hedging may
include sales of futures as an offset against the effect of expected decreases
in stock values or increases in interest rates, and purchases of futures as an
offset against the effect of expected increases in stock values or decreases in
interest rates.
A Portfolio will not enter into a futures contract if, as a result thereof,
(i) the aggregate market value of all open futures positions would exceed
one-third of the Portfolio's total assets or (ii) the sum of the initial margin
deposits of all open futures positions (other than an offsetting transaction)
would be more than 5% of the Portfolio's total assets. More than 5% of the
Portfolio's total assets may be committed to the aggregate of initial and
variation margin payments however. Furthermore, in order to be certain that the
Portfolio has sufficient assets to satisfy its obligations under a futures
contract, the Portfolio deposits cash or cash equivalents equal in value to the
market value of the futures contract in a segregated account for the Portfolio
with the Fund's custodian.
Financial futures prices are volatile and difficult to forecast and the
correlation between changes in prices of futures contracts and the securities
being hedged can be only approximate. A decision of whether, when and how to
hedge involves the exercise of skill and judgment, and even a well-conceived
hedge may be unsuccessful to some degree because of market behavior or
unexpected stock market or interest rate trends.
Because of the low margin deposits required, futures trading involves an
extremely high degree of leverage. A relatively small price movement in a
futures contract may result in immediate and substantial loss, as well as gain,
to the investor. Thus, a purchase or sale of a futures contract may result in
losses in excess of the amount invested in the futures contract.
A description of financial futures contracts is included in the Statement of
Additional Information.
EURODOLLAR CERTIFICATES OF DEPOSIT
The Money Market, Balanced, Growth and Income Stock, Growth Stock and High
Yield Bond Portfolios may purchase Eurodollar certificates of deposit issued by
foreign branches of U.S. banks, but consideration will be given to their
marketability and possible restrictions on the flow of international currency
transactions. Investment in such securities involves considerations which are
not ordinarily associated with investing in domestic instruments, including
currency exchange control regulations, the possibility of expropriation,
seizure, or nationalization of foreign deposits, less liquidity and increased
volatility in foreign securities markets, and the impact of political, social
or diplomatic developments or the adoption of other foreign government
restrictions that might adversely affect the payment of principal and interest.
If the Fund were to invoke legal processes, it might encounter greater
difficulties abroad than in the United States.
REPURCHASE AGREEMENTS AND WARRANTS
Certain securities of each Portfolio may be subject to repurchase
agreements. Each of the Portfolios (except the Select Bond and Money Market
Portfolios) may also invest in warrants. A description of repurchase agreements
and warrants is included in the Statement of Additional Information.
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<PAGE> 64
INVESTMENT RESTRICTIONS
The significant investment restrictions common to all the Portfolios are
described below. The investment restrictions of a Portfolio may be changed only
with the approval of the majority of the Portfolio's shares outstanding. These
investment restrictions provide that each Portfolio will not:
1. Acquire more than 25% of any class of equity securities of any
one issuer.
2. With respect to at least 75% of the value of the total assets of
the Portfolio, invest more than 5% of the value of such assets in the
securities of any one issuer (except securities issued or guaranteed by
the U.S. Government or its agencies), or invest in more than 10% of the
outstanding voting securities of any one issuer.
3. Purchase the securities of any other investment company, except
in open-market transactions involving no commission or profit to a
dealer (other than the customary broker's commission) or in connection
with mergers, consolidations or acquisitions of assets, in amounts not
exceeding 10% of the total assets of the Portfolio.
4. Invest more than 15% of the value of the total assets of the
Portfolio in securities which are restricted as to disposition under
federal securities laws and in other illiquid assets. For the Money
Market Portfolio the limit is 10%.
5. Invest more than 25% of the value of the total assets of the
Portfolio in securities of issuers in any one industry except for
investments by the Money Market Portfolio and the Balanced Portfolio in
U.S. Treasury Bills, other obligations of or guaranteed by the U.S.
Government or its agencies, certificates of deposit or bankers'
acceptances.
6. Make loans aggregating more than 10% of the total assets of the
Portfolio at any one time, provided that neither the purchase of a
portion of an issue of publicly distributed bonds, debentures, or other
debt securities, nor the purchase of short-term debt securities, is to
be considered as a loan.
Additional investment restrictions are included in the Statement of
Additional Information.
MANAGEMENT OF THE FUND
The Board of Directors of the Fund is responsible for the administration of
the affairs of the Fund. The Fund's investment adviser is NMIS, a wholly-owned
subsidiary of Northwestern Mutual Life. NMIS' address is 720 East Wisconsin
Avenue, Milwaukee, Wisconsin 53202. NMIS has served as investment adviser to
each of the mutual funds sponsored by Northwestern Mutual Life, subject to the
supervision and control of the boards of directors of the funds, since their
incorporation. NMIS provides investment advice and recommendations regarding
the purchase and sale of securities for the Fund's Portfolios.
Northwestern Mutual Life employs a full staff of investment personnel to
manage its investment assets. Northwestern Mutual Life's personnel and related
facilities are utilized by NMIS in performing its investment advisory
functions.
J. P. Morgan Investment Management, Inc. ("J. P. Morgan Investment"), a
Delaware corporation with principal offices at 522 Fifth Avenue, New York, New
York 10036, a wholly-owned subsidiary of J. P. Morgan & Co., is the sub-adviser
for the Growth and Income Stock Portfolio. Templeton Investment Counsel, Inc.
("Templeton Counsel"), a Florida corporation with principal offices at 500 East
Broward Boulevard, Ft. Lauderdale, Florida 33394, a wholly-owned indirect
subsidiary of Franklin Resources, Inc., is the sub-adviser for the
International Equity Portfolio. Each of the sub-advisers has been retained by
Northwestern Mutual Life and the Fund pursuant to an investment sub-advisory
agreement to provide investment advice and, in general, to conduct the
management investment program of the Portfolio, subject to the general control
of the Board of Directors of the Fund.
PORTFOLIO MANAGERS
Mark G. Doll, Senior Vice President and Treasurer of Northwestern Mutual
Life, joined Northwestern Mutual Life in 1972 and hold B.A. and M.B.A. degrees
from the University of Wisconsin-Milwaukee. He is a Chartered
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<PAGE> 65
Financial Analyst. Mr. Doll is responsible for the publicly traded investments
of Northwestern Mutual Life and for investment management of the Balanced
Portfolio.
Patricia L. Van Kampen, Vice President of Common Stocks of Northwestern
Mutual Life, joined Northwestern Mutual Life in 1974. She holds a B.A. degree
from St. Norbert College and an M.B.A. from Marquette University, and is a
Chartered Financial Analyst. Ms. Van Kampen is responsible for all common
stock investments of Northwestern Mutual Life, and for investment management of
the Balanced Portfolio.
William R. Walker, Director of Common Stocks of Northwestern Mutual Life,
joined Northwestern Mutual Life in 1984. Prior to this, he worked for the
Chicago Board Options Exchange, the Milwaukee Company, and Armco Insurance.
Mr. Walker is a Chartered Financial Analyst, and holds a B.S. degree from
Marquette University and an M.B.A. from Miami of Ohio. He has primary
responsibility for the management of the Aggressive Growth Stock Portfolio, as
well as the small company portfolio of Northwestern Mutual Life.
Julie M. Van Cleave, Director of Common Stocks of Northwestern Mutual Life,
joined Northwestern Mutual Life in 1984 and holds B.A. and M.B.A. degrees from
the University of Wisconsin-Madison. Ms. Van Cleave is a Chartered Financial
Analyst and has primary responsibility for the Growth Stock Portfolio and the
large company portfolio of Northwestern Mutual Life.
Steven P. Swanson, Vice President-Securities of Northwestern Mutual Life,
joined Northwestern Mutual Life in 1981. He received a B.A. degree from
Lawrence University and an M.B.A. from the University of Michigan. Mr.
Swanson is responsible for the High Yield Bond Portfolio and also manages the
high yield bond portfolio of Northwestern Mutual Life.
Timothy Doubek, Associate Director-Public Fixed Income of Northwestern
Mutual Life, joined Northwestern Mutual Life in 1987. He received a B.A.
degree from the University of Wisconsin-Milwaukee and an M.B.A. from the
University of Michigan. Mr. Doubek is a Chartered Financial Analyst and has
primary investment responsibility for the Select Bond Portfolio, the
fixed-income securities of the Balanced Portfolio and various portfolios of
Northwestern Mutual Life.
Lisa J. Waller, Vice President of J.P. Morgan Investment, joined J.P.
Morgan in 1982. She holds undergraduate and graduate degrees from the
University of Wisconsin-Madison. Ms. Waller is a Chartered Financial Analyst.
She has primary responsibility for the Growth and Income Stock Portfolio, and
also manages several pension fund and mutual fund accounts.
James E. Chaney, Senior Vice President, Equity Research and Portfolio
Management of Templeton Counsel, joined Templeton Counsel in 1991. Prior to
this, Mr. Chaney worked for GE Investments, where he was Vice President of
International Equities. Mr. Chaney received a B.S. degree in Engineering from
the University of Massachusetts, an M.S. in Engineering from Northwestern
University, and an M.B.A. from Columbia University. He has primary
responsibility for the International Equity Portfolio, and manages several
other mutual funds and separate accounts. Mr. Chaney also has various research
responsibilities at Templeton Counsel.
INVESTMENT ADVISORY FEES AND OTHER EXPENSES
Each Portfolio pays a monthly fee for investment advisory services at an
annual rate based on the aggregate average daily net asset values of the
Portfolio. For the Index 500 Stock Portfolio the rate is .20%, and for the
Select Bond, Money Market and Balanced Portfolios the rate is .30%. For the
other Portfolios the rate for the investment advisory fee is graded by the
asset size of the Portfolio according to the following schedule:
<TABLE>
<CAPTION>
Portfolio First $50 Million Next $50 Million Excess
- --------- ----------------- ---------------- ------
<S> <C> <C> <C>
Growth and Income Stock .70% .60% .55%
Growth Stock .60% .50% .40%
Aggressive Growth Stock .80% .65% .50%
High Yield Bond .60% .50% .40%
International Equity .85% .65% .65%
</TABLE>
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<PAGE> 66
Of the amounts received by NMIS from the Fund, the sub-adviser for the
Growth and Income Stock Portfolio will be paid by NMIS at the annual rate of
.45% on the first $100 million of the Portfolio's assets, .40% on the next $100
million, .35% on the next $200 million and .30% on assets in excess of $400
million. For the International Equity Portfolio the sub-adviser will be paid
by NMIS at the annual rate of .50% of the Portfolio's assets, reduced to .40%
on assets in excess of $100 million.
The following table shows the annual expenses for each of the Portfolios,
as a percentage of the average net assets of the Portfolio, based on 1994
operations for the Portfolios and their predecessors:
<TABLE>
<CAPTION>
Portfolio Investment Advisory Fee Other Expenses Total Expenses
- --------- ----------------------- -------------- --------------
<S> <C> <C> <C>
Index 500 Stock .20% .04% .24%
Select Bond .30% .00% .30%
Money Market .30% .00% .30%
Balanced .30% .00% .30%
Growth and Income Stock .69% .09% .78%
Growth Stock .60% .11% .71%
Aggressive Growth Stock .56% .02% .58%
High Yield Bond .60% .13% .73%
International Equity .69% .18% .87%
</TABLE>
CAPITAL STOCK
The Fund was incorporated in Maryland on December 22, 1983.
The Fund issues a separate class of capital stock for each Portfolio. Each
share of capital stock issued with respect to a Portfolio has a pro rata
interest in the assets of that Portfolio and has no interest in the assets of
any other Portfolio. Each share of capital stock is entitled to one vote on all
matters submitted to a vote of shareholders. Shares of a Portfolio will be
voted separately, however, on matters affecting only that Portfolio, including
approval of the Investment Advisory Agreement and changes in fundamental
investment policies of a Portfolio. The assets of each Portfolio are charged
with the liabilities of the Portfolio and their proportionate share of the
general liabilities of the Fund based on the relative asset size of the
Portfolios at the time the liabilities are incurred. All shares may be redeemed
for cash at any time.
All of the outstanding shares of each Portfolio are owned of record by
Northwestern Mutual Life. Shares of each Portfolio are presently being offered
only to Northwestern Mutual Life and its separate investment accounts used for
variable annuity contracts and variable life insurance policies. The shares
held in connection with certain of the separate investment accounts are voted
by Northwestern Mutual Life in accordance with instructions received from the
owners of the variable annuity contracts and variable life insurance policies.
The shares held by Northwestern Mutual Life as general assets are voted by
Northwestern Mutual Life in the same proportions as the shares held in
connection with these separate investment accounts. If applicable laws,
regulations or interpretations change so as to permit Northwestern Mutual Life
to vote the Fund shares in its own discretion, it may elect to do so.
As stated above, the shares of the Fund are offered to separate investment
accounts to fund both variable life insurance policies and variable annuity
contracts. Because of differences in tax treatment or other considerations it
is possible that the interests of variable life insurance policyowners, owners
of variable annuity contracts or owners of other contracts that may participate
in the Fund in the future might at some time be in conflict. The Board of
Directors of the Fund will monitor for any material conflicts and determine
what action, if any, should be taken. Northwestern Mutual Life has agreed to
be responsible, at its cost, to remedy or eliminate any irreconcilable material
conflict up to and including establishing a new registered management
investment company and segregating the assets underlying the variable annuity
contracts and variable life insurance policies.
There are no material pending legal proceedings to which the Fund is a
party.
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<PAGE> 67
TAXES AND DIVIDENDS
Each Portfolio is qualified or intends to qualify as a regulated investment
company under Subchapter M of the Internal Revenue Code. It is the Fund's
policy to comply with the provisions of the Code regarding distribution of
investment income and capital gains so as to relieve each Portfolio from all,
or substantially all, Federal taxes. Each Portfolio expects to distribute all
or substantially all net investment income and net capital gains, if any, from
the sale of investments.
Shareholders of each Portfolio are entitled to receive such dividends from
net investment income and distributions of net capital gains as the Directors
of the Fund may declare. Dividends from net investment income and net capital
gains will be declared for the Index 500 Stock, Select Bond, Balanced, Growth
and Income Stock, Growth Stock, Aggressive Growth Stock, High Yield Bond and
International Equity Portfolios annually, and for the Money Market Portfolio on
each business day.
Net investment income of each Portfolio will be determined at the close of
trading on the New York Stock Exchange on each day during which the Exchange is
open for trading. Net investment income of each Portfolio consists of:
1. all dividends, interest income and discount earned by the
Portfolio (including original issue and market discount) and
2. net short-term capital gain less
3. all expenses of the Portfolio.
OFFERING AND REDEMPTION OF SHARES
Shares of capital stock of each Portfolio of the Fund are offered and
redeemed at their net asset value as next determined following receipt of a
purchase order or tender for redemption without the addition of any selling
commission or "sales load" or any redemption charge. The redemption price may
be more or less than the shareholder's cost.
Equity securities listed on a stock exchange are valued at the closing sale
price or, if no sale took place, the closing bid price. Stock index futures
contracts and interest rate futures contracts are valued at the closing
settlement price on the commodities exchange. Debt securities with maturities
generally exceeding one year are valued on the basis of valuations furnished by
the Merrill Lynch Bond Pricing Service. Money market instruments with
maturities exceeding 60 days but generally not exceeding one year are valued by
marking to market, except for the Money Market Portfolio. Debt securities with
remaining maturities of 60 days or less, and all debt securities of the Money
Market Portfolio, are valued on an amortized cost basis or, if the current
market value differs substantially from the amortized cost, by marking to
market. All other assets are valued at their fair value as determined in good
faith by the Directors. Net asset value is determined as of the close of
trading on the New York Stock Exchange on each day during which the Exchange is
open for trading. In accordance with the requirements of the Investment Company
Act of 1940 the Portfolios will also determine the net asset value of their
shares on any other day on which there is sufficient trading to materially
affect the value of their securities.
A more detailed discussion of asset valuation methods is included in the
Statement of Additional Information.
16
