<PAGE>
As filed with the Securities and Exchange Commission on May 1, 1998
Registration Nos. 333-46389 and 811-08645
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. 1 [x]
-----
Post-Effective Amendment No. [ ]
------
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 1 [x]
---
(Check appropriate box or boxes)
Separate Account Ten of Integrity Life Insurance Company
(Exact Name of Registrant)
Integrity Life Insurance Company
(Name of Depositor)
515 West Market Street, Louisville, KY 40202
(Address of Depositor's Principal Executive Offices) (Zip Code)
Depositor's Telephone Number, including Area Code (502) 582-7900
----------------
Kevin L. Howard
Integrity Life Insurance Company
515 West Market Street
Louisville, Kentucky 40202
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon after the effective date
of this Registration Statement as is practicable.
It is proposed that this filing will become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b) of Rule 485
/ / on (date) pursuant to paragraph (b) of Rule 485
/ / 60 days after filing pursuant to paragraph (a)(1) of Rule 485
/ / on (date) pursuant to paragraph (a)(1) of Rule 485
/ / 75 days after filing pursuant to paragraph (a)(2) of Rule 485
/ / on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
/ / this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
CROSS REFERENCE SHEET - PINNACLE (VERSION III)
Showing Location in Part A (Prospectus) and Part B (Statement of Additional
Information) of Information Required By Form N-3
PART A: INFORMATION REQUIRED IN PROSPECTUS - PINNACLE (VERSION III)
<TABLE>
<CAPTION>
Form N-3 Item No. Location in Prospectus
<S> <C>
1. Cover Page Cover Page
2. Definitions Part I, Section 1 - Summary
3. Synopsis Part I, Section 1 - Summary, Table of Annual Fees and
Expenses, Examples
4. Condensed Financial Information Part I, Section 1 - Summary -- Financial Information
5. General Description of Registrant and Part I, Section 2 - Integrity and the Separate Accounts;
Insurance Company Part I, Section 3 - Your Investment Options;
Part II, Section 1 - The Select Ten Plus Division of
Separate Account Ten
6. Management Part II, Section 2 - Management of Separate Account Ten
7. Deductions and Expenses Part I, Section 4 - Deductions and Charges
8. General Description of Variable Part I, Section 5 - Terms of Your Variable Annuity
Annuity Contracts
9. Annuity Period Part I, Section 5 - Terms of Your Variable Annuity
10. Death Benefit Part I, Section 5 - Terms of Your Variable Annuity
11. Purchases and Contract Value Part I, Section 5 - Terms of Your Variable Annuity
12. Redemptions Part I, Section 5 - Terms of Your Variable Annuity
13. Taxes Part I, Section 7 - Tax Aspects of the Contracts
14. Legal Proceedings Not Applicable
15. Table of Contents of the Statement SAI Table of Contents
of Additional Information
<PAGE>
PART B: INFORMATION REQUIRED IN STATEMENT OF ADDITIONAL INFORMATION - PINNACLE (VERSION III)
Form N-3 Item No. Location in Statement of Additional Information
16. Cover Page Cover Page
17. Table of Contents Cover Page
18. General Information and History Part 1 - Integrity and Custodian
19. Investment Objectives and Policies Part 3 - Investment Restrictions and Policies of the
Select Ten Plus Division
20. Management Part 4 - Management of Separate Account Ten
21. Investment Advisory and Other Services Part 4 - Management of Separate Account Ten
22. Brokerage Allocation Part 5 - Portfolio Transactions and Brokerage
23. Purchase and Pricing of Securities Part 2 - Distribution of the Contracts;
Being Offered Part 7 - Determination of Accumulation Unit Values
24. Underwriters Part 2 - Distribution of the Contracts
25. Calculation of Performance Data Part 6 - Performance Information
26. Annuity Payments Part 8 - Determination of Annuity Unit Values
27. Financial Statements Part 9 - Financial Statements
</TABLE>
<PAGE>
Prospectus PINNACLE (VERSION III)
- ---------- FLEXIBLE PREMIUM VARIABLE ANNUITY*
issued by INTEGRITY LIFE INSURANCE COMPANY
This prospectus describes a flexible premium variable annuity offered by
Integrity Life Insurance Company, an indirect wholly owned subsidiary of ARM
Financial Group, Inc. The individual contracts and group certificates
(CONTRACTS) offered by this prospectus provide several types of benefits, some
of which have tax-favored status under the Internal Revenue Code of 1986, as
amended. The contracts are funded by two separate accounts, Separate Account II
and Separate Account Ten (collectively, SEPARATE ACCOUNTS). Contributions under
the contracts may be allocated to the various available investment divisions of
our Separate Accounts (VARIABLE ACCOUNT OPTIONS, or individually, OPTION) or to
our Fixed Accounts, or both.
Contributions to the Variable Account Options of Separate Account II are
invested in shares of corresponding portfolios of the following list of Funds or
Insurance Trust Funds (FUNDS): BT Insurance Funds Trust (BT FUNDS TRUST);
Variable Insurance Products Fund (VIP), Variable Insurance Products Fund II (VIP
II), and Variable Insurance Products Fund III (VIP III), part of the Fidelity
Investments' group of companies (collectively, FIDELITY'S VIP FUNDS); The
Legends Fund, Inc. (LEGENDS FUND); Janus Aspen Series; J.P. Morgan Series Trust
II (J.P. MORGAN SERIES); and Morgan Stanley Universal Funds, Inc. (MORGAN
STANLEY UNIVERSAL FUNDS). The values allocated to the Options reflect the
investment performance of the Funds' Portfolios. Bankers Trust Global Asset
Management Services, a unit of Bankers Trust Company, is the investment manager
of the BT Funds Trust. Fidelity Management and Research Company serves as
investment adviser to Fidelity's VIP Funds. Integrity Capital Advisors, Inc., a
member of the ARM Financial Group, is the investment adviser of the Legends
Fund. Janus Capital Corporation serves as investment adviser to the Janus
Trust. J.P. Morgan Investment Management Inc. is the investment adviser to the
J.P. Morgan Series. Morgan Stanley Asset Management Inc. serves as investment
adviser to the Morgan Stanley Universal Funds except for Morgan Stanley High
Yield Portfolio, for which Miller Anderson & Sherrerd, LLP serves as investment
adviser. The prospectuses for the Funds describe the investment objectives,
policies and risks of each of the Funds' portfolios. There are 21 Variable
Account Options available under Separate Account II:
BT FUNDS TRUST
EAFE-Registered Trademark- Equity Index Fund
Equity 500 Index Fund
Small Cap Index Fund
FIDELITY'S VIP FUNDS
VIP Equity-Income Portfolio
VIP II Contrafund Portfolio
VIP III Growth & Income Portfolio
VIP III Growth Opportunities Portfolio
JANUS ASPEN SERIES
Janus Aspen Capital Appreciation Portfolio
Janus Aspen Balanced Portfolio
Janus Aspen Worldwide Growth Portfolio
Janus Aspen Money Market Portfolio
J.P. MORGAN SERIES
J.P. Morgan International Opportunities Portfolio
J.P. Morgan Bond Portfolio
LEGENDS FUND
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Zweig Asset Allocation Portfolio
Zweig Equity (Small Cap) Portfolio
Scudder Kemper Value Portfolio
MORGAN STANLEY UNIVERSAL FUNDS
Morgan Stanley Asian Equity Portfolio
Morgan Stanley Emerging Markets Debt Portfolio
Morgan Stanley High Yield Portfolio
Morgan Stanley U.S. Real Estate Portfolio
<PAGE>
THERE CAN BE NO ASSURANCE THAT THE JANUS MONEY MARKET PORTFOLIO WILL ACHIEVE ITS
INVESTMENT OBJECTIVE OR BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00
PER SHARE.
Contributions to Separate Account Ten are allocated to its Select Ten Plus
Division March, Select Ten Plus Division June, Select Ten Plus Division
September, or Select Ten Plus Division December (each a DIVISION, and
collectively, the SELECT TEN PLUS DIVISIONS or the DIVISIONS), which invest
directly in securities. Part I of this prospectus describes the contract and
provides background information regarding the Separate Accounts. Part II of
this prospectus (beginning on page ___) provides information regarding the
investment activities and operations of the Divisions, including their
investment policies.
We currently offer Guaranteed Rate Options (GROs) and a Systematic Transfer
Option (STO), together referred to as FIXED ACCOUNTS. Your allocation to a GRO
accumulates at a fixed interest rate we declare at the beginning of the duration
you select. A market value adjustment (MARKET VALUE ADJUSTMENT) will be made for
withdrawals, surrenders, transfers and certain other transactions before the
expiration of your GRO Account, but your value under a GRO Account may not be
decreased below an amount equal to your allocation plus interest compounded at
an annual effective rate of 3% (MINIMUM VALUE). Withdrawal charges and an
annual administrative charge may be applicable, which may invade principal.
Your allocation to the STO accumulates at a fixed interest rate that we declare
each calendar quarter, guaranteed never to be less than an effective annual
yield of 3%. YOU MUST TRANSFER ALL CONTRIBUTIONS YOU MAKE TO THE STO INTO OTHER
INVESTMENT OPTIONS WITHIN ONE YEAR OF CONTRIBUTION ON A MONTHLY OR QUARTERLY
BASIS.
This prospectus contains information about the contracts that you should know
before investing. You should read this prospectus and any supplements, and
retain them for future reference. This prospectus is not valid unless provided
with the current Fund prospectuses, which you should also read.
For further information and assistance, you should contact our Administrative
Office at Integrity Life Insurance Company, P.O. Box 740074, Louisville,
Kentucky 40201-0074. The express mail address is Integrity Life Insurance
Company, 515 West Market Street, Louisville, Kentucky 40202-3319. You may also
call the following toll-free number: 1-800-325-8583.
Registration statements relating to the contracts, which include a Statement of
Additional Information (SAI) dated May 1, 1998, have been filed with the
Securities and Exchange Commission. The SAI is incorporated by reference into
this prospectus. A copy of the SAI is available free of charge by writing to or
calling our Administrative Office. A table of contents for the SAI follows the
table of contents for this prospectus.
* NOTE: CONTRACTS ISSUED IN THE STATE OF OREGON WILL BE SINGLE PREMIUM VARIABLE
ANNUITIES RATHER THAN FLEXIBLE PREMIUM VARIABLE ANNUITIES. ALL REFERENCES TO
FLEXIBLE CONTRIBUTIONS ARE SINGLE CONTRIBUTIONS FOR THIS STATE.
THE CONTRACTS ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF OR GUARANTEED BY ANY
BANK, NOR ARE THEY INSURED BY THE FDIC. THEY ARE SUBJECT TO INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES 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 May 1, 1998.
<PAGE>
TABLE OF CONTENTS
PART I PAGE
SECTION 1 - SUMMARY
Your Variable Annuity Contract . . . . . . . . . . . . . . . . . . . . . . 1
Your Benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
How Your Contract is Taxed . . . . . . . . . . . . . . . . . . . . . . . . 1
Your Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Your Investment Options. . . . . . . . . . . . . . . . . . . . . . . . . . 1
Variable Account Options . . . . . . . . . . . . . . . . . . . . . . . . . 1
Account Value, Adjusted Account Value and Cash Value . . . . . . . . . . . 2
Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Charges and Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Withdrawals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Your Initial Right to Revoke . . . . . . . . . . . . . . . . . . . . . . . 3
Table of Annual Fees and Expenses. . . . . . . . . . . . . . . . . . . . . 4
Financial Information. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 2 - INTEGRITY AND THE SEPARATE ACCOUNTS
Integrity Life Insurance Company . . . . . . . . . . . . . . . . . . . . . 9
The Separate Accounts and the Variable Account Options . . . . . . . . . . 9
Assets of Our Separate Accounts. . . . . . . . . . . . . . . . . . . . . . 9
Changes In How We Operate. . . . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 3 - YOUR INVESTMENT OPTIONS
The Legends Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 10
The Legends Fund's Investment Adviser and Sub-Advisers. . . . . . . . .10
Investment Objectives of the Portfolios . . . . . . . . . . . . . . . .11
BT Insurance Funds Trust . . . . . . . . . . . . . . . . . . . . . . . .. 11
The Bankers Trust Funds' Investment Adviser . . . . . . . . . . . . . .12
Investment Objectives of the Portfolios . . . . . . . . . . . . . . . .12
Fidelity Variable Insurance Products Funds . . . . . . . . . . . . . . .. 14
Fidelity's VIP Funds' Investment Adviser. . . . . . . . . . . . . . . .14
Investment Objectives of the Portfolios . . . . . . . . . . . . . . . .15
Janus Aspen Series . . . . . . . . . . . . . . . . . . . . . . . . . . .. 15
Janus Aspen Series' Investment Adviser. . . . . . . . . . . . . . . . .16
Investment Objectives of the Portfolios . . . . . . . . . . . . . . . .16
J.P. Morgan Series Trust II. . . . . . . . . . . . . . . . . . . . . . .. 17
The J.P. Morgan Series' Investment Adviser. . . . . . . . . . . . . . .17
Investment Objectives of the Portfolios . . . . . . . . . . . . . . . .17
Morgan Stanley Universal Funds, Inc. . . . . . . . . . . . . . . . . . .. 18
The Morgan Stanley Universal Funds' Investment Advisers . . . . . . . .18
Investment Objectives of the Portfolios . . . . . . . . . . . . . . . 19
The Select Ten Plus Divisions of Separate Account Ten. . . . . . . . . . .20
Fixed Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Guaranteed Rate Options . . . . . . . . . . . . . . . . . . . . . . . .20
Renewals of GRO Accounts . . . . . . . . . . . . . . . . . . . . . .21
Market Value Adjustments . . . . . . . . . . . . . . . . . . . . . .21
Systematic Transfer Option. . . . . . . . . . . . . . . . . . . . . . 21
<PAGE>
PAGE
SECTION 4 - DEDUCTIONS AND CHARGES
Separate Account Charges . . . . . . . . . . . . . . . . . . . . . . . . .22
Annual Administrative Charge . . . . . . . . . . . . . . . . . . . . . . .22
Fund and Division Charges. . . . . . . . . . . . . . . . . . . . . . . . .22
State Premium Tax Deduction. . . . . . . . . . . . . . . . . . . . . . . .22
Contingent Withdrawal Charge . . . . . . . . . . . . . . . . . . . . . . .22
Transfer Charge. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
Hardship Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
Tax Reserve. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
SECTION 5 - TERMS OF PINNACLE YOUR VARIABLE ANNUITY
Contributions Under Your Contract. . . . . . . . . . . . . . . . . . . . .24
Your Account Value . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Your Purchase of Units in Our Separate Accounts. . . . . . . . . . . . . .24
How We Determine Unit Value. . . . . . . . . . . . . . . . . . . . . . . .25
Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Withdrawals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Assignments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Death Benefits and Similar Benefit Distributions . . . . . . . . . . . . .27
Annuity Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
Annuities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
Annuity Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
Timing of Payment. . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
How You Make Requests and Give Instructions. . . . . . . . . . . . . . . .28
SECTION 6 - VOTING RIGHTS
Fund Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
How We Determine Your Voting Shares. . . . . . . . . . . . . . . . . . . .29
How Fund Shares Are Voted. . . . . . . . . . . . . . . . . . . . . . . . .29
How Separate Account Ten Interests Are Voted . . . . . . . . . . . . . . .30
Separate Account Voting Rights . . . . . . . . . . . . . . . . . . . . . .30
SECTION 7 - TAX ASPECTS OF THE CONTRACTS
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
Tax Status of Integrity. . . . . . . . . . . . . . . . . . . . . . . . . .30
Your Contract is an Annuity. . . . . . . . . . . . . . . . . . . . . . . .30
Taxation of Annuities Generally. . . . . . . . . . . . . . . . . . . . . .31
Distribution-at-Death Rules. . . . . . . . . . . . . . . . . . . . . . . .31
Diversification Standards. . . . . . . . . . . . . . . . . . . . . . . . .32
Tax-Favored Retirement Programs. . . . . . . . . . . . . . . . . . . . . .32
Individual Retirement Annuities . . . . . . . . . . . . . . . . . . . .33
Tax Sheltered Annuities . . . . . . . . . . . . . . . . . . . . . . . .33
Simplified Employee Pensions. . . . . . . . . . . . . . . . . . . . . .33
Corporate and Self-Employed (H.R. 10 and Keogh) Pension
and Profit Sharing Plans. . . . . . . . . . . . . . . . . . . . . . .33
Deferred Compensation Plans of State and Local Governments and
Tax-Exempt Organizations. . . . . . . . . . . . . . . . . . . . . . .33
Distributions Under Tax-Favored Retirement Programs. . . . . . . . . . . .33
Federal and State Income Tax Withholding . . . . . . . . . . . . . . . . .34
Impact of Taxes on Integrity . . . . . . . . . . . . . . . . . . . . . . .34
Transfers Among Investment Options . . . . . . . . . . . . . . . . . . . .34
<PAGE>
PAGE
SECTION 8 - ADDITIONAL INFORMATION
Systematic Withdrawals . . . . . . . . . . . . . . . . . . . . . . . . . .34
Dollar Cost Averaging. . . . . . . . . . . . . . . . . . . . . . . . . . .35
Systematic Transfer Program. . . . . . . . . . . . . . . . . . . . . . . .35
Customized Asset Rebalancing . . . . . . . . . . . . . . . . . . . . . . .35
Asset Allocation and Rebalancing Program . . . . . . . . . . . . . . . . .35
Systematic Contributions . . . . . . . . . . . . . . . . . . . . . . . . .36
Performance Information. . . . . . . . . . . . . . . . . . . . . . . . . .36
PART II
SECTION 1 - THE SELECT TEN PLUS DIVISIONS OF SEPARATE ACCOUNT TEN
The Divisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
Investment Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . .38
Investment Objective and Policies. . . . . . . . . . . . . . . . . . . . .38
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
Investment Restrictions. . . . . . . . . . . . . . . . . . . . . . . . . .39
SECTION 2 - MANAGEMENT OF SEPARATE ACCOUNT TEN
Board of Managers of Separate Account Ten. . . . . . . . . . . . . . . . .40
The Investment Adviser . . . . . . . . . . . . . . . . . . . . . . . . . .40
The Sub-Adviser. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
APPENDIX A - ILLUSTRATION OF A MARKET VALUE ADJUSTMENT . . . . . . . . .41
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.
7
<PAGE>
SAI TABLE OF CONTENTS
Part 1 -- Integrity and Custodian
Part 2 -- Distribution of the Contracts
Part 3 -- Investment Restrictions and Policies of the Select Ten Plus
Divisions
Part 4 -- Management of Separate Account Ten
Part 5 -- Portfolio Transactions and Brokerage
Part 6 -- Performance Information
Part 7 -- Determination of Accumulation Unit Values
Part 8 -- Determination of Annuity Unit Values
Part 9 -- Financial Statements
If you would like to receive a copy of the Statement of Additional Information,
please complete the form below and send it to:
Administrative Office
Integrity Life Insurance Company
P.O. Box 740074
Louisville, KY 40201-0074
ATTN: Request for SAI of Separate Account II (Pinnacle) and Separate Account Ten
Name:
----------------------------------------------------------------------
Address:
-------------------------------------------------------------------
City: State: Zip:
-------------------------------- --------- -----------------
8
<PAGE>
PART I
SECTION 1 -- SUMMARY
YOUR VARIABLE ANNUITY CONTRACT
In this prospectus, WE, OUR and US mean Integrity Life Insurance Company
(INTEGRITY), an indirect wholly owned subsidiary of ARM Financial Group, Inc.
(ARM). We offer individual variable annuity contracts. In certain states, we
offer certificates under a group variable annuity contract instead of contracts.
When we use the words contract or certificate, we are referring to both the
individual contracts and the group certificates.
You can invest for retirement by purchasing a contract if you properly complete
a Customer Profile form (an application or enrollment form may be required in
some states) and make a minimum initial contribution. In this prospectus, YOU
and YOUR mean the Annuitant, the person upon whose life the Annuity Benefit and
the Death Benefit are based, usually the Owner of the contract. If the Annuitant
does not own the contract, all of the rights under the contract belong to the
Owner until annuity payments begin. If a Joint Owner is named, the contract
rights are shared with the Owner. Contract changes or any transactions allowed
under the contract require both signatures. The rules governing distribution at
death apply when the first Owner dies. See Section 7, "Distribution-at-Death
Rules."
Your retirement or endowment date (RETIREMENT DATE) will be no later than your
98th birthday or earlier, if required by law, unless you notify us of a
different date.
YOUR BENEFITS
Your contract provides an Account Value, an annuity benefit, and a death
benefit. See "Your Account Value," "Death Benefits and Similar Benefit
Distributions" and "Annuity Benefits" in Part I, Section 5.
Your benefits may be received under a contract subject to the usual rules for
taxation of annuities, including the tax-deferral of earnings until withdrawal.
The contract also can provide your benefits under certain tax-favored retirement
programs, which are subject to special rules covering such matters as
eligibility and contribution amounts. See Part I, Section 7, "Tax Aspects of
the Contracts" for detailed information.
HOW YOUR CONTRACT IS TAXED
Under current law, any increases in the value of your contributions to your
contract are tax deferred and will not be included in your taxable income until
withdrawn. See Part I, Section 7, "Tax Aspects of the Contracts."
YOUR CONTRIBUTIONS
The minimum initial contribution in most states is currently $1,000. Minimum
initial contribution for residents of Pennsylvania and South Carolina is $3,000.
Subsequent contributions of at least $100 can be made. Special rules for lower
minimum initial and subsequent contributions apply for certain tax-favored
retirement plans. See "Contributions Under Your Contract" in Part I, Section 5.
YOUR INVESTMENT OPTIONS
You may allocate contributions to the Variable Account Options or to the Fixed
Accounts, or both. The Variable Account Options and the Fixed Accounts are
together referred to as the INVESTMENT OPTIONS. CONTRIBUTIONS MAY BE ALLOCATED
TO UP TO NINE INVESTMENT OPTIONS AT ANY ONE TIME. See "Contributions Under Your
Contract" in Part I, Section 5. The effective date of allocations to the Select
Ten Plus Divisions are subject to special rules. See "Investment Strategy" in
Part II, Section I. To select Investment Options most suitable for you, see
Part I, Section 3, "Your Investment Options."
9
<PAGE>
VARIABLE ACCOUNT OPTIONS
The Variable Account Options, except the Divisions, invest in shares of
corresponding investment portfolios of the Funds, each a "series" type of mutual
fund. Each investment portfolio is referred to as a PORTFOLIO. The investment
objective of each Variable Account Option and its corresponding Portfolio is the
same. Your value in a Variable Account Option will vary depending on the
performance of the corresponding Portfolio. For a full description of a Fund,
see each Fund's prospectus and the Fund's Statement of Additional Information.
The Divisions invest directly in securities. For a full description of the
Divisions, see Part II.
ACCOUNT VALUE, ADJUSTED ACCOUNT VALUE AND CASH VALUE
The sum of your values under the Fixed Accounts plus your values in the Variable
Account Options is referred to as the ACCOUNT VALUE. Your ADJUSTED ACCOUNT VALUE
is your Account Value, as increased or decreased (but not below the Minimum
Value) by any Market Value Adjustments. Your CASH VALUE is equal to your
Adjusted Account Value, reduced by any applicable contingent withdrawal charge
and will be reduced by the pro rata portion of the annual administrative charge,
if applicable. See "Charges and Fees" below.
TRANSFERS
You may transfer all or portions of your Account Value among the Investment
Options, subject to the conditions described under "Transfers" in Part I,
Section 5. Transfers from any Investment Option must be for at least $250.
Transfers may be arranged through our telephone transfer service. See
"Transfers" in Part I, Section 5. Transfers may also be made among certain
Investment Options under our following special services: (i) Dollar Cost
Averaging, (ii) Customized Asset Rebalancing, (iii) Asset Allocation and
Rebalancing, or (iv) to transfer your STO contributions. See "Dollar Cost
Averaging," "Customized Asset Rebalancing," "Asset Allocation and Rebalancing
Program," and "Systematic Transfer Program" in Part I, Section 8.
CHARGES AND FEES
If your Account Value is less than $50,000 as of the last day of any contract
year prior to your Retirement Date, an annual administrative expense charge of
$30 is deducted from your contract. See Part I, Section 4, "Deductions and
Charges."
A charge at an effective annual rate of 1.35% of the Account Value of the assets
in each Variable Account Option is made daily. We make this charge to cover
mortality and expense risks (1.20%) and certain administrative expenses (.15%).
The charge will never be greater than an effective annual rate of 1.35% of the
Account Value of the assets in each Variable Account Option. See Part I, Section
4, "Deductions and Charges."
Investment management fees and other expenses are deducted from amounts invested
by the Separate Account in the Funds.
For providing investment management services to the BT Funds Trust, Bankers
Trust Company (BANKERS TRUST) receives fees from the EAFE-Registered
Trademark- Equity Index Fund, the Equity 500 Index Fund, and the Small Cap
Index Fund (each a BT FUND and together BT FUNDS) based on the net assets of
each Fund after waivers at a rate of .34% for the EAFE-Registered Trademark-
Equity Index Fund, .11% for the Equity 500 Index Fund, and .22% for the Small
Cap Index Fund. The expenses reflect a voluntary undertaking by Bankers
Trust to waive or reimburse expenses.
For providing investment management services to the Portfolios of the Legends
Fund, and to the Divisions, Integrity Capital Advisors, Inc. (INTEGRITY CAPITAL
ADVISORS), the investment adviser of the Legends Fund and the Divisions,
receives fees ranging from an annual rate of .65% to 1.05% of the average net
assets of the Portfolios and the Divisions.
For providing investment management services to the Portfolios of Fidelity's VIP
Funds, Fidelity Management and Research Company (FMR) receives fees from the
Portfolios based on the average net assets of each Portfolio. The highest annual
rate at which any of the Portfolios of Fidelity's VIP Funds paid advisory fees
in 1997 was .60% of average net assets.
For providing investment management services to the Portfolios of the Janus
Aspen Series, Janus Capital Corporation (JANUS) receives fees from the
Portfolios based on the net assets of each Portfolio. The highest annual rate
at which any of the Janus Portfolios paid advisory fees in 1997 was .76% of
average net assets. Please see Table of Annual Fees and Expenses for rates
associated with specific Portfolios.
10
<PAGE>
For providing investment management services to the J.P. Morgan Series, J.P.
Morgan Investment Management Inc. (JPMIM) receives fees based on the net assets
of the Portfolios at a rate of .30% from the J.P. Morgan Bond Portfolio and .60%
from the J.P. Morgan International Opportunities Portfolio.
For providing investment management services to the Morgan Stanley Universal
Funds, Morgan Stanley Asset Management Inc. (MSAM) receives fees from the
Portfolios at an annual rate of up to .80% for the Morgan Stanley Asian Equity,
Morgan Stanley Emerging Markets Debt, and Morgan Stanley U.S. Real Estate
Portfolios. Miller Anderson & Sherrerd, LLP (MAS) serves as investment adviser
to the Morgan Stanley High Yield Portfolio and receives fees at an annual rate
of up to .50% of the Portfolio's average net assets.
For providing investment management services to the Divisions, Integrity Capital
Advisors will receive a monthly fee based on an annual rate of .50% of each
Division's average daily net assets. Integrity Capital Advisors will pay a
portion of those fees to National Asset Management Corporation (NATIONAL ASSET)
for its services under a sub-advisory agreement at an annual rate of .10% of the
Divisions' average daily net assets up to $100 million and .05% of the
Divisions' average daily net assets in excess of $100 million. Integrity
Capital Advisors has guaranteed it will pay National Asset a minimum sub-
advisory fee of $25,000 during the Divisions' first year of operations.
The advisory fees of a Fund or Division cannot be increased without the consent
of its shareholders. See "Table of Annual Fees and Expenses" below and the
discussions relating to the various investment advisers and sub-advisers in Part
I, Section 3.
If you frequently transfer funds from one Investment Option to another, certain
transfers may become subject to a charge. We will not, however, charge more than
$20 per transfer. See "Transfer Charge" in Part I, Section 4.
When you make withdrawals from your contract, a contingent withdrawal charge may
be deducted from your Account Value. This sales charge will be in addition to
the Market Value Adjustment applicable to early withdrawals from GRO Accounts.
Under certain circumstances, the contingent withdrawal charge and market value
adjustment may be waived. See "Withdrawals" below and "Guaranteed Rate Options"
in Part I, Section 3.
WITHDRAWALS
You may make an unlimited number of withdrawals from your contract as frequently
as you wish. Each withdrawal must be for at least $300. Unless specifically
instructed otherwise, Integrity will make withdrawals (including any applicable
charges) from the Investment Options in the same ratio the Annuitant's Account
Value in each Investment Option bears to the Annuitant's total Account Value. A
sales charge of up to 8% of the contribution amount withdrawn, in excess of any
free withdrawal amount (defined below), will be deducted from your Account
Value, unless one of the exceptions applies. This charge defrays marketing
expenses. See "Contingent Withdrawal Charge" in Part I, Section 4. Most
withdrawals made by you prior to age 59-1/2 are also subject to a 10% federal
tax penalty. In addition, some tax-favored retirement programs limit
withdrawals. See Part I, Section 7, "Tax Aspects of the Contracts." For partial
withdrawals, the total amount deducted from your Account Value will include the
withdrawal amount requested, any applicable Market Value Adjustment, and any
applicable withdrawal charge, so that the net amount you receive will be the
amount requested. For residents of Pennsylvania and South Carolina a $3,000
minimum account balance is required to remain in your Contract after any
withdrawals.
The FREE WITHDRAWAL AMOUNT is a non-cumulative amount which you may take as a
partial withdrawal each contract year without being subject to the contingent
withdrawal charge or any Market Value Adjustment. It is equal to 10% of the
Account Value, minus cumulative prior withdrawals in the current contract year.
However, as explained above, a tax penalty still applies if you are under age
59-1/2.
YOUR INITIAL RIGHT TO REVOKE
Within ten days after you receive your contract, you may cancel it by returning
it to our Administrative Office. The 10-day period may be extended if required
by state law. We will refund all your contributions with an adjustment for any
investment gain or loss on the contributions put into each Variable Account
Option from the date units were purchased until the date your contract is
received by us, including any charges deducted. If state law instead requires a
refund of your contributions without any adjustment, we will return that amount
to you. For allocations to any of the GROs, we will refund to you the amount of
your contributions.
TABLE OF ANNUAL FEES AND EXPENSES
Contract Owner Transaction Expenses
- -----------------------------------
11
<PAGE>
<TABLE>
<S> <C>
Sales Load on Purchases . . . . . . . . . . . . . . $0
Deferred Sales Load (1) . . . . . . . . . . . . . . 8% Maximum
Exchange Fee (2). . . . . . . . . . . . . . . . . . $0
Annual Administrative Charge (3). . . . . . . . . . $30
</TABLE>
Annual Expenses of the Separate Accounts
(as a percentage of average account value) (4)
- ----------------------------------------------
<TABLE>
<S> <C>
Mortality and Expense Risk Charge . . . . . . . . . 1.20%
Administrative Expenses . . . . . . . . . . . . . . .15%
-----
Total Separate Account Annual Expenses. . . . . . . 1.35%
-----
-----
</TABLE>
Portfolio Annual Expenses After Waivers/Reimbursements
(as a percentage of average net assets)
- ---------------------------------------
<TABLE>
<CAPTION>
Management Other Total Annual
Portfolio Fees(5) Expenses Expenses
- --------- ------- -------- --------
<S> <C> <C> <C>
EAFE-Registered Trademark- Equity Index. . . . . . . . 0.34%(6)(7) 0.31%(6)(7) 0.65%(6)(7)
Equity 500 Index . . . . . . . . . . . . . . . . . . . 0.11%(6)(7) 0.19%(6)(7) 0.30%(6)(7)
Small Cap Index. . . . . . . . . . . . . . . . . . . . 0.22%(6)(7) 0.23%(6)(7) 0.45%(6)(7)
VIP Equity-Income. . . . . . . . . . . . . . . . . . . 0.50% 0.08% 0.58%(8)
VIP II Contrafund. . . . . . . . . . . . . . . . . . . 0.60% 0.11% 0.71%(8)
VIP III Growth & Income. . . . . . . . . . . . . . . . 0.49% 0.21%(6) 0.70%
VIP III Growth Opportunities . . . . . . . . . . . . . 0.60% 0.14% 0.74%(8)
Harris Bretall Sullivan & Smith Equity Growth. . . . . 0.65% 0.38% 1.03%(9)
Scudder Kemper Value . . . . . . . . . . . . . . . . . 0.65% 0.40% 1.05%(9)
Zweig Asset Allocation . . . . . . . . . . . . . . . . 0.90% 0.38% 1.28%(9)
Zweig Equity (Small Cap) . . . . . . . . . . . . . . . 1.05% 0.50% 1.55%(9)
Janus Aspen Capital Appreciation . . . . . . . . . . . 0.23%(10) 1.03%(10) 1.26%(10)
Janus Aspen Balanced . . . . . . . . . . . . . . . . . 0.76%(10) 0.07%(10) 0.83%(10)
Janus Aspen Worldwide Growth . . . . . . . . . . . . . 0.66%(10) 0.08%(10) 0.74%(10)
Janus Aspen Money Market . . . . . . . . . . . . . . . 0.22%(10) 0.28%(10) 0.50%(10)
J.P. Morgan International Opportunities. . . . . . . . 0.60% 0.60%(11) 1.20%(11)
J.P. Morgan Bond . . . . . . . . . . . . . . . . . . . 0.30% 0.45%(11) 0.75%(11)
Morgan Stanley Asian Equity. . . . . . . . . . . . . . 0.00%(12) 1.20%(12) 1.20%(12)
Morgan Stanley Emerging Markets Debt . . . . . . . . . 0.00%(12) 1.30%(12) 1.30%(12)
Morgan Stanley High Yield. . . . . . . . . . . . . . . 0.00%(12) 0.80%(12) 0.80%(12)
Morgan Stanley U.S. Real Estate. . . . . . . . . . . . 0.00%(12) 1.10%(12) 1.10%(12)
</TABLE>
<TABLE>
<CAPTION>
Division Annual Expenses After Reimbursement
(as a percentage of average net assets)
- ---------------------------------------
Management Fees(13) Other Expenses(14) Total Annual Expenses(14)
<S> <C> <C>
.50% .35% .85%
</TABLE>
- -------------------------
(1) See "Deductions and Charges - Contingent Withdrawal Charge" in Part I,
Section 4. You may make a partial withdrawal of up to 10% of the Account Value
in any contract year less withdrawals during the current contract year, without
assessment of any withdrawal charge.
12
<PAGE>
(2) After the first twelve transfers during a contract year, Integrity has the
right to impose a transfer charge of $20 per transfer. This charge would not
apply to transfers made for dollar cost averaging, customized asset rebalancing,
asset allocation and rebalancing, or systematic transfers. See "Deductions and
Charges - Transfer Charge" in Part I, Section 4.
(3) The annual administrative charge is $30. This charge applies only if the
Account Value is less than $50,000 at the end of any contract year prior to your
Retirement Date. See "Deductions and Charges - Annual Administrative Charge" in
Part I, Section 4.
(4) See "Deductions and Charges - Separate Account Charges" in Part I,
Section 4.
(5) The stated management fee is the highest applicable rate, or, with respect
to the Janus Portfolios is for the year ended December 31, 1997. The fee for
certain portfolios may be reduced as assets increase. See Part I, Section 3 -
Your Investment Options for the applicable fee rates for particular portfolios.
(6) Estimated.
(7) The fees and expenses in the table show the costs that an investor will
bear directly or indirectly as a shareholder of the Fund. Bankers Trust has
voluntarily agreed to waive a portion of its management fee with respect to each
Fund. Without such waiver, each Fund's management fee would be equal to the
following: EAFE Equity Index - 0.45%; Equity 500 Index - 0.20% and Small Cap
Index - 0.35%. The expense table reflects a voluntary undertaking by Bankers
Trust to waive or reimburse expenses such that the total annual expenses of the
Fund for the fiscal year will not exceed the following percentages of the Funds'
average daily net assets; EAFE Equity Index - 0.65%; Equity 500 Index - 0.30%
and Small Cap Index - 0.45%. In the absence of this undertaking, "Total Annual
Expenses" would be the following: EAFE Equity Index - 0.85%; Equity 500 Index -
0.54% and Small Cap Index - 0.73%. The example should not be considered a
representation of past or future expenses and actual expenses may be greater or
less than those shown.
(8) A portion of the brokerage commissions that certain of Fidelity's VIP Funds
pay was used to reduce the Funds' expenses. In addition, certain Funds have
entered into arrangements with their custodian whereby credits realized, as a
result of uninvested cash balances, were used to reduce custodian expenses.
Including these reductions, the total operating expenses presented in the table
would have been 0.57% for VIP Equity-Income Portfolio, 0.68% for VIP II
Contrafund Portfolio, and 0.73% for VIP III Growth Opportunities Portfolio.
(9) Integrity Capital Advisors has agreed to reimburse each of the Legends Fund
Portfolios for operating expenses (excluding management fees) above an annual
rate of .50% of average net assets for all Portfolios of the Legends Fund.
Without reimbursements, total annual expenses for the Fund's fiscal year ended
June 30, 1997 would have been 1.82% for the Zweig Equity (Small Cap) Portfolio.
Integrity Capital Advisors has reserved the right to withdraw or modify its
policy of expense reimbursement for the Portfolios, but has no current intention
to do so during 1998. In the Legends Fund's prospectus, see "Management of the
Fund."
(10) The fees and expenses in the table above are based on gross expenses after
expense offset arrangements for the fiscal year ended December 31, 1997. Fee
reductions for the Janus Aspen Balanced, Janus Aspen Capital Appreciation and
Janus Aspen Worldwide Growth Portfolios reduce the management fee to the level
of the corresponding Janus retail fund. Other waivers, if applicable, are
first applied against the management fee and then against other expenses.
Without such waivers or reductions, the Management Fee, Other Expenses, and
Total Annual Expenses would have been .72%, .09%, and .81% for Worldwide Growth
Portfolio, 1.14%, 1.05% and 2.19% for Capital Appreciation Portfolio, .77%, .06%
and .83% for Balanced Portfolio, and .25%, .30% and .55% for the Money Market
Portfolio. Janus may modify or terminate the waivers or reductions at any time
upon at least 90 days' notice to the Trustees.
(11) The information in the foregoing table has been restated to reflect a
voluntary agreement by Morgan Guaranty Trust Company of New York, an affiliate
of JPMIM, to reimburse the Trust to the extent certain expenses exceed in any
fiscal year 1.20% and .75% of the average daily net assets of J.P. Morgan
International Opportunities Portfolio and J.P. Morgan Bond Portfolio,
respectively. Absent such agreement, the Other Expenses and Total Annual
Expenses for the fiscal year ended December 31, 1997 would have been as follows:
3.65% and 4.25% for the International Opportunities Portfolio, and 1.61% and
1.91% for the Bond Portfolio.
(12) The Portfolios' expenses were voluntarily waived and reimbursed by the
Portfolios' investment advisers. Absent waiver and/or reimbursement the
Management Fee, Other Expenses and Total Annual Expenses would have been as
follows: .80%, 2.30% and
13
<PAGE>
3.10% for the Asian Equity Portfolio for the annualized period March 3, 1997
through December 31, 1997; .80%, 1.26% and 2.06% for the Emerging Markets Debt
Portfolio for the annualized period June 16, 1997 through December 31, 1997;
.50%, 1.18% and 1.68% for the High Yield Portfolio for the annualized period
January 2, 1997 through December 31, 1997; and .80%, 1.52% and 2.32% for the
U.S. Real Estate Portfolio for the annualized period March 3, 1997 through
December 31, 1997. MSAM may modify or terminate the waivers or reductions at
any time.
(13). Integrity Capital Advisors will pay a portion of its Management Fee to
National Asset for its services under a sub-advisory agreement at an annual rate
of .10% of the Divisions' average daily net assets up to $100 million and .05%
of the Divisions' average daily net assets in excess of $100 million. Integrity
Capital Advisors has guaranteed it will pay National Asset a minimum sub-
advisory fee of $25,000 during the Divisions' first year of operations.
(14) Integrity Capital Advisors has agreed to reimburse each Division for
operating expenses (excluding management fees) above an annual rate of .35% of
the Division's average net assets. Absent such reimbursement, Integrity Capital
Advisors estimates that operating expenses would be approximately .35%.
Integrity Capital Advisors has reserved the right to withdraw or modify its
policy of expense reimbursement for the Divisions, but has no current intention
to do so during 1998.
14
<PAGE>
EXAMPLES
The examples below show the expenses that would be borne by the Annuitant per
$1,000 investment, assuming a $60,000 average contract value and a 5% annual
rate of return on assets.
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PER $1,000 INVESTMENT IF YOU SURRENDER YOUR CONTRACT AT THE END OF THE APPLICABLE PERIOD:
Portfolio 1 year 3 years 5 years 10 years
- --------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
EAFE-Registered Trademark- Equity Index. . . . . . . . . . . $100.99 $124.75 $150.98 $238.35
Equity 500 Index . . . . . . . . . . . . . . . . . . . . . . $ 97.41 $113.87 $132.66 $200.80
Small Cap Index. . . . . . . . . . . . . . . . . . . . . . . $ 98.94 $118.54 $140.54 $217.06
VIP Equity-Income. . . . . . . . . . . . . . . . . . . . . . $100.28 $122.58 $147.34 $230.95
VIP II Contrafund. . . . . . . . . . . . . . . . . . . . . . $101.61 $126.61 $154.09 $244.65
VIP III Growth & Income. . . . . . . . . . . . . . . . . . . $101.51 $126.30 $153.57 $243.61
VIP III Growth Opportunities . . . . . . . . . . . . . . . . $101.92 $127.53 $155.65 $247.79
Harris Bretall Sullivan & Smith Equity Growth. . . . . . . . $104.89 $136.47 $170.56 $277.64
Scudder Kemper Value . . . . . . . . . . . . . . . . . . . . $105.09 $137.08 $171.59 $279.66
Zweig Asset Allocation . . . . . . . . . . . . . . . . . . . $107.45 $144.13 $183.28 $302.67
Zweig Equity (Small Cap) . . . . . . . . . . . . . . . . . . $110.22 $152.36 $196.85 $328.99
Janus Aspen Capital Appreciation . . . . . . . . . . . . . . $107.24 $143.52 $182.26 $300.69
Janus Aspen Balanced . . . . . . . . . . . . . . . . . . . . $102.84 $130.31 $160.30 $257.15
Janus Aspen Worldwide Growth . . . . . . . . . . . . . . . . $101.92 $127.53 $155.65 $247.79
Janus Aspen Money Market . . . . . . . . . . . . . . . . . . $ 99.46 $120.10 $143.16 $222.42
J.P. Morgan International Opportunities . . . . . . . . . . $106.63 $141.68 $179.22 $294.73
J.P. Morgan Bond . . . . . . . . . . . . . . . . . . . . . . $102.02 $127.84 $156.16 $248.84
Morgan Stanley Asian Equity. . . . . . . . . . . . . . . . . $106.63 $141.68 $179.22 $294.73
Morgan Stanley Emerging Markets Debt . . . . . . . . . . . . $107.65 $144.74 $184.29 $304.64
Morgan Stanley High Yield . . . . . . . . . . . . . . . . . $102.53 $129.39 $158.75 $254.04
Morgan Stanley U.S. Real Estate. . . . . . . . . . . . . . . $105.61 $138.62 $174.14 $284.71
Select Ten Plus Division March . . . . . . . . . . . . . . . $100.48 $123.20 $148.38 $233.07
Select Ten Plus Division June. . . . . . . . . . . . . . . . $100.48 $123.20 $148.38 $233.07
Select Ten Plus Division September . . . . . . . . . . . . . $100.48 $123.20 $148.38 $233.07
Select Ten Plus Division December. . . . . . . . . . . . . . $100.48 $123.20 $148.38 $233.07
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PER $1,000 INVESTMENT IF YOU ELECT THE NORMAL FORM OF ANNUITY OR DO NOT SURRENDER YOUR CONTRACT AT THE END OF
THE APPLICABLE PERIOD (I.E., NO DEFERRED SALES LOAD ASSESSED):
Portfolio 1 year 3 years 5 years 10 years
- --------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
EAFE-Registered Trademark- Equity Index. . . . . . . . . . . $20.99 $64.75 $110.98 $238.35
Equity 500 Index . . . . . . . . . . . . . . . . . . . . . . $17.41 $53.87 $ 92.66 $200.80
Small Cap Index. . . . . . . . . . . . . . . . . . . . . . . $18.94 $58.54 $100.54 $217.06
VIP Equity-Income. . . . . . . . . . . . . . . . . . . . . . $20.28 $62.58 $107.34 $230.95
VIP II Contrafund. . . . . . . . . . . . . . . . . . . . . . $21.61 $66.61 $114.09 $244.65
VIP III Growth & Income. . . . . . . . . . . . . . . . . . . $21.51 $66.30 $113.57 $243.61
VIP III Growth Opportunities . . . . . . . . . . . . . . . . $21.92 $67.53 $115.65 $247.79
Harris Bretall Sullivan & Smith Equity Growth. . . . . . . . $24.89 $76.47 $130.56 $277.64
Scudder Kemper Value . . . . . . . . . . . . . . . . . . . . $25.09 $77.08 $131.59 $279.66
Zweig Asset Allocation . . . . . . . . . . . . . . . . . . . $27.45 $84.13 $143.28 $302.67
Zweig Equity (Small Cap) . . . . . . . . . . . . . . . . . . $30.22 $92.36 $156.85 $328.99
Janus Aspen Capital Appreciation . . . . . . . . . . . . . . $27.24 $83.52 $142.26 $300.69
Janus Aspen Balanced . . . . . . . . . . . . . . . . . . . . $22.84 $70.31 $120.30 $257.15
Janus Aspen Worldwide Growth . . . . . . . . . . . . . . . . $21.92 $67.53 $115.65 $247.79
Janus Aspen Money Market . . . . . . . . . . . . . . . . . . $19.46 $60.10 $103.16 $222.42
J.P. Morgan International Opportunities. . . . . . . . . . . $26.63 $81.68 $139.22 $294.73
J.P. Morgan Bond . . . . . . . . . . . . . . . . . . . . . . $22.02 $67.84 $116.16 $248.84
Morgan Stanley Asian Equity. . . . . . . . . . . . . . . . . $26.63 $81.68 $139.22 $294.73
Morgan Stanley Emerging Markets Debt . . . . . . . . . . . . $27.65 $84.74 $144.29 $304.64
Morgan Stanley High Yield. . . . . . . . . . . . . . . . . . $22.53 $69.39 $118.75 $254.04
Morgan Stanley U.S. Real Estate. . . . . . . . . . . . . . . $25.61 $78.62 $134.14 $284.71
Select Ten Plus Division March . . . . . . . . . . . . . . . $20.48 $63.20 $108.38 $233.07
Select Ten Plus Division June. . . . . . . . . . . . . . . . $20.48 $63.20 $108.38 $233.07
Select Ten Plus Division September . . . . . . . . . . . . . $20.48 $63.20 $108.38 $233.07
Select Ten Plus Division December. . . . . . . . . . . . . . $20.48 $63.20 $108.38 $233.07
</TABLE>
These examples assume the current level of fixed charges that are borne by the
Separate Accounts and the investment management fees and other expenses of the
Portfolios and the Divisions as they were for their most recent fiscal years
ended or estimated expenses (after reimbursement), if applicable. ACTUAL
PORTFOLIO/DIVISION EXPENSES MAY BE GREATER OR LESS THAN THOSE ON WHICH THESE
EXAMPLES WERE BASED. The annual rate of return assumed in the examples is not an
estimate or guarantee of future investment performance. The table also assumes
an estimated $60,000 average contract value, so that the administrative charge
per $1,000 of net asset value in the Separate Account is $0.50. Such per $1,000
charge would be higher for smaller Account Values and lower for higher values.
The above table and examples are intended to assist your understanding of the
various costs and expenses that apply to your contract, directly or indirectly.
These tables reflect expenses of the Separate Accounts as well as those of the
Portfolios and the Divisions. Premium taxes upon annuitization also may be
applicable.
16
<PAGE>
FINANCIAL INFORMATION
The table below shows the unit value for certain Variable Account Options at
inception, the number of units outstanding at December 31 of each year since
inception, and the unit value at the beginning and end of each period. No
condensed financial information is provided for any of the Divisions because as
of December 31, 1997 the Divisions had not commenced operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995 1994 1993 1992 INCEPTION*
---- ---- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
SCUDDER KEMPER VALUE
Unit value at beginning of period................... $18.24 $14.85 $10.34 $10.56 $10.07 - $10.00
Unit value at end of period......................... $23.47 $18.24 $14.85 $10.34 $10.56 $10.07
Number of units outstanding at end of period........ 1,278,296 1,119,634 806,752 733,336 547,498 3,540
HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH
Unit value at beginning of period................... $14.85 $13.21 $10.17 $9.91 $10.05 - $10.00
Unit value at end of period......................... $19.74 $14.85 $13.21 $10.17 $9.91 $10.05
Number of units outstanding at end of period........ 1,295,185 1,184,119 1,342,971 1,014,016 830,307 18,906
ZWEIG ASSET ALLOCATION
Unit value at beginning of period................... $15.23 $13.44 $11.23 $11.33 $9.99 - $10.00
Unit value at end of period......................... $18.32 $15.23 $13.44 $11.23 $11.33 $9.99
Number of units outstanding at end of period........ 2,107,245 2,434,199 2,541,023 2,558,692 1,518,39 11,385
ZWEIG EQUITY (SMALL CAP)
Unit value at beginning of period................... $14.71 $12.58 $10.53 $10.74 - - $10.00
Unit value at end of period......................... $18.15 $14.71 $12.58 $10.53 $10.74 -
Number of units outstanding at end of period........ 592,060 592,469 587,830 567,827 425,500 -
BT EAFE-Registered Trademark- EQUITY INDEX
Unit value at beginning of period................... - - - - - $10.00
Unit value at end of period......................... $9.42
Number of units outstanding at end of period........ 19,652
BT EQUITY 500 INDEX
Unit value at beginning of period................... - - - - - $10.00
Unit value at end of period......................... $10.16
Number of units outstanding at end of period........ 224,706
BT SMALL CAP INDEX
Unit value at beginning of period................... - - - - - $10.00
Unit value at end of period......................... $9.44
Number of units outstanding at end of period........ 70,238
VIP EQUITY INCOME
Unit value at beginning of period................... - - - - - $10.00
Unit value at end of period......................... $10.06
Number of units outstanding at end of period........ 155,520
VIP II CONTRAFUND
Unit value at beginning of period................... - - - - - $10.00
Unit value at end of period......................... $9.73
Number of units outstanding at end of period........ 129,361
VIP III GROWTH & INCOME
Unit value at beginning of period...................
Unit value at end of period......................... - - - - - $10.00
Number of units outstanding at end of period........ $10.24
119,576
VIP III GROWTH OPPORTUNITIES
Unit value at beginning of period................... - - - - - $10.00
Unit value at end of period......................... $10.26
Number of units outstanding at end of period........ 78,180
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995 1994 1993 1992 INCEPTION*
---- ---- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
JANUS ASPEN CAPITAL APPRECIATION
Unit value at beginning of period................... - - - - - $10.00
Unit value at end of period......................... $9.47
Number of units outstanding at end of period........ 92,194
JANUS ASPEN BALANCED
Unit value at beginning of period................... - - - - - $10.00
Unit value at end of period......................... $9.95
Number of units outstanding at end of period........ 5,661,088
JANUS ASPEN WORLDWIDE GROWTH
Unit value at beginning of period................... - - - - - $10.00
Unit value at end of period......................... $9.47
Number of units outstanding at end of period........ 151,721
JANUS ASPEN MONEY MARKET
Unit value at beginning of period................... - - - - - $10.00
Unit value at end of period......................... $10.08
Number of units outstanding at end of period........ 634,249
J.P. MORGAN INTERNATIONAL OPPORTUNITIES
Unit value at beginning of period................... - - - - - $10.00
Unit value at end of period......................... $9.28
Number of units outstanding at end of period........ 41,664
J.P. MORGAN BOND
Unit value at beginning of period................... - - - - - $10.00
Unit value at end of period......................... $10.19
Number of units outstanding at end of period........ 418,029
MORGAN STANLEY ASIAN EQUITY
Unit value at beginning of period................... - - - - - $10.00
Unit value at end of period......................... $8.46
Number of units outstanding at end of period........ 484,093
MORGAN STANLEY EMERGING MARKETS DEBT
Unit value at beginning of period................... - - - - - $10.00
Unit value at end of period......................... $9.23
Number of units outstanding at end of period........ 653,365
MORGAN STANLEY HIGH YIELD
Unit value at beginning of period................... - - - - - $10.00
Unit value at end of period......................... $10.11
Number of units outstanding at end of period........ 69,823
MORGAN STANLEY U.S. REAL ESTATE
Unit value at beginning of period................... - - - - - $10.00
Unit value at end of period......................... $10.15
Number of units outstanding at end of period........ 67,357
</TABLE>
*The unit value for each Variable Account Option at inception is $10.00. The
inception date for the Harris Bretall Sullivan & Smith Equity Growth Option
is December 8, 1992. The inception date for the Zweig Asset Allocation,
Scudder Kemper Value and Zweig Equity Options is December 14, 1992. The
inception date for the EAFE-Registered Trademark- Equity Index, Equity 500
Index, Small Cap Index, VIP Equity-Income, VIP II Contrafund,VIP III Growth &
Income,VIP III Growth Opportunities, Janus Aspen Capital Appreciation, Janus
Aspen Balanced, Janus Aspen Worldwide Growth, Janus Aspen Money Market,
J.P.Morgan International Opportunities, J.P. Morgan Bond, Morgan Stanley
Asian Equity, Morgan Stanley Emerging Markets Debt, Morgan Stanley High
Yield, and Morgan Stanley U.S. Real Estate Options is October 1, 1997. The
inception date for the Select Ten Plus Divisions is May 1, 1998.
18
<PAGE>
SECTION 2 - INTEGRITY AND THE SEPARATE ACCOUNTS
INTEGRITY LIFE INSURANCE COMPANY
Integrity is a stock life insurance company organized under the laws of
Ohio. Its principal executive offices are located in Louisville, Kentucky.
We are authorized to sell life insurance and annuities in 45 states and the
District of Columbia. In addition to the contracts, we sell flexible
premium annuity contracts with underlying investment options other than the
Funds, fixed single premium annuity contracts, and flexible premium annuity
contracts offering both traditional fixed guaranteed interest rates along
with fixed equity indexed options. We are currently licensed to sell
variable contracts in 45 states and the District of Columbia. In addition
to issuing annuity products, we have entered into agreements with other
insurance companies to provide administrative and investment support for
products to be designed, underwritten and sold by these companies.
Integrity is an indirect wholly owned subsidiary of ARM. ARM specializes
in the asset accumulation business, providing retail and institutional
customers with products and services designed to serve the growing
long-term savings and retirement markets. At December 31, 1997, ARM had
$6.9 billion of assets under management.
Integrity is currently evaluating, on an ongoing basis, its computer
systems and the systems of other companies on which Integrity's operations
rely to determine if they will function properly with respect to dates in
the year 2000 and beyond. These activities are designed to ensure that
there is no adverse effect on Integrity's core business operations. While
Integrity believes its planning efforts are adequate to address its year
2000 concerns, there can be no guarantee that the systems of other
companies on which Integrity's operations rely will be converted on a
timely basis and will not have a material effect on Integrity.
THE SEPARATE ACCOUNTS AND THE VARIABLE ACCOUNT OPTIONS
The Separate Accounts are established and maintained under the insurance
laws of the State of Ohio. Separate Account II is a unit investment trust
registered with the Securities and Exchange Commission (the SEC) under the
Investment Company Act of 1940 (1940 ACT). A unit investment trust is a
type of investment company. SEC registration does not involve any
supervision by the SEC of the management or investment policies of Separate
Account II. Each of its Variable Account Options invests in shares of a
corresponding Portfolio of the Funds. We may establish additional Options,
some of which may not be available for your allocations. The Variable
Account Options currently available to you are listed on the cover page of
this prospectus.
Separate Account Ten is registered with the SEC under the 1940 Act as a
management investment company. Registration with the SEC does not involve
any supervision by the SEC of the management or investment policies or
practices of Separate Account Ten. The Divisions invest directly in
securities in accordance with their investment objective and policies.
ASSETS OF OUR SEPARATE ACCOUNTS
Under Ohio law, we own the assets of our Separate Accounts and use them to
support the variable portion of your contract and other variable annuity
contracts. Annuitants under other variable annuity contracts will
participate in the Separate Accounts in proportion to the amounts relating
to their contracts. The Separate Accounts' assets supporting the variable
portion of these variable contracts may not be used to satisfy liabilities
arising out of any other business of ours. Under certain unlikely
circumstances, one Variable Account Option may be liable for claims
relating to the operations of another Option.
Income, gains and losses, whether or not realized, from assets allocated to
the Separate Accounts are credited to or charged against the Separate
Accounts without regard to our other income, gains or losses. We may permit
charges owed to us to stay in the Separate Accounts, and thus may
participate proportionately in the Separate Accounts. Amounts in the
Separate Accounts in excess of reserves and other liabilities belong to us,
and we may transfer them to our general account (GENERAL ACCOUNT).
19
<PAGE>
CHANGES IN HOW WE OPERATE
We may modify how we or our Separate Accounts operate, subject to your
approval when required by the 1940 Act or other applicable law or
regulation. You will be notified if any changes result in a material change
in the underlying investments of a Variable Account Option. WE MAY:
- add Options to, or remove Options from, our Separate Accounts, combine
two or more Options within our Separate Accounts, or withdraw assets
relating to your contract from one Option and put them into another;
- register or end the registration of the Separate Accounts under the
1940 Act;
- operate our Separate Accounts under the direction of a committee or
discharge such a committee at any time (the committee may be composed
of a majority of persons who are "interested persons" of Integrity
under the 1940 Act);
- restrict or eliminate any voting rights of Owners or others who have
voting rights that affect our Separate Accounts;
- cause one or more Options to invest in a mutual fund other than or in
addition to the Funds;
- operate our Separate Accounts or one or more of the Options in any
other form the law allows, including a form that allows us to make
direct investments. We may make any legal investments we wish. In
choosing these investments, we will rely on our own or outside counsel
for advice.
SECTION 3 - YOUR INVESTMENT OPTIONS
THE LEGENDS FUND, INC.
The Legends Fund, a Maryland corporation, is an open-end diversified
management investment company registered under the 1940 Act. Such
registration does not involve supervision by the SEC of the investments or
investment policies of the Legends Fund. The Legends Fund is a "series"
type of investment company with diversified portfolios. The Legends Fund
does not impose a sales charge or "load" for buying and selling its shares.
The shares of the Portfolios of the Legends Fund are bought and sold by
Separate Account II at their respective net asset values.
The Legends Fund is designed to serve as an investment vehicle for variable
annuity and variable life contracts of insurance companies. Shares of the
Portfolios of the Legends Fund currently are available to the separate
accounts of Integrity and National Integrity Life Insurance Company
(NATIONAL INTEGRITY), a wholly owned subsidiary of Integrity.
Shares of Portfolios of the Legends Fund are made available to Separate
Account II under a participation agreement (PARTICIPATION AGREEMENT). The
Participation Agreement is among the Legends Fund, ARM Securities
Corporation (ARM SECURITIES), a wholly owned subsidiary of ARM which is the
principal underwriter for Legends Fund shares, and Integrity. If state or
federal law precludes the sale of the Legends Fund's or any Portfolio's
shares to Separate Account II, or in certain other circumstances, sales of
shares to Separate Account II may be suspended and/or the Participation
Agreement may be terminated as to the Legends Fund or the affected
Portfolio. Also, the Participation Agreement may be terminated by any party
thereto with one year's written notice.
Notwithstanding termination of the Participation Agreement, the Legends
Fund and ARM Securities are obligated to continue to make the Legends
Fund's shares available for contracts outstanding on the date the
Participation Agreement terminates, unless the Participation Agreement was
terminated due to an irreconcilable conflict among contractowners of
different separate accounts. If for any reason the shares of any Portfolio
are no longer available for purchase by Separate Account II for outstanding
contracts, the parties to the Participation Agreement have agreed to
cooperate to comply with the 1940 Act in arranging for the substitution of
another funding medium as soon as reasonably practicable and without
disruption of sales of shares to Separate Account II or any Variable
Account Option.
THE LEGENDS FUND'S INVESTMENT ADVISER AND SUB-ADVISERS. Integrity Capital
Advisors (formerly known as ARM Capital Advisors, Inc.) became the
investment adviser to the Legends Fund on February 1, 1996. Integrity
Capital Advisors is a wholly owned subsidiary of ARM Financial Group, Inc.
(ARM), AND IS REGISTERED AS AN INVESTMENT ADVISER UNDER THE INVESTMENT
ADVISERS ACT OF 1940. ITS OFFICES ARE LOCATED AT 515 WEST MARKET STREET,
LOUISVILLE, KENTUCKY 40202.
Integrity Capital Advisors has entered into a sub-advisory agreement with a
professional manager for investment of the assets of each of the
Portfolios. The sub-adviser for each Portfolio is listed under "Investment
Objectives of the Portfolios" below. The Portfolios pay monthly investment
management fees to integrity Capital Advisors, and Integrity Capital
Advisors pays the sub-advisers for their services to the Portfolios.
Integrity Capital Advisors retains a management fee at an annual rate of
.25% of each Portfolio's net assets as compensation for providing certain
services to the Portfolios.
20
<PAGE>
The management fees paid by each Portfolio to Integrity Capital Advisors as
a percentage of net assets are set forth below:
<TABLE>
<CAPTION>
Legends Fund Portfolio Management Fee
---------------------- --------------
<S> <C>
Harris Bretall Sullivan & Smith Equity Growth..... 0.65%
Scudder Kemper Value.............................. 0.65%
Zweig Asset Allocation............................ 0.90%
Zweig Equity (Small Cap).......................... 1.05%
</TABLE>
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Set forth below is a summary of
the investment objectives of the Portfolios of the Legends Fund. There can
be no assurance that these objectives will be achieved. YOU SHOULD READ THE
LEGENDS FUND'S PROSPECTUS CAREFULLY BEFORE INVESTING.
HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH PORTFOLIO
Harris Bretall Sullivan & Smith Equity Growth Portfolio seeks long-term
capital appreciation. It primarily invests in stocks of established
companies with proven records of superior and consistent growth. The
Portfolio may invest all or a portion of its assets in cash and cash
equivalents if the sub-adviser considers the equity markets to be
overvalued. The Portfolio may invest in U.S. government securities when
this appears desirable in light of the Portfolio's investment objective or
when market conditions warrant. Harris Bretall Sullivan & Smith, LLC is the
sub-adviser to the Portfolio.
SCUDDER KEMPER VALUE PORTFOLIO
Scudder Kemper Value Portfolio seeks primarily long-term capital
appreciation with a secondary objective of current income. It invests
principally in a diversified portfolio of securities believed by the
sub-adviser to be undervalued. The sub-adviser's philosophy centers on
identifying stocks of large, well-known companies with solid financial
strength and generous dividend yields that have low price-earnings ratios
and have been generally overlooked by the market. Scudder Kemper Investors,
Inc. is the sub-adviser to the Portfolio.
ZWEIG ASSET ALLOCATION PORTFOLIO
Zweig Asset Allocation Portfolio seeks long-term capital appreciation. It
invests primarily in Blue Chip Stocks, consistent with preservation of
capital and the reduction of portfolio exposure to market risk, as
determined by the sub-adviser to the Portfolio. Blue Chip Stocks are stocks
which the sub-adviser considers comparable to the stocks included in the
S&P 500 at the time of purchase, and that have a minimum of $400 million
market capitalization, average daily trading volume of 50,000 shares or
$425 million in total assets, and which are traded on the New York Stock
Exchange (NYSE), American Stock Exchange (AMEX), over-the-counter (OTC) or
on foreign exchanges. Zweig/Glaser Advisers is the sub-adviser to the
Portfolio.
ZWEIG EQUITY (SMALL CAP) PORTFOLIO
Zweig Equity (Small Cap) Portfolio seeks long-term capital appreciation. It
invests primarily in Small Company Stocks, consistent with preservation of
capital and reduction of portfolio exposure to market risk, as determined
by the sub-adviser. Current income is not an objective. SMALL COMPANY
STOCKS are the 2,500 stock positions immediately after the 500 largest
stocks ranked in terms of market capitalization and/or trading volume, and
which are traded on the NYSE, AMEX, OTC or on foreign exchanges.
Zweig/Glaser Advisers is the sub-adviser to the Portfolio.
BT INSURANCE FUNDS TRUST
The BT Funds Trust is an open-end management investment company registered under
the 1940 Act. Each of the BT Funds is a separate "series" or portfolio of the
BT Funds Trust. The BT Funds Trust does not impose a sales charge or "load" for
buying and selling its shares. Shares of the BT Funds Trust are bought and sold
by Separate Account II at their respective net asset values.
THE BANKERS TRUST FUNDS' INVESTMENT ADVISER. Bankers Trust Global Asset
Management Services, a unit of Bankers Trust, serves as the investment adviser
to the BT Funds Trust. Bankers Trust, a New York banking corporation with
21
<PAGE>
executive offices at 130 Liberty Street (One Bankers Trust Plaza), New York, New
York 10006, is a wholly owned subsidiary of Bankers Trust New York Corporation.
As of June 30, 1997, Bankers Trust New York Corporation was the seventh largest
bank holding company in the United States with total assets of approximately
$129 billion. Bankers Trust conducts a variety of general banking and trust
activities and is a major wholesaler supplier of financial services to the
international and domestic institutional markets, servicing the needs of
corporations, governments, financial institutions and private clients through a
global network of over 80 offices in more than 50 countries.
As compensation for its services to the BT Funds, Bankers Trust receives a fee
from each BT Fund, accrued daily and paid monthly. The BT Funds are subject to
the following management fee schedule (after waivers):
<TABLE>
<CAPTION>
Funds Management Fee
----- --------------
<S> <C>
EAFE-Registered Trademark- Equity Index 0.34%
Equity 500 Index 0.11%
Small Cap Index 0.22%
</TABLE>
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Set forth below is a summary of the
investment objectives of the BT Funds Trust. There can be no assurance that
these objectives will be achieved. YOU SHOULD READ THE BT FUNDS TRUST
PROSPECTUSES CAREFULLY BEFORE INVESTING.
- -------------------------------
EAFE-Registered Trademark- EQUITY INDEX FUND
The EAFE-Registered Trademark- Equity Index Fund seeks to replicate as closely
as possible (before the deduction of expenses) the total return of the Morgan
Stanley Capital International Europe, Australia, Far East (EAFE) Index, a
capitalization-weighted index containing approximately 1,100 equity securities
of companies located outside the United States. The BT Fund will be invested
primarily in equity securities of business enterprises organized and domiciled
outside of the United States or for which the principal trading market is
outside the United States. Statistical methods will be employed to replicate
the EAFE Index by buying most of the EAFE Index securities. Securities
purchased for the Fund will generally, but not necessarily, be traded on a
foreign securities exchange.
The Fund is not sponsored, endorsed, sold or promoted by Morgan Stanley. Morgan
Stanley makes no representation or warranty, express or implied, to the owners
of the Fund or any member of the public regarding the advisability of investing
in securities generally or in the Fund particularly or the ability of the EAFE
Index to track general stock market performance. Morgan Stanley is the licenser
of certain trademarks, service marks and trade names of Morgan Stanley and of
the EAFE Index which is determined, composed and calculated by Morgan Stanley
without regard to the issuer of the Fund or the Fund itself. Morgan Stanley has
no obligation to take the needs of the issuer of the Fund or the owners of the
Fund into consideration in determining, composing or calculating the EAFE Index.
Inclusion of a security in the EAFE Index in no way implies an opinion by Morgan
Stanley as to its attractiveness as an investment. Morgan Stanley is not
responsible for and has not participated in the determination of the timing of,
prices at, or quantities of the Fund to be issued or in the determination or
calculation of the equation by which the Fund is redeemable for cash. Morgan
Stanley has no obligation or liability to owners of the Fund in connection with
the administration, marketing or trading of the Fund. The Fund is neither
sponsored by nor affiliated with Morgan Stanley.
Although Morgan Stanley shall obtain information for inclusion in or for use in
the calculation of the indices from sources which Morgan Stanley considers
reliable, Morgan Stanley does not guarantee the accuracy and/or the completeness
of the indices or any data included therein. Morgan Stanley makes no warranty,
express or implied, as to results to be obtained by licensee, licensee's
customers and counterparties, owners of the products, or any other person or
entity from the use of the indices or any data included therein in connection
with the rights licensed hereunder or for any other use. Morgan Stanley makes
no express or implied warranties, and hereby expressly disclaims all warranties
of merchantability or fitness for a particular purpose with respect to the
indices or any data included therein. Without limiting any of the foregoing, in
no event shall Morgan Stanley have any liability for any direct, indirect,
special, punitive, consequential or any other damages (including lost profits)
even if notified of the possibility of such damages.
22
<PAGE>
For more information about the performance of the EAFE Index, see the
EAFE-Registered Trademark- Equity Index Fund's Prospectus and Statement of
Additional Information.
EQUITY 500 INDEX FUND
The Equity 500 Index Fund seeks to replicate as closely as possible (before the
deduction of expenses) the total return of the Standard & Poor's 500 Composite
Stock Price Index (the S&P 500), an index emphasizing large-capitalization
stocks. The BT Fund will include the common stock of those companies included
in the S&P 500, other than Bankers Trust New York Corporation, selected on the
basis of computer generated statistical data, that are deemed representative of
the industry diversification of the entire S&P 500.
The S&P 500 is a well-known stock market index that includes common stocks of
500 companies from several industrial sectors representing a significant portion
of the market value of all common stocks publicly traded in the United States,
most of which are listed on the New York Stock Exchange. Stocks in the S&P 500
are weighted according to their market capitalization (i.e., the number of
shares outstanding multiplied by the stock's current price). The composition of
the S&P 500 is determined by S&P and is based on such factors as the market
capitalization and trading activity of each stock and its adequacy as a
representation of stocks in a particular industry group, and may be changed from
time to time.
The Fund is not sponsored, endorsed, sold or promoted by S&P. S&P makes no
representation or warranty, express or implied, to the shareholders of the Fund
or any member of the public regarding the advisability of investing in
securities generally or in the Fund particularly or the ability of the S&P 500
to track general stock market performance.
S&P does not guarantee the accuracy and/or the completeness of the S&P 500 or
any data included therein.
S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE RESULTS TO BE OBTAINED BY
THE FUND, OWNERS OF THE FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE
S&P 500 OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED
WARRANTIES AND HEREBY EXPRESSLY DISCLAIMS ALL SUCH WARRANTIES OF MERCHANTABILITY
OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 OR ANY
DATA INCLUDED THEREIN.
For more information about the performance of the S&P 500, see the Equity 500
Index Fund's Prospectus and Statement of Additional Information.
SMALL CAP INDEX FUND
The Small Cap Index Fund seeks to replicate as closely as possible (before
deduction of expenses) the total return of the Russell 2000 Small Stock Index
(the RUSSELL 2000), an index consisting of 2,000 small-capitalization common
stocks. The Fund will include the common stock of companies included in the
Russell 2000, on the basis of computer-generated statistical data, that are
deemed representative of the industry diversification of the entire Russell
2000.
The Fund is neither sponsored by nor affiliated with the Frank Russell Company.
Frank Russell's only relationship to the Fund is the licensing of the use of the
Russell 2000. Frank Russell Company is the owner of the trademarks and
copyrights relating to the Russell indices.
The Fund invests in a statistically selected sample of the 2,000 stocks included
in the Russell 2000. The stocks of the Russell 2000 to be included in the Fund
will be selected utilizing a statistical sampling technique known as
"optimization." This process selects stocks for the Fund so that various
industry weightings, market capitalizations and fundamental characteristics
(e.g., price-to-book, price-to-earnings and debt-to-asset ratios and dividend
yields) closely approximate those of the Russell 2000. For instance, if 10% of
the capitalization of the Russell 2000 consists of utility companies with
relatively small capitalizations, then the Fund is constructed so that
approximately 10% of the Fund's assets are invested in the stocks of utility
companies with relatively small capitalizations. The stocks held by the Fund
are weighted to make the Fund's aggregate investment characteristics similar to
those of the Russell 2000 as a whole.
For more information about the performance of the Russell 2000, see the Small
Cap Index Fund's Prospectus and Statement of Additional Information.
FIDELITY VARIABLE INSURANCE PRODUCTS FUNDS
23
<PAGE>
Each of Fidelity's VIP Funds is an open-end diversified management investment
company registered under the 1940 Act. Such registration does not involve
supervision by the SEC of the investments or investment policies of Fidelity's
VIP Funds. Fidelity's VIP Funds are each a "series" type of investment company
with diversified portfolios. Fidelity's VIP Funds do not impose a sales charge
or "load" for buying and selling their shares. The shares of the Portfolios of
Fidelity's VIP Funds are bought and sold by Separate Account II at their
respective net asset values.
FIDELITY'S VIP FUNDS' INVESTMENT ADVISER. FMR, a registered investment
adviser under the Investment Advisers Act of 1940, serves as the investment
adviser to each Fund. FMR, whose principal address is 82 Devonshire Street,
Boston, Massachusetts, is a wholly owned subsidiary of FMR Corp. and is part
of Fidelity Investments-Registered Trademark-, one of the largest investment
management organizations in the United States. Fidelity
Investments-Registered Trademark- includes a number of different companies,
which provide a variety of financial services and products to individuals and
corporations.
FMR provides investment research and portfolio management services to mutual
funds and other clients. At April 30, 1997, FMR advised funds having more
than 29 million shareholder accounts with a total value of more than $432
billion. For certain of the Portfolios, FMR has entered into sub-advisory
agreements with affiliated companies that are part of the Fidelity
Investments-Registered Trademark- organization. FMR, not the Portfolios, pays
the sub-advisers for their services to the Portfolios.
The Portfolios of Fidelity's VIP Funds pay monthly advisory fees to FMR. The
advisory fee payable by each of the Portfolios is composed of a group fee rate
and an individual fund fee rate. The group fee rate is based on the average
monthly net assets of all mutual funds advised by FMR. For the VIP Equity-Income
and VIP II Contrafund Portfolios, the group fee rate cannot rise above .52%.
The group fee rate drops as total assets under management increase.
Set forth in the table below is the individual fund fee rate for the portfolios
and their 1997 management fee rate, comprised of the individual and group rates,
as a percentage of average net assets:
<TABLE>
<CAPTION>
1997
Portfolio Individual Rate Management Fee
--------- --------------- --------------
<S> <C> <C>
VIP Equity-Income 0.20% 0.50%
VIP II Contrafund 0.30% 0.60%
VIP III Growth & Income 0.20% 0.49%
VIP III Growth Opportunities 0.30% 0.60%
</TABLE>
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Set forth below is a summary of the
investment objectives of the Portfolios of Fidelity's VIP Funds. There can be no
assurance that these objectives will be achieved. YOU SHOULD READ FIDELITY'S VIP
FUNDS' PROSPECTUS CAREFULLY BEFORE INVESTING.
VIP EQUITY-INCOME PORTFOLIO
VIP Equity-Income Portfolio seeks reasonable income by investing primarily in
income producing equity securities, with the potential for capital appreciation
as a consideration. It normally invests at least 65% of its assets in
income-producing equity securities. The Portfolio has the flexibility, however,
to invest the balance in all types of domestic and foreign securities, including
bonds.
VIP II CONTRAFUND PORTFOLIO
VIP II Contrafund Portfolio is a growth fund which seeks to increase the value
of your investment over the long term by investing in equity securities of
companies that are undervalued or out of favor. This approach focuses on
companies that are currently out of public favor but show potential for capital
appreciation. VIP II Contrafund Portfolio invests primarily in common stock and
securities convertible into common stock, but it has the flexibility to invest
in any type of security that may produce capital appreciation.
VIP III GROWTH & INCOME PORTFOLIO
VIP III Growth & Income Portfolio seeks high total return through a combination
of current income and capital appreciation by investing mainly in equity
securities. It invests primarily in stocks of companies that offer potential
for
24
<PAGE>
growth in earnings while paying dividends, but offer the potential for capital
appreciation on future income. Investments may include common and preferred
stocks, convertible securities, fixed-income securities and foreign securities.
VIP III GROWTH OPPORTUNITIES PORTFOLIO
VIP III Growth Opportunities Portfolio seeks to provide capital growth by
investing primarily in common stocks and securities convertible into common
stock. Although the Portfolio invests in common stock and securities
convertible into common stock, it has the ability to purchase other securities,
such as preferred stock and bonds, that may produce capital growth.
JANUS ASPEN SERIES
Each of the Portfolios of Janus Aspen Series currently offers two classes of
shares. The Institutional Shares are sold under the name "Janus Aspen Series."
The Janus Aspen Series is registered with the SEC as an open-end management
investment company. The Janus Aspen Series sells and redeems its Shares at net
asset value without any sales charges, commissions or redemption fees.
THE JANUS ASPEN SERIES' INVESTMENT ADVISER. Janus, a registered investment
adviser under the Investment Advisers Act of 1940, serves as the investment
adviser to each Fund. Janus, whose principal address is 100 Fillmore Street,
Denver, Colorado 80206-4928, is approximately 83% owned by Kansas City Southern
Industries, Inc., and approximately 12% owned by Thomas H. Bailey, President and
Chairman of the Board of Janus. Janus has served as investment adviser to Janus
Fund since its inception in 1970 and currently serves as investment adviser to
all of the Janus retail funds, as well as adviser or sub-adviser to other mutual
funds and individual, corporate, charitable and retirement accounts. Janus has
been in the investment advisory business for over 26 years and as of September
1997 managed over $60 billion in assets.
25
<PAGE>
The Portfolios of the Janus Aspen Series pay a management fee to Janus which is
calculated daily. Each of the Portfolios is subject to the following management
fee schedule (expressed as an annual rate):
<TABLE>
<CAPTION>
Average Daily Net Annual Rate Expense Limit
Portfolio Assets of Portfolio Percentage (%) Percentage (%)
- --------- ------------------- -------------- --------------
<S> <C> <C> <C>
Janus Aspen Capital Appreciation First $300 Million 0.75* 1.25%
Janus Aspen Balanced Next $200 Million 0.70 N/a
Janus Aspen Worldwide Growth Over $500 Million 0.65 N/a
Janus Aspen Money Market All Asset Levels 0.25 0.50
</TABLE>
* Janus has agreed to reduce each of the Capital Appreciation, Balanced, and
Worldwide Growth Portfolios' advisory fees to the extent that such fee exceeds
the effective rate of the Janus retail fund corresponding to such Portfolio,
which are the Janus Olympus Fund, Janus Balanced Fund, and Janus Worldwide Fund,
respectively. Janus may terminate this fee reduction or any of the expense
limitations set forth above at any time upon at least 90 days' notice to the
Trustees. The effective rate is the advisory fee calculated by the
corresponding retail fund as of the last day of each calendar quarter (expressed
as an annual rate). The effective rates of Janus Olympus Fund, Janus Balanced
Fund and Janus Worldwide Fund were .70%, .73% and .65%, respectively, for the
quarter ended March 31, 1998. Janus has agreed to limit the expenses of the
Janus Capital Appreciation Portfolio's Institutional Shares to an annual rate of
1.25% of average net assets through at least April 30, 1999.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Set forth below is a summary of the
investment objectives of the Portfolios of the Janus Aspen Series. There can be
no assurance that these objectives will be achieved. YOU SHOULD READ THE JANUS
ASPEN SERIES' PROSPECTUSES CAREFULLY BEFORE INVESTING.
JANUS ASPEN CAPITAL APPRECIATION PORTFOLIO
Janus Aspen Capital Appreciation Portfolio seeks long-term growth of capital.
It is a non-diversified portfolio that pursues its objective by investing
primarily in common stocks of issuers of any size, which may include larger
well-established issuers and/or smaller emerging growth companies. The
Portfolio invests primarily in common stocks of foreign and domestic companies,
and may invest to a lesser degree in other types of securities including
preferred stock, warrants, convertible securities and debt securities when its
portfolio manager perceives an opportunity for capital growth from such
securities or to receive a return on idle cash.
JANUS ASPEN BALANCED PORTFOLIO
Janus Aspen Balanced Portfolio seeks long-term capital growth, consistent with
preservation of capital and balanced by current income. It is a diversified
portfolio that, under normal circumstances, pursues its objective by investing
40-60% of its assets in securities selected primarily for their growth potential
and 40-60% of its assets in securities selected primarily for their income
potential. The Portfolio normally invests at least 25% of its assets in
fixed-income senior securities, which include debt securities and preferred
stocks.
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO
Janus Aspen Worldwide Growth Portfolio seeks long-term growth of capital in a
manner consistent with the preservation of capital. It is a diversified
portfolio that pursues its objective primarily through investments in common
stocks of foreign and domestic issuers. The Portfolio has the flexibility to
invest on a worldwide basis in companies and other organizations of any size,
regardless of country of organization or place of principal business activity.
Janus Aspen Worldwide Growth Portfolio normally invests in issuers from at least
five different countries, including the United States. The Portfolio may at any
time invest in fewer than five countries or even a single country.
26
<PAGE>
JANUS ASPEN MONEY MARKET PORTFOLIO
Janus Aspen Money Market Portfolio seeks maximum current income to the extent
consistent with stability of capital. There can be no assurance that the
Portfolio will achieve its investment objective or be able to maintain a stable
net asset value of $1.00 per share. The Portfolio will invest only in eligible
high quality, short-term money market instruments that present minimal credit
risks, as determined by Janus, the Portfolio's investment adviser, pursuant to
procedures adopted by the Trustees. The Portfolio may invest only in U.S.
dollar-denominated instruments that have a remaining maturity of 397 days or
less and will maintain a dollar-weighted average portfolio maturity of 90 days
or less.
J.P. MORGAN SERIES TRUST II
The J.P. Morgan Series is an open-end management investment company organized as
a Delaware business trust. Shares of each Portfolio are both offered and
redeemed at their net asset value without the addition of any sales load or
redemption charge. The shares of the Portfolios of J.P. Morgan Series are
bought and sold by Separate Account II at their respective net asset values.
THE J.P. MORGAN SERIES' INVESTMENT ADVISER. JPMIM is a registered investment
adviser which maintains its principal office at 522 Fifth Avenue, New York, New
York 10036. JPMIM is a wholly owned subsidiary of J.P. Morgan & Co.
Incorporated (J.P. MORGAN & CO.), a bank holding company organized under the
laws of Delaware. Through offices in New York City and abroad, J.P. Morgan &
Co., through JPMIM and its other subsidiaries, offers a wide range of services
to governmental, institutional, corporate and individual customers and acts as
investment adviser to individual and institutional clients. As of December 31,
1996, J.P. Morgan & Co. and its subsidiaries had total combined assets under
management of approximately $208 billion. J.P. Morgan & Co. has a long history
of service as adviser, underwriter and lender to an extensive roster of major
companies and as a financial adviser to national governments. The firm, through
its predecessor firms, has been in business for over a century and has been
managing investments since 1913.
As compensation for JPMIM's services under the Investment Advisory Agreement,
the J.P. Morgan Series has agreed to pay JPMIM a monthly fee at the annual rate
set forth below as a percentage of the average daily net assets of the relevant
Portfolio:
<TABLE>
<CAPTION>
Portfolio Management Fee
--------- --------------
<S> <C>
J.P. Morgan Bond Portfolio 0.30%
J.P. Morgan International
Opportunities Portfolio 0.60%
</TABLE>
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Set forth below is a summary of the
investment objectives of the Portfolios of the J.P. Morgan Series. There can be
no assurance that these objectives will be achieved. YOU SHOULD READ THE J.P.
MORGAN SERIES' PROSPECTUS CAREFULLY BEFORE INVESTING.
J.P. MORGAN BOND PORTFOLIO
J.P. Morgan Bond Portfolio seeks to provide a high total return consistent with
moderate risk of capital and maintenance of liquidity. Total return will
consist of realized and unrealized capital gains and losses plus income less
expenses. Although the net asset value of the Portfolio will fluctuate, the
Portfolio attempts to preserve the value of its investments to the extent
consistent with its objective.
J.P. MORGAN INTERNATIONAL OPPORTUNITIES PORTFOLIO
J.P. Morgan International Opportunities Portfolio seeks to provide a high total
return from a portfolio of equity securities of foreign corporations. Total
return will consist of realized and unrealized capital gains and losses plus
income less expenses. The Portfolio is designed for investors with a long-term
investment horizon who want to diversify their investments by adding
international equities and take advantage of investment opportunities outside
the U.S. The Portfolio seeks to achieve its investment objective through
country allocation and stock valuation and selection.
MORGAN STANLEY UNIVERSAL FUNDS, INC.
27
<PAGE>
Each of the Morgan Stanley Universal Funds is an open-end management investment
company registered under the 1940 Act. Such registration does not involve
supervision by the SEC of the investments or investment policies of the Morgan
Stanley Universal Funds. The shares of the Portfolios of the Morgan Stanley
Universal Funds are bought and sold by Separate Account II at their respective
net asset values.
THE MORGAN STANLEY UNIVERSAL FUNDS' INVESTMENT ADVISERS. The Adviser assigned to
a Portfolio provides investment advice and portfolio management services
pursuant to an Investment Advisory Agreement. MSAM serves as the Adviser for
the Emerging Markets Debt, U.S. Real Estate, and Asian Equity Portfolios. MAS
serves as the Adviser for the High Yield Portfolio. MSAM, with principal
offices at 1221 Avenue of the Americas, New York, New York 10020, conducts a
worldwide investment management business, providing a broad range of portfolio
management services to customers in the United States and abroad. MSAM is a
wholly owned subsidiary of Morgan Stanley, Dean Witter, Discover & Co. (MSDW), a
preeminent global financial services firm that maintains leading market
positions in each of its three primary businesses - securities, asset management
and credit services. MAS is a Pennsylvania limited liability partnership with
principal offices at One Tower Bridge, West Conshohocken, Pennsylvania 19428.
MAS is also indirectly wholly owned by MSDW. MAS provides investment advisory
services to employee benefit plans, endowment funds, foundations and other
institutional investors and has served as investment adviser to several open-end
investment companies since 1984. As of December 31, 1997, MSAM and its
institutional investment advisory affiliates (exclusive of MAS) managed assets
of approximately $86.6 billion, and MAS managed assets of approximately $59.4
billion.
The Adviser assigned to a Portfolio is entitled to receive from such Portfolio a
management fee, payable quarterly, at an annual rate as a percentage of average
daily net assets. Each of the Portfolios is subject to the following management
fee schedule:
<TABLE>
<CAPTION>
Morgan Stanley Morgan Stanley U.S. Morgan Stanley Asian Morgan Stanley Emerging
Assets of Portfolio High Yield Real Estate Equity Markets Debt
------------------- ---------- ----------- ------ ------------
<S> <C> <C> <C> <C>
First $500 Million 0.50% 0.80% 0.80% 0.80%
Next $500 Million 0.45% 0.75% 0.75% 0.75%
More than $1 Billion 0.40% 0.70% 0.70% 0.70%
Maximum Total Annual 0.80% 1.10% 1.20% 1.30%
Operating Expenses After
Fee Waivers*
</TABLE>
* The Advisers have voluntarily waived receipt of their management fees and
agreed to reimburse the Portfolios, if necessary, if such fees would cause the
total annual operating expenses of the Portfolio to exceed the respective
percentage of average daily net assets set forth in the table. The fee waivers
are voluntary and may be terminated by MSAM or MAS at any time without notice.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Set forth below is a summary of the
investment objectives of the Portfolios of the Morgan Stanley Universal Funds.
There can be no assurance that these objectives will be achieved. YOU SHOULD
READ THE MORGAN STANLEY UNIVERSAL FUNDS' PROSPECTUS CAREFULLY BEFORE INVESTING.
MORGAN STANLEY ASIAN EQUITY PORTFOLIO
Morgan Stanley Asian Equity Portfolio seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers (excluding Japan)
using an approach that is oriented to the selection of individual stocks that
the Adviser believes are undervalued. The Portfolio intends to invest primarily
in equity securities that are traded on recognized stock exchanges of countries
in Asia and in equity securities of companies organized under the laws of an
Asian country whose business is conducted principally in Asia.
MORGAN STANLEY EMERGING MARKETS DEBT PORTFOLIO
Morgan Stanley Emerging Markets Debt Portfolio seeks high total return by
investing primarily in fixed income securities of government and
government-related issuers located in emerging market countries, which
securities provide a high level of current income, while at the same time
holding the potential for capital appreciation if the perceived creditworthiness
28
<PAGE>
of the issuer improves due to improving economic, financial, political, social
or other conditions in the country in which the issuer is located.
MORGAN STANLEY HIGH YIELD PORTFOLIO
Morgan Stanley High Yield Portfolio seeks above-average total return over a
market cycle of three to five years by investing primarily in a diversified
portfolio of high yield securities, including corporate bonds and other fixed
income securities and derivatives. High yield securities are rated below
investment grade and are commonly referred to as "junk bonds." The Portfolio's
average weighted maturity will ordinarily exceed five years and will usually be
between five and fifteen years.
MORGAN STANLEY U.S. REAL ESTATE PORTFOLIO
Morgan Stanley U.S. Real Estate Portfolio seeks above-average current income and
long-term capital appreciation by investing primarily in equity securities of
U.S. and non-U.S. companies principally engaged in the U.S. real estate
industry, including real estate investment trusts ("REITs").
THE SELECT TEN PLUS DIVISIONS OF SEPARATE ACCOUNT TEN
Each Division is a non-diversified investment company that invests directly in
securities. There can be no assurance that any Division will meet its
investment objective. Separate Account Ten may also offer other investment
divisions which are not available through the purchase of the contracts offered
by this prospectus.
Integrity Capital Advisors serves as investment adviser of the Divisions and
National Asset serves as the sub-adviser of the Divisions. For providing
investment management services to the Divisions, Integrity Capital Advisors will
receive a monthly fee based on an annual rate of .50% of each Division's average
daily net assets. Integrity Capital Advisors will pay a portion of those fees
to National Asset for its services under a sub-advisory agreement at an annual
rate of .10% of the Divisions' average daily net assets up to $100 million and
.05% of the Divisions' average daily net assets in excess of $100 million.
Integrity Capital Advisors has guaranteed it will pay National Asset a minimum
sub-advisory fee of $25,000 during the Divisions' first year of operations.
Integrity Capital Advisors has agreed to reimburse each Division for operating
expenses (excluding management fees) above an annual rate of .35% of the
Division's average net assets. Integrity Capital Advisors has reserved the
right to withdraw or modify its policy of expense reimbursement for the
Divisions, but has no current intention to do so during 1998.
FOR COMPLETE INFORMATION ABOUT THE SELECT TEN PLUS DIVISIONS OF SEPARATE ACCOUNT
TEN, INCLUDING THE RISKS ASSOCIATED WITH THEIR INVESTMENTS, SEE "INVESTMENT
STRATEGY," "INVESTMENT OBJECTIVE AND POLICIES," AND "RISK FACTORS" IN PART II,
SECTION 1.
FIXED ACCOUNTS
BECAUSE OF APPLICABLE EXEMPTIVE AND EXCLUSIONARY PROVISIONS, INTERESTS IN
CONTRACTS ATTRIBUTABLE TO GROS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933 ("1933 ACT"), NOR UNDER THE INVESTMENT COMPANY ACT OF 1940 ("1940 ACT").
THUS, NEITHER SUCH CONTRACTS NOR OUR GENERAL ACCOUNT, WHICH GUARANTEES THE
VALUES AND BENEFITS UNDER THOSE CONTRACTS, ARE GENERALLY SUBJECT TO REGULATION
UNDER THE PROVISIONS OF THE 1933 ACT OR THE 1940 ACT. ACCORDINGLY, WE HAVE BEEN
ADVISED THAT THE STAFF OF THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
REVIEWED THE DISCLOSURE IN THIS PROSPECTUS RELATING TO THE GROS OR THE GENERAL
ACCOUNT. DISCLOSURES REGARDING THE GROS OR THE GENERAL ACCOUNT MAY, HOWEVER, BE
SUBJECT TO CERTAIN GENERALLY APPLICABLE PROVISIONS OF THE FEDERAL SECURITIES
LAWS RELATING TO THE ACCURACY AND COMPLETENESS OF STATEMENTS MADE IN
PROSPECTUSES.
GUARANTEED RATE OPTIONS
We offer GROs with durations of three, five, seven and ten years. We may from
time to time change the durations available. Each allocation to a GRO locks in a
fixed effective annual interest rate declared by us (GUARANTEED INTEREST RATE)
for the duration you select (your GRO ACCOUNT). The duration of your GRO
Account is the GUARANTEE PERIOD. Each contribution or transfer to a GRO
establishes a new GRO Account at the then-current Guaranteed Interest Rate
declared by us. We will not declare an interest rate less than 3%. Each GRO
Account expires at the end of the duration
29
<PAGE>
you have selected. See "Renewals of GRO Accounts" below. Values and benefits
under your contract attributable to GROs are guaranteed by the reserves in our
GRO separate account as well as by our General Account.
The value of each of your GRO Accounts is referred to as a GRO VALUE. The GRO
Value at the expiration of the GRO Account, assuming you have not transferred or
withdrawn any amounts, will be the amount allocated plus interest at the
Guaranteed Interest Rate. We credit interest daily at an effective annual rate
equal to the Guaranteed Interest Rate. We allocate interest at the end of each
contract year and at the time of any transfer, full or partial withdrawal,
payment of a death benefit or purchase of any annuity benefit.
We may declare a higher rate of interest in the first year for any Contribution
allocated to a GRO which will exceed the Guaranteed Interest Rate credited
during the remaining years of the Guarantee Period (ENHANCED RATE). This
Enhanced Rate will be guaranteed for the Guaranteed Period's first year and
declared at the time of purchase. We reserve the right to declare and credit
additional interest based on Contribution, Account Value, withdrawal dates,
economic conditions or on any other lawful, nondiscriminatory basis (ADDITIONAL
INTEREST). Any Enhanced Rate and Additional Interest credited to your GRO
Account will be separate from the Guaranteed Interest Rate and not used in the
Market Value Adjustment formula. THE ENHANCED RATE OR ADDITIONAL INTEREST MAY
NOT BE MADE APPLICABLE UNDER CONTRACTS ISSUED IN CERTAIN STATES.
Each group of GRO Accounts of the same duration is considered one GRO, (i.e. all
of your three-year GRO Accounts are one GRO while all of your five-year GRO
Accounts are another GRO).
You may obtain information about our current Guaranteed Interest Rates by
calling our Administrative Office.
ALLOCATIONS TO GROS MAY NOT BE MADE UNDER CONTRACTS ISSUED IN CERTAIN STATES.
THE TEN YEAR GRO IS NOT AVAILABLE IN OREGON.
RENEWALS OF GRO ACCOUNTS. When a GRO Account expires, a new GRO Account of the
same duration, at the then-current Guaranteed Interest Rate, will be established
unless you withdraw your GRO Value or transfer it to another Investment Option.
We will notify you in writing before the expiration of your GRO Accounts. You
must notify us prior to the expiration of your GRO Accounts of any changes you
desire to make. See "Transfers" in Part I, Section 5.
Any renewal of a GRO Account will be implemented on the expiration date of the
GRO Account. You will receive the current Guaranteed Interest Rate applicable on
the expiration date. If a GRO Account expires and it cannot be renewed for the
same duration, it will be renewed for the next shortest available duration,
unless you instruct us otherwise within 30 days prior to expiration of the GRO
Account. You may not choose, and we will not renew, a GRO Account that expires
after your Retirement Date.
MARKET VALUE ADJUSTMENTS. A MARKET VALUE ADJUSTMENT is an adjustment, either up
or down, in your GRO Value prior to the expiration of your GRO Account. A Market
Value Adjustment will be made for each transfer, partial withdrawal in excess of
the free withdrawal amount, surrender, or purchase of an annuity benefit from a
GRO Account that occurs other than within 30 days prior to the expiration of the
GRO Account. There will be no Market Value Adjustment made for a death benefit.
The market adjusted value may be higher or lower than the GRO Value. In no
event, however, may the market adjusted value in each GRO Account be less than
the Minimum Value, an amount equal to your allocation to such GRO Account plus
3% interest, compounded annually, less previous withdrawals from such GRO
Account and less any applicable contingent withdrawal charges. The Minimum Value
for partial withdrawals or transfers will be calculated on a pro-rata basis.
Withdrawal charges and the administrative expense charge may invade principal.
The Market Value Adjustment applicable to a GRO Account prior to its expiration
reflects the relationship between the Guaranteed Interest Rate for such GRO
Account and the then-current Guaranteed Interest Rate applicable to a newly
elected GRO Account of a duration equal to the time remaining in your GRO
Account. The Market Value Adjustment will reduce the GRO Value (but not below
the Minimum Value) if the current Guaranteed Interest Rate is higher than the
Guaranteed Interest Rate being credited to amounts under your GRO Account.
Conversely, the Market Value Adjustment will increase the GRO Value if the
current Guaranteed Interest Rate is lower than the Guaranteed Interest Rate
being credited to amounts under your GRO Account.
The Market Value Adjustment (MVA) for a GRO Account is determined under the
following formula:
N/12 N/12
MVA = GRO Value x [(1 + A) / (1 + B + .0025) - 1], where
30
<PAGE>
A is the Guaranteed Interest Rate being credited to the GRO Account subject
to the Market Value Adjustment,
B is the current Guaranteed Interest Rate, as of the effective date of the
application of the Market Value Adjustment, for current allocations to a
GRO Account, the length of which is equal to the number of whole months
remaining in your GRO Account. Subject to certain adjustments, if such
remaining period is not equal to an exact period for which we have declared
a new Guaranteed Interest Rate, B will be determined by interpolating
between the Guaranteed Interest Rates for GRO Accounts of durations closest
to (next higher and next lower) the remaining period described above.
N is the number of whole months remaining in your GRO Account.
For contracts issued in certain states, the formula above will be adjusted to
comply with applicable state requirements.
If the remaining term of your GRO Account is 30 days or less, the Market Value
Adjustment for your GRO Account shall be zero. If for any reason we are no
longer declaring current Guaranteed Interest Rates, then for purposes of
determining B we will use the yield to maturity of United States Treasury Notes
with the same remaining term as your GRO Account, interpolating when necessary,
in place of the current Guaranteed Interest Rate or Rates.
For illustrations of the application of the Market Value Adjustment formula, see
Appendix A.
SYSTEMATIC TRANSFER OPTION
We also offer a STO which guarantees an interest rate that we declare in advance
for each calendar quarter. This interest rate applies to all contributions
within the STO Account at the time the rate is declared. You MUST transfer all
STO contributions into other Investment Options within one year of your most
recent STO contribution. Transfers will be made automatically in approximately
equal quarterly or monthly installments of not less than $1,000 each. No
transfers into the STO from other Investment Options are permitted. Withdrawals
from the STO are subject to normal contingent withdrawal charges. We guarantee
that the STO's effective annual yield will never be less than 3.0%. See
"Systematic Transfer Program" in Part I, Section 8 for details on this program.
This option may not be currently available in some states.
New contributions to a Select Ten Plus Division will held in the STO until the
next available Investment Date. You may also instruct us to transfer
approximately equal quarterly installments of at least $1,000 each over a
one-year period from the STO to each of the four Divisions. We reserve the
right to hold new contributions received less than five Business Days before any
Investment Date in the STO until the next following Investment Date. See Part
II for important information on the Divisions.
SECTION 4 - DEDUCTIONS AND CHARGES
SEPARATE ACCOUNT CHARGES
Integrity deducts from the unit value every calendar day an amount equal to an
effective annual rate of 1.35% of the Account Value in the Variable Account
Options. This daily expense rate cannot be increased without your consent.
Various portions of this total charge, as described below, pay for certain
services to the Separate Account and the contracts.
A daily charge equal to an effective annual rate of .15% of the value of each
Variable Account Option is deducted for administrative expenses not covered by
the annual administrative charge described below. The daily administrative
charge, like the annual administrative charge, is designed to reimburse
Integrity for expenses actually incurred.
A daily charge equal to an effective annual rate of 1.20% of the value of each
Variable Account Option is deducted for Integrity's assuming the expense risk
(.85%) and the mortality risk (.35%) under the contract. The expense risk is the
risk that our actual expenses of administering the contracts will exceed the
annual administrative expense charge. In this context, mortality risk refers to
the cost of insuring the risk Integrity takes that annuitants, as a class of
persons, will live longer than estimated and therefore require Integrity to pay
out more annuity benefits than anticipated. The relative proportion of the
mortality and expense risk charges may be modified, but the total effective
annual risk charge of 1.20% of the value of the Variable Account Options may not
be increased on your Contract.
Integrity may realize a gain from these daily charges to the extent they are not
needed to meet the actual expenses incurred.
31
<PAGE>
ANNUAL ADMINISTRATIVE CHARGE
If your Account Value is less than $50,000 on the last day of any contract year
prior to the your Retirement Date, Integrity charges an annual administrative
charge of $30. This charge is deducted from your Account Value in each
Investment Option on a pro-rata basis. The portion of the charge applicable to
the Variable Account Options will reduce the number of units credited to you.
The portion of the charge applicable to the Fixed Accounts is withdrawn in
dollars. The annual administrative charge will be pro-rated based on the number
of days that have elapsed in the contract year in the event of the Annuitant's
retirement, death, or termination of a contract during a contract year.
REDUCTION OR ELIMINATION OF SEPARATE ACCOUNT OR ADMINISTRATIVE CHARGES
The separate account or administrative charges may be reduced or eliminated when
contract sales are made to individuals or to a group of individuals in such a
manner that results in savings of expenses. The entitlement to such a reduction
will be based on:
(1) the size and type of the group of individuals to whom the contract is
offered; and/or
(2) the amount of expected contribution.
Any reduction or elimination of the separate account or administrative charges
will not unlawfully discriminate against any person.
FUND AND DIVISION CHARGES
Separate Account II purchases shares of the Funds at net asset value. That price
reflects investment management fees and other direct expenses that have already
been deducted from the assets of the Funds. The amount charged for investment
management may not be increased without the prior approval of a Fund's
shareholders. The Divisions invest directly in securities and certain
investment management fees and other expenses are deducted directly from the
Divisions. See Part I, Section 3, "Your Investment Options."
STATE PREMIUM TAX DEDUCTION
Integrity will not deduct state premium taxes from your contributions before
applying the contributions to the Investment Options, unless required to pay
such taxes under applicable state law. If the Annuitant elects an annuity
benefit, Integrity will deduct any applicable state premium taxes from the
amount otherwise available for an annuity benefit. State premium taxes, if
applicable, currently range up to 4%.
CONTINGENT WITHDRAWAL CHARGE
No sales charges are applied when you make a contribution to the contract.
Contributions withdrawn will be subject to a withdrawal charge of up to 8%. As
shown below, the percentage charge varies, depending upon the "age" of the
contributions included in the withdrawal-that is, the number of years that have
elapsed since each contribution was made. The maximum percentage of 8% would
apply if the entire amount of the withdrawal consisted of contributions made
during your current contribution year. No withdrawal charge applies when you
withdraw contributions made earlier than your sixth prior contribution year. For
purposes of calculating the withdrawal charge, (1) THE OLDEST CONTRIBUTIONS WILL
BE TREATED AS THE FIRST WITHDRAWN AND MORE RECENT CONTRIBUTIONS NEXT, AND (2)
partial withdrawals up to the free withdrawal amount will not be considered a
withdrawal of any contributions. For partial withdrawals, the total amount
deducted from your Account Value will include the withdrawal amount requested,
any applicable Market Value Adjustment, and any applicable withdrawal charge and
administrative expense charge, so that the net amount you receive will be the
amount requested.
During any contract year, no charge will be applied to your partial withdrawals
that do not exceed the free withdrawal amount. On any Business Day, the free
withdrawal amount is 10% of your Account Value less withdrawals during the
current contract year. If any partial withdrawal exceeds the free withdrawal
amount, we will deduct the applicable contingent withdrawal charge with respect
to such excess amount. The contingent withdrawal charge is a sales charge to
defray our costs of selling and promoting the contracts. We do not expect that
revenues from contingent withdrawal charges will cover all of such costs. Any
shortfall will be made up from our General Account assets, including any profits
from other charges under the contracts.
32
<PAGE>
<TABLE>
<CAPTION>
Contribution Year in Which Charge as a % of the
Withdrawn Contribution Was Made Contribution Withdrawn
------------------------------- ----------------------
<S> <C>
Current..................................... 8%
First Prior................................. 7
Second Prior................................ 6
Third Prior................................. 5
Fourth Prior................................ 4
Fifth Prior................................. 3
Sixth Prior................................. 2
Seventh Prior and Earlier................... 0
</TABLE>
No contingent withdrawal charge will be applied to any amount withdrawn if the
Annuitant uses the withdrawal either to purchase from Integrity an immediate
annuity benefit with life contingencies or an immediate annuity without life
contingencies which provides for level payments over five or more years, with a
restricted prepayment option. Similarly, no charge will be applied if the
Annuitant dies and the withdrawal is made by the Annuitant's beneficiary. See
"Death Benefits and Similar Benefit Distributions" in Part I, Section 5.
Unless specifically instructed otherwise, Integrity will make withdrawals
(including any applicable charges) from the Investment Options in the same ratio
the Annuitant's Account Value in each Investment Option bears to the Annuitant's
total Account Value. The minimum withdrawal permitted is $300. For residents of
Pennsylvania and South Carolina a $3,000 minimum account balance is required to
remain in your contract after any withdrawals.
33
<PAGE>
REDUCTION OR ELIMINATION OF THE CONTINGENT WITHDRAWAL CHARGE
We may reduce or eliminate the contingent withdrawal charge when sales of the
contracts are made to individuals or a group of individuals in such a manner
that results in savings of expenses. The entitlement to such a reduction in the
contingent withdrawal charge will be based on the following:
(1) the size and type of the group of individuals to whom the contract is
offered;
(2) the amount of expected contributions; and/or
(3) whether there is a prior or existing relationship with Integrity, such
as being an employee of Integrity or an affiliate, receiving
distributions or making internal transfers from other contracts issued
by Integrity, or making transfers of amounts held under qualified
plans sponsored by Integrity or an affiliate.
Any reduction or elimination of the contingent withdrawal charge will not
unlawfully discriminate against any person.
TRANSFER CHARGE
No charge is made for your first twelve transfers among the Variable Account
Options or the GROs during a contract year. We are, however, permitted to
charge up to $20 from the amount transferred for each additional transfer during
that contract year. However, no transfer charge will apply to transfers under
(i) Dollar Cost Averaging, (ii) Customized Asset Rebalancing, (iii) Asset
Allocation and Rebalancing, or (iv) systematic transfers from the STO, nor will
such transfers count towards the twelve transfers you may make in a contract
year before we may impose a transfer charge. See "Transfers" in Part I, Section
5. Transfers from a GRO may be subject to a Market Value Adjustment. See
"Guaranteed Rate Options" in Part I, Section 3.
HARDSHIP WAIVER
Withdrawal Charges may also be waived on full or partial withdrawal requests of
$1,000 or more under a hardship circumstance. The Market Value Adjustment may
also be waived on any amounts withdrawn from the GRO Accounts. Such hardship
circumstances include the Owner's (1) confinement to a nursing home, hospital
and long term care facility, (2) diagnosis of terminal illness with any medical
condition which would result in death or total disability, and (3) unemployment.
We reserve the right to obtain reasonable notice and documentation including,
but not limited to, a physician's certification and Determination Letter from a
State Department of Labor. Some of the hardship circumstances listed above may
not be applicable in some states, and, in other states, may not be available at
all.
TAX RESERVE
We have the right to make a charge in the future for taxes or for reserves set
aside for taxes, which will reduce the investment experience of the Variable
Account Options.
SECTION 5 -- TERMS OF YOUR VARIABLE ANNUITY
CONTRIBUTIONS UNDER YOUR CONTRACT
You can make contributions of at least $100 at any time up to the Annuitant's
Retirement Date. Your first contribution, however, cannot be less than $1,000.
Minimum initial contribution for residents of Pennsylvania and South Carolina
is $3,000 after any withdrawals. We will accept contributions of at least $50
for salary allotment programs. We have special rules for minimum contribution
amounts for tax-favored retirement programs. See "Special Rules for Tax-Favored
Retirement Programs" in Part I, Section 7.
We may limit the total contributions under one contract to $1,000,000 if you are
under age 76 or to $250,000 if you are over age 76. Once you reach eight years
before your Retirement Date, we may refuse to accept any contribution made for
you. Contributions may also be limited by various laws or prohibited by
Integrity for all Annuitants under the contract. If your contributions are made
under a tax-favored retirement program, we will not measure them against the
maximum limits set by law.
Contributions are applied to the various Investment Options selected by you and
are used to pay annuity and death benefits.
34
<PAGE>
Each contribution is credited as of the date we have RECEIVED (as defined below)
at our Administrative Office both the contribution and instructions for
allocation among the Investment Options, PROVIDED THAT AT ANY TIME YOU MAY HAVE
AMOUNTS IN NOT MORE THAN NINE INVESTMENT OPTIONS. Contributions to the Select
Ten Plus Divisions are subject to special rules described in Part II, Section 1,
"Investment Strategy." For purposes of calculating the nine Investment Options,
each of your GRO Accounts counts as one Investment Option. Wire transfers of
federal funds are deemed received on the day of transmittal if credited to our
account by 3 p.m. Eastern Time, otherwise they are deemed received on the next
Business Day. Contributions by check or mail are deemed received not later than
the second Business Day after they are delivered to our Administrative Office. A
BUSINESS DAY is defined as any day that the New York Stock Exchange is open.
You can change your choice of Investment Options at any time by writing to the
Administrative Office. The request should indicate your contract number and the
specific change, and you should sign the request. When it is received by the
Administrative Office, the change will be effective for any contribution which
accompanies it and for all future contributions. See "Transfers" in Section 5.
For special rules on transfers to the Select Ten Plus Divisions, see Part II,
Section 1, "Investment Strategy."
YOUR ACCOUNT VALUE
Your Account Value reflects various charges. See Part I, Section 4, "Deductions
and Charges." Annual deductions are made as of the last day of each contract
year. Withdrawal charges and Market Value Adjustments, if applicable, are made
as of the effective date of the transaction. Charges against our Separate
Accounts are reflected daily. Any amount allocated to a Variable Account Option
will go up or down in value depending on the investment experience of that
Option. For contributions allocated to the Variable Account Options, there are
no guaranteed values. The value of your contributions allocated to the Fixed
Accounts is guaranteed, subject to any applicable Market Value Adjustments. See
"Guaranteed Rate Options" in Part I, Section 3.
YOUR PURCHASE OF UNITS IN OUR SEPARATE ACCOUNTS
Allocations to the Variable Account Options are used to purchase units. On any
given day, the value you have in a Variable Account Option is the unit value
multiplied by the number of units credited to you in that Option. The units of
each Variable Account Option have different unit values.
The number of units purchased or redeemed (sold) in any Variable Account Option
is calculated by dividing the dollar amount of the transaction by the Option's
unit value, calculated after the close of business that day. The number of units
for a Variable Account Option at any time is the number of units purchased less
the number of units redeemed. The value of units of Separate Account II
fluctuates with the investment performance of the corresponding Portfolios of
the Funds which in turn reflects the investment income and realized and
unrealized capital gains and losses of the Portfolios, as well as the Funds'
expenses. The value of units of Separate Account Ten varies with the
performance of the securities held by the Divisions. The unit values also
change because of deductions and charges we make to our Separate Accounts. The
number of units credited to you, however, will not vary because of changes in
unit values. Units of a Variable Account Option are purchased when you allocate
new contributions or transfer prior contributions to that Option. Units are
redeemed when you make withdrawals or transfer amounts from a Variable Account
Option. We also redeem units to pay the death benefit when the Annuitant dies
and to pay the annual administrative charge. Please note that special rules
apply to the timing of allocations to the Select Ten Plus Divisions. See Part
II.
HOW WE DETERMINE UNIT VALUE
We determine unit values for each Variable Account Option on the Valuation Date.
The Valuation Date for purposes of determining unit values is 4 p.m. Eastern
Time on each day the New York Stock Exchange is open for business.
The unit value of each Variable Account Option in Separate Account II for any
day on which we determine unit values is equal to the unit value for the last
day on which a unit value was determined multiplied by the net investment factor
for that Option on the current day. We determine a NET INVESTMENT FACTOR for
each Option in Separate Account II as follows:
- - First, we take the value of the shares belonging to the Option in the
corresponding Portfolio at the close of business that day (before giving
effect to any transactions for that day, such as contributions or
withdrawals). For this purpose, we use the share value reported to us by
the Funds.
35
<PAGE>
- Next, we add any dividends or capital gains distributions by the Fund on
that day.
- Then, we charge or credit for any taxes or amounts set aside as a reserve
for taxes.
- Then, we divide this amount by the value of the amounts in the Option at
the close of business on the last day on which a unit value was determined
(after giving effect to any transactions on that day).
- Finally, we subtract a daily asset charge for each calendar day since the
last day on which a unit value was determined (for example, a Monday
calculation will include charges for Saturday and Sunday). The daily charge
is .00003721, which is an effective annual rate of 1.35%. This charge is
for the mortality risk, administrative expenses and expense risk assumed by
us under the contract.
We determine a net investment factor for each Division as follows:
- First, we take the value of the assets in the Division at the end of the
preceding period.
- Next, we add any investment income and capital gains, realized or
unrealized, credited to the assets during the current valuation period.
- Then, we subtract any capital losses, realized or unrealized, charged
against the assets during the current valuation period.
- Next, we subtract any amount charged against the Division for any taxes.
- Then, we divide this amount by the value of the assets in the Division at
the end of the preceding valuation period.
- Then we subtract the daily charge for management and investment advice for
each day in the valuation period and a daily charge for estimated operating
expenses for each day in the valuation period.
- Finally, we subtract a daily asset charge for each calendar day since the
last day on which a unit value was determined (for example, a Monday
calculation will include charges for Saturday and Sunday). The daily charge
is .00003721, which is an effective annual rate of 1.35%. This charge is
for the mortality risk, administrative expenses and expense risk assumed by
us under the contract.
Generally, this means that we adjust unit values to reflect what happens to the
Funds and the Divisions, and also for the mortality and expense risk charge and
any charge for administrative expenses or taxes.
TRANSFERS
You may transfer your Account Value among the Variable Account Options and the
GROs, subject to Integrity's then current transfer restrictions. You may not
make a transfer into the STO. Transfers to a GRO must be to a newly elected GRO
(i.e., to a GRO that you have not elected before) at the then-current Guaranteed
Interest Rate, unless Integrity otherwise consents. Transfers from a GRO other
than within 30 days prior to the expiration date of a GRO Account are subject to
a Market Value Adjustment. See "Guaranteed Rate Options" in Part I, Section 3.
For amounts in GROs, transfers will be made according to the order in which
monies were originally allocated to any GRO.
36
<PAGE>
Transfers from a Select Ten Plus Division may be made at any time. Transfers to
a Select Ten Plus Division from any other Investment Option in which you are
invested will be effected as of the day preceding the next available Investment
Date. We reserve the right not to accept transfer instructions received less
than two Business Days before any Investment Date. See Part II for important
information on the Divisions.
The amount transferred must be at least $250 or, if less, the entire amount in
the Investment Option. After twelve transfers have been made by you during a
contract year, a charge of up to $20 may apply to each additional transfer
during that contract year, except that no charge will be made for transfers
under our dollar cost averaging or customized asset rebalancing or systematic
transfer programs, described in Part I, Section 8. Once annuity payments begin,
transfers are no longer permitted.
Written transfer requests must be sent directly to the Administrative Office.
Each Annuitant's request for a transfer must specify the contract number, the
amounts to be transferred and the Investment Options to and from which the
amounts are to be transferred. Transfers may also be arranged through our
telephone transfer service provided you have established a Personal
Identification Number (PIN CODE). We will honor telephone transfer instructions
from any person who provides correct identifying information, and we are not
responsible in the event of a fraudulent telephone transfer which is believed to
be genuine in accordance with these procedures. Accordingly, you bear the risk
of loss if unauthorized persons make transfers on your behalf.
A transfer request will be effective as of the Business Day it is received by
our Administrative Office, except for transfers to the Select Ten Plus Divisions
(see part II). A transfer request does not change the allocation of current or
future contributions among the Investment Options. Telephone transfers may be
requested from 9:00 a.m. - 5:00 p.m., Eastern Time, on any day we are open for
business. You will receive the Variable Account Options' unit values as of the
close of business on the day you call, except that you will receive the unit
values for the Select Ten Plus Divisions as described in Part II. Accordingly,
transfer requests for Variable Account Options other than the Select Ten Plus
Divisions that are received after 4:00 p.m. Eastern Time (or the close of the
New York Stock Exchange, if earlier) will be processed using unit values as of
the close of business on the next Business Day after the day you call. All
transfers will be confirmed in writing.
Transfer requests submitted by agents or market timing services that represent
multiple policies will be processed not later than the next Business Day after
the requests are received by our Administrative Office; note that special rules
apply to transfer requests to the Select Ten Plus Divisions. See Part II.
WITHDRAWALS
You may make an unlimited number of withdrawals from your contract as frequently
as you wish. Each withdrawal must be for at least $300. For residents of
Pennsylvania and South Carolina a $3,000 minimum account balance is required to
remain in your Contract after any withdrawals. A withdrawal charge of up to 8%
of the contribution amount withdrawn, as adjusted for any applicable Market
Value Adjustment and the withdrawal charge itself will be deducted from your
Account Value, unless one of the exceptions applies. See "Guaranteed Rate
Options" in Part I, Section 3 and "Contingent Withdrawal Charge" in Part I,
Section 4. Most withdrawals made by you prior to age 59-1/2 are also subject to
a 10% federal tax penalty. In addition, some tax-favored retirement programs
limit withdrawals. See Part I, Section 7, "Tax Aspects of the Contracts" for
further information regarding various tax consequences associated with the
contracts.
ASSIGNMENTS
You may not assign the contract as collateral or security for a loan, but an
Owner whose contract is not related to a tax-favored program may otherwise
assign the contract before the Annuitant's Retirement Date. An assignment of the
contract as a gift may, however, have adverse tax consequences. See Part I,
Section 7, "Tax Aspects of the Contracts." Integrity will not be bound by an
assignment unless it is in writing, and we have received it at the
Administrative Office.
DEATH BENEFITS AND SIMILAR BENEFIT DISTRIBUTIONS
We will pay a death benefit to the Annuitant's surviving beneficiary (or
beneficiaries, in equal shares) if the last Annuitant dies before annuity
payments have started. If the Annuitant dies at or over age 90 (or after the
contract's 10th anniversary date, if later), the death benefit is the contract
account value at the end of the business day on which we receive due proof of
death. Similarly, if the contract was issued on or after the youngest
Annuitant's 86th birthday, the death benefit is the contract account value at
the end of the business day on which we receive due proof of death.
37
<PAGE>
For contracts issued before the Annuitant's 86th birthday, if the Annuitant dies
before age 90 (or the contract's 10th anniversary date, if later) and before
annuity payments have started, the death benefit is the highest of:
a) the contract account value at the end of the business day on which we
receive due proof of death;
b) the total of all contributions; and
c) the highest contract account value on any contract anniversary which
occurred prior to the Annuitant's 81st birthday and prior to the
Annuitant's death, plus any subsequent contributions;
each reduced on a pro rata basis for prior withdrawals (after being adjusted for
any applicable market value adjustments and/or charges). The amount of the
reduction will be determined by dividing the amount of the withdrawal by the
annuity account value on the transaction date and multiplying this percentage by
the then current guaranteed minimum death benefit.
Death benefits (and benefit distributions required because of a separate Owner's
death) can be paid in a lump sum or as an annuity. If no benefit option is
selected for the beneficiary at the Annuitant's death, the beneficiary can
select an option.
The beneficiary of the death benefit under a contract is selected by the Owner.
An Owner may change beneficiaries by submitting the appropriate form to the
Administrative Office. If no Annuitant's beneficiary survives the Annuitant,
then the death benefit is generally paid to the Annuitant's estate. No death
benefit will be paid after the Annuitant's death if there is a contingent
Annuitant. In that case, the contingent Annuitant becomes the new Annuitant
under the contract.
Effective November 1, 1997, the maximum issue age for the Annuitant is 85 years
old.
ANNUITY BENEFITS
All annuity benefits under your contract are calculated as of the Retirement
Date selected by you. The Retirement Date can be changed by written notice to
the Administrative Office any time prior to the Retirement Date. The Retirement
Date may be no later than your 98th birthday or earlier, if required by law. The
terms of the contracts applicable to the various retirement programs, along with
the federal tax laws, establish certain minimum and maximum retirement ages.
Annuity benefits may take the form of a lump sum payment or an annuity. A lump
sum payment will provide the Annuitant with the Cash Value under the contract,
shortly after the Retirement Date. The amount applied for the purchase of an
annuity benefit will be the Adjusted Account Value, except that the Cash Value
will be the amount applied if the annuity benefit does not have a life
contingency and either the term is less than five years or the annuity can be
commuted to a lump sum payment without a withdrawal charge applying.
ANNUITIES
Alternate forms of annuity benefits can provide for fixed or variable payments
which may be made monthly, quarterly, semi-annually or annually. Variable
payments will be funded through one or more Variable Account Options. For any
annuity, the minimum amount applied to the annuity must be $2,000 and the
minimum initial payment must be at least $20.
If you have not already selected a form of annuity, we will send you, within six
months prior to your Retirement Date, an appropriate notice form on which you
may indicate the type of annuity you desire or confirm to us that the normal
form of annuity, as defined below, is to be provided. However, if we do not
receive a completed form from you on or before your Retirement Date, we will
deem the Retirement Date to have been extended until we receive your written
instructions at our Administrative Office. During such extension, the values
under your contract in the various Investment Options will remain invested in
such options and amounts remaining in Variable Account Options will continue to
be subject to the investment risks associated with those Options. However, your
Retirement Date cannot be extended beyond your 98th birthday or earlier, if
required by law. You will receive a lump sum benefit if you do not make an
election by such date.
We currently offer the following types of annuities:
A PERIOD CERTAIN ANNUITY provides for fixed or variable payments, or both, to
the Annuitant or the Annuitant's beneficiary (the PAYEE) for a fixed period. The
amount is determined by the period selected. The Annuitant, or if the payee dies
before the end of the period selected, the payee's beneficiary, may elect to
receive the total present value of future payments in cash.
38
<PAGE>
A PERIOD CERTAIN LIFE ANNUITY provides for fixed or variable payments, or both,
for at least the period selected and thereafter for the life of the payee or the
payee and another annuitant under a joint and survivor annuity. You may not
change or redeem the annuity once payments have begun. If the payee (or the
payee and the other annuitant under a joint and survivor annuity) dies before
the period selected ends, the remaining payments will go to another named payee
who may have the right to redeem the annuity and secure the present value of
future guaranteed payments in a lump sum. The NORMAL FORM OF ANNUITY is a fixed
life income annuity with 10 years of payments guaranteed, funded through our
General Account.
A LIFE INCOME ANNUITY provides fixed payments for the life of the payee or the
payee and another annuitant under a joint and survivor annuity. Once a life
income annuity is selected, the form of annuity cannot be changed or redeemed
for a lump sum payment by the Annuitant or any payee.
ANNUITY PAYMENTS
Fixed annuity payments will not change and are based upon annuity rates provided
in your contract. The size of payments will depend on the form of annuity that
was chosen and, in the case of a life income annuity, on the payee's age (or
payee and a joint annuitant in the case of a joint and survivor annuity) and sex
(except under most tax-favored retirement programs). If Integrity's current
annuity rates then in effect would yield a larger payment, those current rates
will apply instead of the tables.
Variable annuity payments are funded only in the Variable Account Options
through the purchase of annuity units. The Variable Account Option or Options
selected cannot be changed after annuity payments begin. The SAI provides
further information concerning the determination of annuity payments. The
number of units purchased is equal to the amount of the first annuity payment
divided by the new annuity unit value for the valuation period which includes
the due date of the first annuity payment. The amount of the first annuity
payment is determined in the same manner for a variable annuity as it is for a
fixed annuity. The number of annuity units stays the same for the annuity
payment period but the new annuity unit value changes to reflect the investment
income and the realized and unrealized capital gains and losses of the Variable
Account Option or Options selected, after charges made against it. Annuity unit
values assume a base rate of net investment return of 5%, except in states which
require a lower rate in which case 3.5% will be used. The annuity unit value
will rise or fall depending on whether the actual rate of net investment return
is higher or lower than the assumed base rate. In the SAI, see "Determination of
Annuity Unit Values."
If the age or sex of an annuitant has been misstated, any benefits will be those
which would have been purchased at the correct age and sex. Any overpayments or
underpayments made by us will be charged or credited with interest at the rate
of 6% per year. If we have made overpayments because of incorrect information
about age or sex, we will deduct the overpayment from the next payment or
payments due. We add underpayments to the next payment.
TIMING OF PAYMENT
We normally make payments from the Variable Account Options, or apply your
Adjusted Account Value to the purchase of an annuity within seven days after
receipt of the required form at our Administrative Office. Our action can be
deferred, however, for any period during which (1) the New York Stock Exchange
has been closed or trading on it is restricted; (2) sales of securities or
determination of the fair value of Separate Accounts assets is not reasonably
practicable because of an emergency; or (3) the SEC, by order, permits Integrity
to defer action in order to protect persons with interests in the Separate
Accounts. Integrity can defer payment of your Fixed Accounts for up to six
months, and interest will be paid on any such payment delayed for 30 days or
more.
HOW YOU MAKE REQUESTS AND GIVE INSTRUCTIONS
When you communicate in writing with our Administrative Office, use the address
on the first page of this prospectus. Your request or instruction cannot be
honored unless it is in proper and complete form. Whenever possible, use one of
our printed forms, which may be obtained from our Administrative Office.
SECTION 6 - VOTING RIGHTS
FUND VOTING RIGHTS
39
<PAGE>
Integrity is the legal owner of the shares of the Funds held by Separate Account
II and, as such, has the right to vote on certain matters. Among other things,
we may vote to elect a Fund's Board of Directors, to ratify the selection of
independent auditors for a Fund, and on any other matters described in a Fund's
current prospectus or requiring a vote by shareholders under the 1940 Act.
Whenever a shareholder vote is taken, we give you the opportunity to tell us how
to vote the number of shares purchased as a result of contributions to your
contract. We will send you Fund proxy materials and a form for giving us voting
instructions.
If we do not receive instructions in time from all Owners, we will vote shares
in a Portfolio for which no instructions have been received in the same
proportion as we vote shares for which we have received instructions. Under
eligible deferred compensation plans and certain Qualified Plans, your voting
instructions must be communicated to us indirectly, through your employer, but
we are not responsible for any failure by your employer to solicit your
instructions or to communicate your instructions to us. We will vote any Fund
shares that we are entitled to vote directly, because of amounts we have
accumulated in Separate Account II, in the same proportions that other Owners
vote. If the federal securities laws or regulations or interpretations of them
change so that we are permitted to vote shares of a Fund in our own right or to
restrict Owner voting, we may do so.
HOW WE DETERMINE YOUR VOTING SHARES
You may participate in voting only on matters concerning the Portfolios in which
your contributions have been invested. We determine the number of Fund shares in
each Variable Account Option that are attributable to your contract by dividing
the amount of your Account Value allocated to that Option by the net asset value
of one share of the corresponding Portfolio as of the record date set by a
Fund's Board for a Fund's shareholders' meeting. The record date for this
purpose must be no more than 60 days before the meeting of a Fund. We count
fractional shares. After annuity payments have commenced, voting rights are
calculated in a similar manner based on the actuarially determined value of your
interest in each Variable Account Option.
HOW FUND SHARES ARE VOTED
All Fund shares are entitled to one vote; fractional shares have fractional
votes. Voting is on a Portfolio-by-Portfolio basis, except for certain matters
(for example, election of Directors) which require collective approval. On
matters on which the interests of the individual Portfolios differ, the approval
of the shareholders in one Portfolio is not needed in order to make a decision
in another Portfolio. To the extent shares of a Fund are sold to separate
accounts of other insurance companies, the shares voted by such companies in
accordance with instructions received from their contract holders will dilute
the effect of voting instructions received by Integrity from its Owners.
Owners with accumulation value in the Divisions have certain voting rights.
Each such owner will be given one vote for every $1.00 of accumulation value in
a Division with fractional interests counted, unless a different allocation of
voting rights is required under applicable law for an investment medium for
variable annuity contracts.
HOW SEPARATE ACCOUNT TEN INTERESTS ARE VOTED
Separate Account Ten's rules do not require Separate Account Ten to hold annual
meetings of owners of interests in Separate Account Ten, although special
meetings may be called for Separate Account Ten for purposes such as electing or
removing members of the Board of Managers, changing fundamental policies, or
approving a contract for investment advisory services. When required, "the vote
of a majority of the outstanding voting securities" of Separate Account Ten
means the lesser of:
(1) The holders of more than 50% of all votes entitled to be cast with
respect to Separate Account Ten; or,
(2) The holders of at least 67% of the votes which are present at
a meeting of such persons or represented by proxy.
We will determine the number of votes you can instruct us to vote 60 days or
less before Separate Account Ten's meeting.
SEPARATE ACCOUNT VOTING RIGHTS
40
<PAGE>
Under the 1940 Act, certain actions (such as some of those described under
"Changes in How We Operate" in Part I, Section 2) may require Owner approval. In
that case, you will be entitled to a number of votes based on the value you have
in the Variable Account Options, as described above under "How We Determine Your
Voting Shares." We will cast votes attributable to amounts we have in the
Variable Account Options in the same proportions as votes cast by Owners.
SECTION 7 - TAX ASPECTS OF THE CONTRACTS
INTRODUCTION
The effect of federal income taxes on the amounts held under a contract, on
annuity payments, and on the economic benefits to the Owner, Annuitant, and the
beneficiary or other payee may depend on Integrity's tax status, on the type of
retirement plan, if any, for which the contract is purchased, and upon the tax
and employment status of the individuals concerned.
The following discussion of the federal income tax treatment of the contract is
not exhaustive, does not purport to cover all situations and is not intended to
be tax advice. It is based upon our understanding of the present federal income
tax laws as currently interpreted by the Internal Revenue Service (IRS) and
various courts. No representation is made regarding the likelihood of
continuation of the present federal income tax laws or of the current
interpretations by the IRS or the courts. Future legislation may affect annuity
contracts adversely. Moreover, no attempt has been made to consider any
applicable state or other tax laws. Because of the inherent complexity of such
laws and the fact that tax results will vary according to the particular
circumstances of the individual involved and, if applicable, the qualified plan,
any person contemplating the purchase of a contract, contemplating selection of
annuity payments under the contract, or receiving annuity payments under a
contract should consult a qualified tax adviser. INTEGRITY DOES NOT MAKE ANY
GUARANTEE REGARDING THE TAX STATUS, FEDERAL, STATE, OR LOCAL, OF ANY CONTRACT OR
ANY TRANSACTION INVOLVING THE CONTRACTS.
TAX STATUS OF INTEGRITY
Integrity is taxed as a life insurance company under Part I of Subchapter L of
the Internal Revenue Code of 1986, as amended (the CODE). Since the Separate
Accounts are not separate entities from Integrity and their operations form a
part of Integrity, they will not be taxed separately as "regulated investment
companies" under Subchapter M of the Code. Investment income and realized
capital gains on the assets of the Separate Accounts are reinvested and taken
into account in determining the accumulation value. Under existing federal
income tax law, the Separate Accounts' investment income, including realized net
capital gains, is not taxed to Integrity. Integrity reserves the right to make
a deduction for taxes should they be imposed with respect to such items in the
future.
YOUR CONTRACT IS AN ANNUITY
Under the federal tax law, any individual can purchase an annuity with after-tax
dollars and exclude any annuity earnings in taxable income until an actual
distribution is taken from the annuity. Alternatively, the individual (or
employer) may purchase the annuity to fund a tax-favored retirement program
(contributions are with pre-tax dollars), such as an IRA or qualified plan.
Finally, the individual (or employer) may purchase the annuity to fund a Roth
IRA (contributions are with after-tax dollars and earnings are excluded in
taxable income at distribution).
This prospectus covers the basic tax rules that apply to an annuity purchased
directly with after-tax dollars, (NONQUALIFIED ANNUITY), and some of the special
tax rules which apply to an annuity purchased to fund a tax-favored retirement
program, (QUALIFIED ANNUITY). A qualified annuity may restrict your rights and
benefits in order to qualify for its special treatment under the federal tax
law.
TAXATION OF ANNUITIES GENERALLY
Section 72 of the Code governs the taxation of annuities. In general, an Owner
is not taxed on increases in value under a contract until some form of
withdrawal or distribution is made under the contract. However, under certain
circumstances, the increase in value may be subject to current federal income
tax. For example, corporations, partnerships, trusts and other non-natural
persons cannot defer the taxation of current income credited to the contract
unless an exception applies. In addition, if an Owner transfers an annuity as a
gift to someone other than a spouse (or divorced spouse), any increase in its
value will be taxed at the time of transfer. The assignment or pledge of any
portion of the value of a contract will be treated as a distribution of that
portion of the value of the contract.
41
<PAGE>
Section 72 provides that the proceeds of a full or partial withdrawal from a
contract prior to the date on which annuity payments begin are treated first as
taxable income to the extent that the Account Value exceeds the "investment" or
"basis" in the contract and then as non-taxable recovery of the investment or
basis in the contract. Generally, the investment or basis in the contract
equals the contributions made by or on your behalf, less any amounts previously
withdrawn which were not treated as taxable income. Special rules may apply if
the contract includes contributions made prior to August 14, 1982 which were
rolled over to the contract in a tax-free exchange.
Once annuity payments begin, the Annuitant recovers a portion of the investment
tax-free from each payment. The non-taxable portion of each payment is based on
the ratio of the Annuitant's investment to his or her expected return under the
contract (exclusion ratio). The remainder of each payment will be ordinary
income.
After you have recovered your total investment, future payments are fully
included in income. If the Annuitant dies prior to recovering the total
investment, a deduction for the remaining basis will generally be allowed on the
Annuitant's final federal income tax return.
Withholding of federal income taxes on all distributions may be required unless
the recipient who is eligible elects not to have any amounts withheld and
properly notifies Integrity of that election.
The taxable portion of a distribution is treated as ordinary income and is taxed
at ordinary income tax rates. In addition, a tax penalty of 10% applies to the
taxable portion of a distribution unless the distribution is: (1) on or after
the date on which the taxpayer attains age 59-1/2; (2) as a result of the death
of the Owner; (3) part of a series of substantially equal periodic payments (not
less frequently than annually) for the life (or life expectancy) of the taxpayer
or joint lives (or joint life expectancies) of the taxpayer and beneficiary; (4)
attributable to the taxpayer becoming disabled within the meaning of Code
Section 72(m)(7); (5) from certain qualified plans (note, however, other
penalties may apply); (6) under a qualified funding asset (as defined in Section
130(d) of the Code); (7) purchased by an employer on termination of certain
types of qualified plans and held by the employer until the employee separates
from service; (8) under an immediate annuity as defined in Code Section
72(u)(4); or (9) purchase of a first home (distribution up to $10,000,
applicable to IRAs only).
However, the withdrawal provisions of your contract still apply. See
"Withdrawals" in Section 5.
All annuity contracts issued by Integrity or its affiliates to one Annuitant
during any calendar year are treated as a single contract in measuring the
taxable income that results from surrenders and withdrawals under any one of the
contracts.
DISTRIBUTION-AT-DEATH RULES
Under Section 72(s) of the Code, in order to be treated as an annuity, a
contract must provide the following distribution rules: (a) if any Owner dies
on or after the Retirement Date and before the entire interest in the contract
has been distributed, then the remaining portion of such interest must be
distributed at least as quickly as the method in effect on the date of the
Owner's death; and (b) if any Owner dies before the Retirement Date, the entire
interest in the contract must be distributed within five years after the date of
the Owner's death. To the extent such interest is payable to a beneficiary,
however, such interest may be annuitized over the life of that beneficiary or
over a period not extending beyond the life expectancy of that beneficiary, so
long as distributions commence within one year after the Owner's death. If the
beneficiary is the spouse of the Owner, the contract (along with the deferred
tax status) may be continued in the name of the spouse as the Owner.
DIVERSIFICATION STANDARDS
Each Portfolio of the Funds and each Division will be required to adhere to
regulations adopted by the Treasury Department pursuant to Section 817(h) of the
Code prescribing asset diversification requirements for investment companies
whose shares are sold to insurance company separate accounts funding variable
contracts. The investment managers for the Funds and the Divisions monitor the
investments in order to comply with the regulations to assure that the contracts
continue to be treated as annuities for federal income tax purposes.
The IRS has stated in published rulings that a variable contract owner will be
considered the owner of separate account assets if the contract owner possesses
incidents of ownership in those assets, such as the ability to exercise
investment control over the assets. In those circumstances, income and gains
from the separate account assets would be includable in the variable contract
owner's gross income. The Treasury Department also announced, in connection
with the issuance of regulations concerning diversification, that those
regulations "do not provide guidance concerning the circumstances
42
<PAGE>
in which investor control of the investments of a segregated asset account may
cause the investor (I.E., the Owner), rather than the insurance company, to be
treated as the owner of the assets in the account." This announcement also
stated that guidance would be issued by way of regulations or rulings on the
"extent to which policyholders may direct their investments to particular
subaccounts without being treated as owners of the underlying assets." As of
the date of this prospectus, no such guidance has been issued.
TAX-FAVORED RETIREMENT PROGRAMS
The contract is designed for use in connection with certain types of retirement
plans which receive favorable treatment under the Code. Numerous special tax
rules apply to the participants in such qualified plans and to the contracts
used in connection with such qualified plans. These tax rules vary according to
the type of plan and the terms and conditions of the plan itself. Owners,
Annuitants, and beneficiaries are cautioned that the rights of any person to any
benefits under qualified plans may be subject to the terms and conditions of the
plans themselves, regardless of the terms and conditions of the contract. In
addition, loans from qualified contracts, where allowed, are subject to a
variety of limitations, including restrictions as to the amount that may be
borrowed, the duration of the loan, and the manner in which the loans must be
repaid. (Owners should always consult their tax advisors and retirement plan
fiduciaries prior to exercising their loan privileges.) Also, special rules
apply to the time at which distributions must commence and the form in which the
distributions must be paid. THEREFORE, NO ATTEMPT IS MADE TO PROVIDE MORE THAN
GENERAL INFORMATION ABOUT THE USE OF CONTRACTS WITH THE VARIOUS TYPES OF
QUALIFIED PLANS.
Integrity reserves the right to change its administrative rules, such as minimum
contribution amounts, as needed to comply with the Code as to tax-favored
retirement programs.
Following are brief descriptions of various types of qualified plans in
connection with which Integrity may issue a contract.
TRADITIONAL INDIVIDUAL RETIREMENT ANNUITIES
Code Section 408(b) permits eligible individuals to contribute to an individual
retirement program known as a Traditional IRA. An individual who receives
compensation and who has not reached age 70-1/2 by the end of the tax year may
establish a Traditional IRA and make contributions up to the deadline for filing
his or her federal income tax return for that year (without extensions).
Traditional IRAs are subject to limitations on the amount that may be
contributed, the persons who may be eligible, and on the time when distributions
may commence. An individual may also rollover amounts distributed from another
Traditional IRA, Roth IRA or another tax-favored retirement program to a
Traditional IRA contract. Your Traditional IRA contract will be issued with a
rider outlining the special terms of your contract which apply to Traditional
IRAs. The Owner will be deemed to have consented to any other amendment unless
the Owner notifies us that he or she does not consent within 30 days from the
date we mail the amendment to the Owner.
ROTH INDIVIDUAL RETIREMENT ANNUITIES
Section 408(A) of the Code permits eligible individuals to contribute to an
individual retirement program known as a Roth IRA. An individual who receives
compensation may establish a Roth IRA and make contributions up to the deadline
for filing his or her federal income tax return for that year (without
extensions). Roth IRAs are subject to limitations on the amount that may be
contributed, the persons who are eligible to contribute, and on the time when a
tax-favored distribution may commence. An individual may also rollover amounts
distributed from another Roth IRA or Traditional IRA to a Roth IRA contract.
Your Roth IRA contract will be issued with a rider outlining the special terms
of your contract which apply to Roth IRAs. Any amendment made for the purpose
of complying with provisions of the Code and related regulations may be made
without consent of the Owner. The Owner will be deemed to have consented to any
other amendment unless the Owner notifies us that he or she does not consent
within 30 days from the date we mail the amendment to the Owner.
SIMPLE INDIVIDUAL RETIREMENT ANNUITIES
Currently, we do not issue Individual Retirement Annuities known as a "SIMPLE
IRA" as defined in Section 408(b) of the Code.
43
<PAGE>
TAX SHELTERED ANNUITIES
Section 403(b) of the Code permits the purchase of tax-sheltered annuities (TSA)
by public schools and certain charitable, educational and scientific
organizations described in Section 501(c)(3) of the Code. The contract is not
intended to accept other than employee contributions. Such contributions are not
includible in the gross income of the employee until the employee receives
distributions from the contract. The amount of contributions to the TSA is
limited to certain maximums imposed by Code sections 403(b), 415 and 402(g).
Furthermore, the Code sets forth additional restrictions governing such items as
transferability, distributions and withdrawals. Any employee should obtain
competent tax advice as to the tax treatment and suitability of such an
investment. Your contract will be issued with a rider outlining the special
terms which apply to a TSA.
SIMPLIFIED EMPLOYEE PENSIONS
Section 408(k) of the Code allows employers to establish simplified employee
pension plans (SEP-IRAS) for their employees, using the employees' IRAs for such
purposes, if certain criteria are met. Under these plans the employer may,
within specified limits, make deductible contributions on behalf of the
employees to IRAs. Employers intending to use the contract in connection with
such plans should seek competent advice. The SEP-IRA will be issued with a rider
outlining the special terms of the contract.
CORPORATE AND SELF-EMPLOYED (H.R. 10 AND KEOGH) PENSION AND PROFIT SHARING PLANS
Sections 401(a) and 403(a) of the Code permit corporate employers to establish
various types of tax-favored retirement plans for employees. The Self-Employed
Individuals' Tax Retirement Act of 1962, as amended, commonly referred to as
"H.R. 10" or "Keogh," permits self-employed individuals also to establish such
tax-favored retirement plans for themselves and their employees. Such
retirement plans may permit the purchase of the contract in order to provide
benefits under the plans. Employers intending to use the contract in connection
with such plans should seek competent advice. The Company reserves the right to
request documentation to substantiate that a qualified plan exists and is being
properly administered. Integrity does not administer such plans.
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS
Section 457 of the Code permits employees of state and local governments and
tax-exempt organizations to defer a portion of their compensation without paying
current taxes. The employees must be participants in an eligible deferred
compensation plan. To the extent the contracts are used in connection with an
eligible plan, employees are considered general creditors of the employer and
the employer as Owner of the contract has the sole right to the proceeds of the
contract. However, Section 457(g), as added by the Small Business and Jobs
Protection Act (SBJPA) of 1996, provides that on and after August 20, 1996, a
plan maintained by an eligible governmental employer must hold all assets and
income of the plan in a trust, custodial account, or annuity contract for the
exclusive benefit of participants and their beneficiaries. If the plan is in
existence on August 20, 1996, the employer need not establish a trust, custodial
account, or annuity contract until January 1, 1999. Loans to employees may be
permitted under such plans; however, a Section 457 plan is not required to allow
loans. Contributions to a contract in connection with an eligible government
plan are subject to limitations. Those who intend to use the contracts in
connection with such plans should seek competent advice. The Company reserves
the right to request documentation to substantiate that a qualified plan exists
and is being properly administered. Integrity does not administer such plans.
DISTRIBUTIONS UNDER TAX FAVORED RETIREMENT PROGRAMs
Distributions from tax-favored plans are subject to certain restrictions. Prior
to the enactment of the 1996 SBJPA, distributions of minimum amounts specified
by the Code must have commenced by April 1 of the calendar year following the
calendar year in which the participant reaches age 70-1/2. The SBJPA provides
participants in qualified plans, with the exception of five-percent owners and
Traditional IRA holders, to begin receiving distributions by April 1 of the
calendar year following the later of either (i) the calendar year in which the
employee reaches age 70-1/2, or (ii) the calendar year in which the employee
retires. Additional distribution rules apply after the participant's death.
Failure to make mandatory distributions may result in the imposition of a 50%
penalty tax on any difference between the required distribution amount and the
amount distributed. Distributions to a participant from all plans (other than
457 plans) in a calendar year that exceed a specific limit under the Code are
generally subject to a 15% penalty tax (in addition to any ordinary income tax)
on the excess portion of the distributions. However, the SBJPA of 1996 has
suspended the excise tax on excess distributions. The provision relating to the
excise tax on excess distributions is effective with respect to distributions
received in 1997, 1998 and 1999.
44
<PAGE>
The Taxpayer Relief Act of 1997 creating Roth IRAs eliminates mandatory
distribution at age 70-1/2 for Roth IRAs.
Distributions from a tax-favored plan (not including a Traditional IRA subject
to Code Section 408 or a Roth IRA) to an employee, surviving spouse, or former
spouse who is an alternate payee under a qualified domestic relations order, in
the form of a lump sum settlement or periodic annuity payments for a fixed
period of fewer than 10 years are subject to mandatory income tax withholding of
20% of the taxable amount of the distribution, unless (1) the distributee
directs the transfer of such amounts in cash to another plan or Traditional IRA;
or (2) the payment is a minimum distribution required under the Code. The
taxable amount is the amount of the distribution less the amount allocable to
after-tax contributions. All other types of taxable distributions are subject
to withholding unless the distributee elects not to have withholding apply.
We are not permitted to make distributions from a contract unless a request has
been made. It is therefore your responsibility to comply with the minimum
distribution rules. You should consult your tax adviser regarding these rules
and their proper application.
The above description of the federal income tax consequences of the different
types of tax-favored retirement plans which may be funded by the contract is
only a brief summary and is not intended as tax advice. The rules governing the
provisions of plans are extremely complex and often difficult to comprehend.
Anything less than full compliance with all applicable rules, all of which are
subject to change, may have adverse tax consequences. A prospective Owner
considering adoption of a plan and purchase of a contract in connection
therewith should first consult a qualified and competent tax adviser, with
regard to the suitability of the contract as an investment vehicle for the plan.
45
<PAGE>
FEDERAL AND STATE INCOME TAX WITHHOLDING
When required, Integrity will withhold and remit to the U.S. Government a part
of the taxable portion of each distribution made under a contract unless the
distributee notifies Integrity at or before the time of the distribution of an
election not to have any amounts withheld. In certain circumstances, Integrity
may be required to withhold tax, as explained above. The withholding rates
applicable to the taxable portion of periodic annuity payments (other than
eligible rollover distributions) are the same as the withholding rates generally
applicable to payments of wages. In addition, the withholding rate applicable
to the taxable portion of non-periodic payments (including withdrawals prior to
the maturity date) is 10%. The withholding rate applicable to eligible rollover
distributions is 20% unless such distribution is paid directly to an eligible
retirement plan.
Certain states have indicated that pension and annuity withholding will apply to
payments made to residents. Generally, an election out of federal withholding
will also be considered an election out of state withholding. For more
information concerning a particular state, call our Administrative Office at the
toll-free number.
IMPACT OF TAXES ON INTEGRITY
The contracts provide that Integrity may charge the Separate Accounts for taxes.
Integrity can also set up reserves for taxes.
TRANSFERS AMONG INVESTMENT OPTIONS
There will not be any tax liability if you transfer any part of the Account
Value among the Investment Options of your contract.
SECTION 8 - ADDITIONAL INFORMATION
SYSTEMATIC WITHDRAWALS
We offer a program for systematic withdrawals that allows you to pre-authorize
periodic withdrawals from your contract prior to your Retirement Date. You may
choose to have withdrawals made monthly, quarterly, semi-annually or annually
and may specify the day of the month (other than the 29th, 30th or 31st) on
which the withdrawal is to be made. You may specify a dollar amount for each
withdrawal or an annual percentage to be withdrawn. The minimum systematic
withdrawal currently is $100. For residents of Pennsylvania, South Carolina and
Washington State a $3,000 minimum account balance is required to remain in your
Contract after any withdrawals. You may also specify an account for direct
deposit of your systematic withdrawals. To enroll under our systematic
withdrawal program, you must deliver the appropriate administrative form to our
Administrative Office. Withdrawals may begin not less than one business day
after our receipt of the form. You or we may terminate your participation in the
program upon one day's prior written notice, and we may terminate or amend the
systematic withdrawal program at any time. If on any withdrawal date you do not
have sufficient values to make all of the withdrawals you have specified, no
withdrawals will be made and your enrollment in the program will be ended.
Amounts withdrawn by you under the systematic withdrawal program may be within
the free withdrawal amount in which case neither a contingent withdrawal charge
nor a Market Value Adjustment will be made. See "Contingent Withdrawal Charge"
in Part I, Section 4. AMOUNTS WITHDRAWN UNDER THE SYSTEMATIC WITHDRAWAL PROGRAM
IN EXCESS OF THE FREE WITHDRAWAL AMOUNT WILL BE SUBJECT TO A CONTINGENT
WITHDRAWAL CHARGE, AN ADMINISTRATIVE EXPENSE CHARGE AND A MARKET VALUE
ADJUSTMENT IF APPLICABLE. WITHDRAWALS ALSO MAY BE SUBJECT TO THE 10% FEDERAL TAX
PENALTY FOR EARLY WITHDRAWALS UNDER THE CONTRACTS AND TO INCOME TAXATION. See
Part I, Section 7, "Tax Aspects of the Contracts."
INCOME PLUS WITHDRAWAL PROGRAM
We offer the Income Plus Withdrawal Program that allows you to pre-authorize
substantially equal periodic withdrawals, based on your life expectancy, from
your contract prior to your reaching age 59-1/2. Income Plus Withdrawals are
exempt from the 10% penalty tax, normally applicable to early distributions made
prior to age 59-1/2, but remain subject to ordinary income tax. See "Taxation
of Annuities Generally," in Section 7. Once distributions begin they should not
be changed or stopped until the later of age 59-1/2 or five years from the date
of the first distribution. If you change or stop the distribution or take an
additional withdrawal, you may be liable for the 10% penalty tax that would have
otherwise been due on all prior distributions made under the Income Plus Program
and for any interest thereon.
46
<PAGE>
The Income Plus Withdrawal Program may be elected at any time if you are below
age 59-1/2. You can elect this option by submitting the proper election form to
our Administrative Office. You may choose to have withdrawals made monthly,
quarterly, semi-annually or annually and may specify the day of the month (other
than the 29th, 30th or 31st) on which the withdrawal is to be made. We will
calculate the amount of the distribution under a method selected by you. The
minimum Income Plus Withdrawal currently is $100. You must also specify an
account for direct deposit of your Income Plus Withdrawals.
To enroll under our Income Plus Withdrawal Program, you must deliver the
appropriate administrative form to our Administrative Office. Withdrawals may
begin not less than one Business Day after our receipt of the form. You or we
may terminate your participation in the program upon seven Business Days prior
written notice, and we may terminate or amend the Income Plus Program at any
time. If on any withdrawal date you do not have sufficient values to make all
of the withdrawals you have specified, no withdrawals will be made and your
enrollment in the program will be ended. This program is not available in
concert with the Systematic Withdrawal Program, Dollar Cost Averaging,
Systematic Transfer Option or Asset Allocation and Rebalancing Program.
Amounts withdrawn by you under the Income Plus Withdrawal Program may be within
the free withdrawal amount in which case neither a contingent withdrawal charge
nor a Market Value Adjustment will be made. See "Contingent Withdrawal Charge"
in Part 4. AMOUNTS WITHDRAWN UNDER THE INCOME PLUS WITHDRAWAL PROGRAM IN EXCESS
OF THE FREE WITHDRAWAL AMOUNT WILL BE SUBJECT TO A CONTINGENT WITHDRAWAL CHARGE
AND A MARKET VALUE ADJUSTMENT IF APPLICABLE.
DOLLAR COST AVERAGING
We offer a dollar cost averaging program under which allocations to the Janus
Money Market Option are automatically transferred on a monthly, quarterly,
semi-annual or annual basis to one or more other Variable Account Options. The
Select Ten Plus Divisions are not eligible for the dollar cost averaging
program. You must specify a dollar amount to be transferred into each Variable
Account Option, and the current minimum transfer to each Option is $250. No
transfer charge will apply to transfers under our dollar cost averaging program,
and such transfers will not count towards the twelve transfers you may make in a
contract year before we may impose a transfer charge.
To enroll under our dollar cost averaging program, you must deliver the
appropriate administrative form to our Administrative Office. You or we may
terminate your participation in the program upon one day's prior written notice,
and we may terminate or amend the dollar cost averaging program at any time. If
you do not have sufficient funds in the Janus Money Market Option to transfer to
each Variable Account Option specified, no transfer will be made and your
enrollment in the program will be ended.
SYSTEMATIC TRANSFER PROGRAM
We also offer a systematic transfer program under which contributions to the STO
are automatically transferred on a monthly or quarterly basis, as selected by
you, to one or more other Investment Options. See Part I, Section 3,
"Systematic Transfer Option." Your STO contributions will be transferred in
equal installments of not less than $1,000 over a one year period. If you do not
have sufficient funds in the STO to transfer to each Option specified, a final
transfer will be made on a pro rata basis and your enrollment in the program
will be ended. All interest accrued and any funds remaining in the STO at the
end of the period during which transfers are scheduled to be made will be
transferred at the end of such period on a pro rata basis to the Options
previously elected by you for this program. No transfer charge will apply to
transfers under our systematic transfer program, and such transfers will not
count towards the twelve transfers you may make in a contract year before we may
impose a transfer charge.
New contributions to a Select Ten Plus Division will be held in the STO until
the next available Investment Date. You may also instruct us to transfer
approximately equal quarterly installments of at least $1,000 each over a
one-year period from the STO to each of the four Divisions. We reserve the
right to hold new contributions received less than five Business Days before any
Investment Date in the STO until the next following Investment Date. See Part
II for important information on the Divisions.
To enroll under our systematic transfer program, you must deliver the
appropriate administrative form to our Administrative Office. We reserve the
right to terminate the systematic transfer program in whole or in part, or to
place restrictions on contributions to the program. This program may not be
currently available in some states.
CUSTOMIZED ASSET REBALANCING
47
<PAGE>
We offer a customized asset rebalancing program whereby you can select the
frequency for rebalancing. Frequencies available include rebalancing monthly,
quarterly, semi-annually or annually. The value in the Variable Account Options
will be automatically rebalanced by transfers among such Variable Account
Options, and you will receive a confirmation notice after each rebalancing.
Transfers will occur only to and from those Variable Account Options where you
have current contribution allocations. No transfer charge will apply to
transfers under our customized asset rebalancing program, and such transfers
will not count towards the twelve transfers you may make in a contract year
before we may impose a transfer charge.
Fixed Accounts and the Select Ten Plus Divisions are not eligible for the
customized asset rebalancing program.
To enroll under our customized asset rebalancing program, you must deliver the
appropriate administrative form to our Administrative Office. You should be
aware that other allocation programs, such as dollar cost averaging, as well as
transfers and withdrawals that you make, may not work in concert with the
customized asset rebalancing program. You should, therefore, monitor your use
of such other programs, transfers, and withdrawals while the customized asset
rebalancing program is in effect. You or we may terminate your participation in
the program upon one day's prior written notice, and we may terminate or amend
the customized asset rebalancing program at any time.
ASSET ALLOCATION AND REBALANCING PROGRAM
We also offer an Asset Allocation and Rebalancing Program developed in
consultation with Callan Associates (MODEL(s)). Callan Associates is an
independent research and consulting firm, specializing in the strategic asset
allocation decision.
You may select one of five proposed Models: Conservative, Moderately
Conservative, Moderate, Moderately Aggressive, or Aggressive. Your current
contribution allocations will be initially allocated among the Options currently
established for each Model. You and your financial representative also have the
option to design a program that is tailored to your specific retirement needs.
When selecting this program, contributions will be allocated and your variable
portfolios will be rebalanced at least annually as recommended by the Asset
Allocation & Rebalancing Program. The program applies to all contributions made
to your annuity contract. You will receive a confirmation notice after each
rebalancing. No transfer charge will apply to transfers under the Asset
Allocation and Rebalancing Program, nor will such transfers count toward the
twelve transfers you may make in a contract year before we may impose a transfer
charge. See "Transfer Charges" in Part I, Section 4.
In each investor profile, a portion of all contributions is allocated to a
five-year Guaranteed Rate Option (GRO). The amount allocated to the GRO will
not be reallocated or rebalanced while participating in a specific investor
profile. You may cancel or change the investment profile you have selected at
any time. However, the GRO funds may be subject to a market value adjustment
(MVA) that may increase or decrease your account value.
To enroll under the Asset Allocation and Rebalancing Program, complete the
Dollar Cost Averaging/Asset Allocation and Rebalancing form (Catalog #1814)
found in the back of this prospectus. You should be aware that other allocation
programs, such as dollar cost averaging, as well as additions, transfers and
withdrawals that you make, may not work in concert with the Customized Asset
Rebalancing program. If, after selecting one of the five Models, you initiate a
transaction that results in a reallocation outside one of the Models, your
participation in the Model program is automatically terminated. You should,
therefore, monitor your use of such other programs, transfers, and withdrawals
while the Customized Asset Rebalancing program is in effect. This program is
not available in concert with the Customized Asset Rebalancing program. The
Select Ten Plus Divisions are not eligible for the Asset Allocation and
Rebalancing Program. We reserve the right to terminate or amend this program in
whole or in part, or to place restrictions on contributions to the program.
This program may not be available in all states.
You may terminate participation in this program upon one day's prior written
notice.
SYSTEMATIC CONTRIBUTIONS
We offer a program for systematic contributions that allows you to pre-authorize
monthly, quarterly, or semi-annual withdrawals from your checking account for
payment to us. To enroll under our program, you must deliver the appropriate
administrative form to our Administrative Office. You or we may terminate your
participation in the program upon 30
48
<PAGE>
days' prior written notice. Your participation may be terminated by us if your
bank declines to make any payment. The minimum amount for systematic
contributions is $1,000 per month. The Select Ten Plus Divisions are not
eligible for Systematic Contributions.
PERFORMANCE INFORMATION
Performance data for the Variable Account Options, including the yield and
effective yield of the Janus Money Market Option, the yield of the other
Options, and the total return of all of the Options may appear in advertisements
or sales literature. Performance data for any Option reflects only the
performance of a hypothetical investment in the Option during the particular
time period on which the calculations are based. Performance information should
be considered in light of the investment objectives and policies of the
Portfolio in which the Option invests and the market conditions during the given
time period, and it should not be considered as a representation of performance
to be achieved in the future.
TOTAL RETURNS are based on the overall dollar or percentage change in value of a
hypothetical investment in an Option. Total return quotations reflect changes in
Fund share price, the automatic reinvestment by the Option of all distributions
and the deduction of applicable contract charges and expenses, including any
contingent withdrawal charge that would apply if an Owner surrendered the
contract at the end of the period indicated. Total returns also may be shown
that do not take into account the contingent withdrawal charge or the annual
administrative charge applicable where the Account Value is less than $50,000 at
the end of a contract year.
A CUMULATIVE TOTAL RETURN reflects an Option's performance over a stated period
of time. An AVERAGE ANNUAL TOTAL RETURN reflects the hypothetical annually
compounded return that would have produced the same cumulative total return if
the Option's performance had been constant over the entire period. Because
average annual total returns tend to smooth out variations in an Option's
returns, you should recognize that they are not the same as actual year-by-year
results.
Some Options may also advertise YIELD. These measures reflect the income
generated by an investment in the Option over a specified period of time. This
income is annualized and shown as a percentage. Yields do not take into account
capital gains or losses or the contingent withdrawal charge.
The Janus Aspen Money Market Option may advertise its CURRENT and EFFECTIVE
YIELD. Current yield reflects the income generated by an investment in the
Option over a specified 7-day period. Effective yield is calculated in a similar
manner except that income earned is assumed to be reinvested. The JPM Bond
Option may advertise a 30-day yield which reflects the income generated by an
investment in such Option over a specified 30-day period.
For a detailed description of the methods used to determine yield and total
return for the Variable Account Options, see the SAI.
49
<PAGE>
PART II
SECTION 1 -- THE SELECT TEN PLUS DIVISIONS OF SEPARATE ACCOUNT TEN
THE DIVISIONS
Separate Account Ten is currently divided into four Divisions: March, June,
September and December. Each Division is a non-diversified investment company
which invests directly in securities. There can be no assurance that any
Division will meet its investment objective. Separate Account Ten may also
offer other securities which are not available through the purchase of the
contracts offered by this prospectus. Integrity Capital Advisors serves as the
investment adviser to Separate Account Ten and National Asset Management
Corporation serves as the sub-adviser to the Divisions.
INVESTMENT STRATEGY
The Divisions seek total return by acquiring the ten highest yielding stocks in
the Dow Jones Industrial Average (DJIA) in equal weights and holding them for
approximately twelve months, with each new Division commencing on the last
Business Day of each calendar quarter. At the end of each Division's twelve-
month period, the Division's portfolio is restructured to again hold the ten
highest yielding stocks in the DJIA in equal weights for the next twelve months.
Separate Account Ten may have different investment portfolios, i.e., the four
Divisions, operating simultaneously for their respective twelve-month periods.
New contributions and transfers to each of the four Divisions will be invested
on only one day of each year (the "Investment Date"), as follows:
<TABLE>
<CAPTION>
Division Investment Date
-------- ---------------
<S> <C>
Select Ten Plus Division - March last Business Day of March
Select Ten Plus Division - June last Business Day of June
Select Ten Plus Division - September last Business Day of September
Select Ten Plus Division - December last Business Day of December
</TABLE>
The term "equal weights" means that if you invested $100 in a Division, the
Division would buy $10 of each of the ten highest yielding stocks. The term
"highest yielding stocks" means the yield for each stock calculated by
annualizing the last quarterly or semi-annual ordinary dividend distributed on
that stock and dividing the result by the market value of that stock as of the
close of the NYSE on the Business Day prior to the Investment Date. This rate
is historical, and there is no assurance that any dividends will be declared or
paid in the future on the stocks in the Divisions.
The weights of the individual stock positions will not be rebalanced during the
year, nor will additional contributions or transfers be accepted during any
Division's twelve-month holding period. Rather, additional contributions or
transfers will be invested on the next available Investment Date.
New contributions to a Division will be held in the STO until the day preceding
the next available Investment Date. You may also instruct us to transfer on
each of the next four Investment Dates equal quarterly installments of at least
$1,000 each from the STO to each of the four Divisions. We reserve the right to
hold new contributions received less than five Business Days before any
Investment Date in the STO until the next following Investment Date. See also
Part I, Section 3, "Systematic Transfer Option," and Part I, Section 8,
"Systematic Transfer Program."
Transfers to a Division from any other Investment Option in which you are
invested will be effected as of the day preceding the next available Investment
Date. We reserve the right not to accept transfer instructions received less
than two Business Days before any Investment Date. See also Part I, Section 5,
"Transfers."
Dividends from stocks in each Division's portfolio will be reinvested on the day
the dividend is received in additional shares of the stock that paid the
dividend.
50
<PAGE>
Upon the receipt of a withdrawal request, approximately equal dollar amounts of
shares of each of the ten stocks will be sold, such that the total dollar amount
sold equals the amount of the withdrawal.
This investment strategy is based on three time-tested investment principles:
(1) time in the market is more important than timing the market; (2) the stocks
to buy are the ones everyone else is selling; and (3) dividends can be an
important part of total return. Investment in a number of companies with high
dividends relative to their stock prices is designed to increase a Division's
potential for higher returns. Investing in these stocks of the DJIA may be
effective as well as conservative because regular dividends are common for
established companies and dividends have accounted for a substantial portion of
the total return on stocks of the DJIA as a group. Each Division's return will
consist of a combination of capital appreciation and current dividend income.
There can be no assurance that the dividend rates on the selected stocks will be
maintained. Reduction or elimination of a dividend could adversely affect the
stock price as well.
To the extent any of the ten highest yielding stocks qualifying for a Division
are reasonably believed to receive 15% or more of their revenues from
securities-related activities, the Division will allocate a maximum of 5% of its
assets to each of those stocks, and will allocate the remainder of its assets
among the remaining stocks not so limited. Separate Account Ten has applied to
the SEC for exemptive relief from this limitation, but there is no assurance as
to when or if it will be granted.
The Divisions follow a buy and hold investment strategy in contrast to the
frequent portfolio changes of a fund based on economic, financial and market
analyses. In this regard, adverse developments concerning a stock including the
adverse financial condition of the issuer, a failure to maintain a current
dividend rate, the institution of legal proceedings against the issuer, a
default under certain documents materially and adversely affecting the future
declaration of dividends, or a decline in the price or the occurrence of other
market or credit factors (including a public tender offer or a merger or
acquisition transaction) that might otherwise make retention of the stock
detrimental to the interest of investors, will generally not cause the Divisions
to dispose of a stock or cease buying it.
The DJIA consists of 30 common stocks chosen by the editors of THE WALL STREET
JOURNAL as representative of the New York Stock Exchange and of American
industry. The companies are highly capitalized in their industries and their
stocks are widely followed and held by individual and institutional investors.
Companies with an asterisk are the ten highest yielding stocks in the DJIA as of
the market close on December 31, 1997. These ten stocks are commonly known as
the "Dogs of the Dow:"
Allied Signal Procter & Gamble
J.P. Morgan* American Express
Minnesota Mining & Manufacturing* International Paper*
DuPont* Philip Morris*
Eastman Kodak* United Technologies
Goodyear Sears Roebuck
Johnson & Johnson Exxon*
IBM Hewlett-Packard
General Electric Coca-Cola
General Motors* Union Carbide
McDonald's Walt Disney
Chevron* AT&T*
Caterpillar Travelers
Boeing Walmart
Merck Aluminum Co. of America
The designations "Dow Jones-Registered Trademark-," "Dow Jones Industrial
Average-Registered Trademark-" and "DJIA-Registered Trademark-" are the
property of Dow Jones & Company, Inc. (DOW JONES). Dow Jones is not
affiliated with Integrity, has not participated in any way in the creation of
the Divisions or in the selection of stocks included in the Divisions and has
not reviewed or approved any information included in this prospectus. The
Divisions are not sponsored, endorsed, sold or promoted by Dow Jones, and Dow
Jones has no relationship whatsoever to the Divisions. The Dow Jones
Industrial Average-Registered Trademark- is determined, composed and
calculated by Dow Jones without regard to the Divisions. Dow Jones is not
responsible for and does not participate in the determination of the timing
of, prices at, or quantities of the Divisions' shares to be issued or in the
determination or
51
<PAGE>
calculation of the equation by which the Divisions' shares are to be redeemed.
Dow Jones has no obligation or liability whatsoever in connection with the
administration or marketing of the Divisions.
INVESTMENT OBJECTIVE AND POLICIES
The Divisions seek total return by acquiring the ten highest dividend yielding
common stocks in the DJIA. "Highest yielding stocks" means the yield for each
stock calculated by annualizing the last quarterly or semi-annual ordinary
dividend distributed on that stock and dividing the result by the market value
of that stock as of the close of the NYSE on the Business Day prior to the
Investment Date. This yield is historical and there is no assurance that any
dividends will be declared or paid in the future on the stocks in the Divisions.
No leverage or borrowing is used (except that each Division may borrow up to 5%
of its total assets for temporary or emergency purposes) nor does any Division's
portfolio contain other kinds of securities to enhance yield.
The selection process is a straightforward, objective, mathematical application
that ignores any subjective factors concerning an issuer in the DJIA, an
industry or the economy generally. The application of the selection process may
cause a Division to own a stock that the sub-adviser does not recommend for
purchase and, in fact, the sub-adviser may have sell recommendations on a number
of the stocks at the time the stocks are selected for inclusion in a Division's
portfolio. Various theories attempt to explain why a common stock is among the
ten highest yielding stocks in the DJIA at any given time: (1) the issuer may be
in financial difficulty or out of favor in the market because of weak earnings
or performance or forecasts or negative publicity; (2) uncertainties relating to
pending or threatened litigation or pending or proposed legislation or
government regulation; (3) the stock may be a cyclical stock reacting to
national and international economic developments; or (4) the market may be
anticipating a reduction in or the elimination of the issuer's dividend. Some of
the foregoing factors may be relevant to only a segment of an issuer's overall
business yet the publicity may be strong enough to outweigh otherwise solid
business performance. In addition, companies in certain industries have
historically paid relatively high dividends.
PERFORMANCE INFORMATION
At December 31, 1997 and as of the date of this Prospectus, the Select Ten Plus
Divisions had not commenced operations. However, the performance of the
investment strategies for the Divisions relative to other investment strategies
can be demonstrated using historical data.
The returns shown in the following tables reflect the historical performance of
a hypothetical investment in the Ten Highest Yielding Stocks in the DJIA and the
performance of the DJIA. They are not guarantees of future performance and
should not be used as predictors of returns to be expected in connection with
any Division. Stock prices (which will fluctuate in value) and dividends (which
may be increased, reduced or eliminated) can affect the returns. The strategy
has underperformed the DJIA certain years. Accordingly, there can be no
assurance that any Division will outperform the DJIA over the life of the
Division.
An investor in a Division would not necessarily realize as high a total return
on an investment in the stocks upon which the hypothetical returns are based for
the following reasons: the total return figures shown do not reflect insurance
charges, brokerage commissions, Division expenses or taxes, and the Divisions
are established at different times of the year. If the above-mentioned charges
were reflected in the hypothetical returns, the returns would be lower than
those presented here. See Part I, Section 4, "Deductions and Charges".
52
<PAGE>
<TABLE>
<CAPTION>
COMPARISON OF TOTAL RETURN(2)
TEN HIGHEST DIVIDEND
YEAR YIELDING STOCKS (1) DJIA
<S> <C> <C>
1973 3.9% (13.1)%
1974 (1.3)% (23.1)%
1975 55.9% 44.4%
1976 34.8% 22.7%
1977 0.9% (12.7)%
1978 (0.1)% 2.7%
1979 12.4% 10.5%
1980 27.2% 21.5%
1981 5.0% (3.4)%
1982 23.6% 25.8%
1983 38.7% 25.7%
1984 7.6% 1.1%
1985 29.5% 32.8%
1986 32.1% 26.9%
1987 6.19% 6.0%
1988 22.9% 16.0%
1989 26.5% 31.7%
1990 (7.6)% (0.4)%
1991 39.3% 23.9%
1992 7.9% 7.4%
1993 27.3% 16.8%
1994 4.1% 4.9%
1995 36.7% 36.4%
1996 27.9% 28.9%
1997 21.9% 24.9%
Cumulative 6,558% 2,042%
</TABLE>
- ----------------------------------
(1) The Ten Highest Dividend Yielding Stocks in the DJIA for any given year were
selected by ranking the dividend yields for each of the stocks in the index, as
of the beginning of that year, based upon an annualization of the last quarterly
or semi-annual regular dividend distribution (which would have been declared in
the preceding year) divided by that stock's market value on the first trading
day on the NYSE in that year.
(2) Total Return represents the sum of the percentage change in market value of
each group of stocks between the first trading day of a period and the total
dividends paid on each group of stocks during the period divided by the opening
market value of each group of stocks as of the first trading day of a period.
Total Return does not take into consideration any sales charges, commissions,
expenses or taxes. Total Return does not take into consideration any
reinvestment of dividend income. Over the twenty-five years listed above, the
Ten Highest Dividend Yielding Stocks in the DJIA achieved an average annual
total return of 18.3%. In addition, over this period, the strategy achieved a
greater average annual total return than that of the DJIA, which was 13.0%.
Although each Division seeks to achieve a better performance than the DJIA as a
whole, there can be no assurance that a Division will achieve a better
performance. Performance may also be compared to the performance on the same
basis as the S&P 500 Composite Price Stock Index or performance data from
publications such as Morningstar Publications, Inc. Source: BEATING THE DOW,
by Michael O'Higgins with John Downes, published by Harper Perennial, 1992.
Used with permission of the authors.
53
<PAGE>
<TABLE>
<CAPTION>
HOW THE STRATEGY HAS PERFORMED
[Graphic mountain chart to be presented]
Ten Highest Dividend
Year Yielding DJIA Stocks DJIA Index
---- -------------------- ----------
<S> <C> <C>
1973 $ 10,390 $ 8,690
1974 10,255 6,683
1975 15,987 9,650
1976 21,551 11,840
1977 21,745 10,336
1978 21,723 10,616
1979 24,417 11,730
1980 31,058 14,252
1981 32,611 13,768
1982 40,308 17,320
1983 55,907 21,771
1984 60,155 22,010
1985 77,901 29,230
1986 102,908 37,092
1987 109,185 39,318
1988 134,188 45,609
1989 169,748 60,067
1990 156,848 59,827
1991 218,489 74,125
1992 235,749 79,610
1993 300,109 92,985
1994 312,413 97,541
1995 427,069 133,046
1996 546,221 171,496
1997 665,843 214,199
</TABLE>
The chart above represents a hypothetical investment of $10,000 in the DJIA and
the Ten Highest Dividend Yielding DJIA Stocks (but not the Divisions) from
January 1, 1973 through December 31, 1997 and should not be considered
indicative of future results. The chart assumes that all dividends during a year
are reinvested at the end of that year and does not reflect sales or insurance
charges, commissions, expenses or taxes. The value of the ten highest dividend-
yielding DJIA stocks would have been $414,656 if the following fees and expenses
had been charged: annual insurance charges of 1.20%, management fees of .50%,
insurance company administrative fees of .15% and other expenses of .35%. There
can be no assurance that any of the Divisions will outperform the DJIA.
The calculations of total return assume the reinvestment of all dividends and
capital gains distributions at the end of the year. Investors should not rely
on the preceding financial information as an indication of the past or future
performance of the Divisions.
STANDARDIZED PERFORMANCE DATA
From time to time, Integrity may advertise historical total returns for the
Divisions. These figures will be calculated according to standardized methods
prescribed by the SEC. They will be based on historical earnings and are not
intended to indicate future performance.
The total return calculations for a Division do not reflect the effect of any
premium taxes that may be applicable to a particular Policy. To the extent that
any or all of a premium tax is applicable to a particular Policy, the total
return of that Policy will be reduced. For additional information regarding
total returns calculated using the standard formats briefly summarized above,
please refer to the Statement of Additional Information, a copy of which may be
obtained from our Administrative Office upon request.
54
<PAGE>
NON-STANDARDIZED PERFORMANCE DATA
Integrity may from time to time also advertise or disclose average annual total
return or other performance data in non-standard formats for a Division. The
non-standard data may assume that the Policy remains in force and therefore not
reflect the Surrender Charge. The non-standard performance data may make other
assumptions such as the amount invested in a Division, differences in time
periods to be shown, or the effect of partial withdrawals or annuity payments
and may also make other assumptions.
All non-standard performance data will be advertised only if the standard
performance data is also disclosed. For additional information regarding the
calculation of other performance data, please refer to the Statement of
Additional Information, a copy of which may be obtained from our Administrative
Office upon request.
RISK FACTORS
An investment in a Division entails certain risks, including the risk that the
value of your investment will decline if the financial condition of the issuers
of the stocks becomes impaired or if the general condition of the stock market
worsens and the risk that holders of common stocks have generally inferior
rights to receive payments from the issuer in comparison with the rights of
creditors of, or holders of debt obligations or preferred stocks issued by, the
issuer. Moreover, common stocks do not represent an obligation of the issuer and
therefore do not offer any assurance of income or provide the degree of
protection of capital provided by debt securities. Common stocks in general may
be especially susceptible to general stock market movements and to volatile
increases and decreases in value as market confidence in and perceptions of the
issuers change. These perceptions are based on unpredictable factors including
expectations regarding government, economic, monetary and fiscal policies,
inflation and interest rates, economic expansion or contraction, and global or
regional political, economic or banking crises. Neither the investment adviser
nor the sub-adviser can predict the direction or scope of any of these factors.
Each Division is non-diversified and will invest a larger portion of its assets
in the securities of fewer issuers than diversified investment companies. As a
result, an investment in a Division may be subject to greater fluctuations in
value than an investment in a diversified investment company. In addition, a
Division may be concentrated in one or more of types of issuers. Concentration
may involve additional risk because of the decreased diversification of
economic, financial and market risks. Moreover, changing approaches to
regulation, particularly with respect to the environment or with respect to the
petroleum or tobacco industry, may have a negative impact on certain companies
represented in a Division's portfolio. Set forth below is a brief description
of certain risks associated with stocks which may be held by the Divisions.
Additional information is contained in the Statement of Additional Information.
Certain of the issuers of the stocks refine, market and transport oil and
related petroleum products. The principal risks faced by these companies include
the price and availability of oil, the level of demand for oil and petroleum
products, refinery capacity and operating margins, the cost of financing
required for exploration and expansion and increasing expenses necessary to
comply with environmental and other energy related laws and regulations. Oil
prices generally depend upon the available supply of crude oil and the
willingness and ability of companies to adjust production levels. Declining U.S.
crude oil production is likely to lead to increased dependence on foreign
sources of oil and to uncertain supply for refiners and the risk of
unpredictable supply disruptions. In addition, future scientific advances with
new energy sources could have an adverse impact on the petroleum and natural gas
industries.
INVESTMENT RESTRICTIONS
The Divisions are subject to investment restrictions that are described in the
Statement of Additional Information. Those investment restrictions, the
investment objective, and any investment policies identified as "fundamental"
cannot be changed without a majority vote of the Owners. All other investment
policies and practices described in this prospectus and in the Statement of
Additional Information are not fundamental, and may be changed by the Board of
Managers without Owner approval.
55
<PAGE>
SECTION 2 -- MANAGEMENT OF SEPARATE ACCOUNT TEN
BOARD OF MANAGERS OF SEPARATE ACCOUNT TEN
The business and affairs of Separate Account Ten are managed under the direction
of a Board of Managers, which currently consists of five (5) members. The Board
of Managers has responsibility for the investment management related operations
of Separate Account Ten and matters arising under the 1940 Act. The Board of
Managers does not have responsibility for the payment of obligations under the
contracts and administration of the contracts. These matters are Integrity's
responsibility.
THE INVESTMENT ADVISER
Integrity Capital Advisors serves as the investment adviser to Separate Account
Ten pursuant to an investment advisory agreement. As discussed in Part I,
Integrity Capital Advisors is a wholly owned subsidiary of ARM and is registered
as an investment adviser under the Investment Advisers Act of 1940. Its offices
are located at 515 West Market Street, Louisville, Kentucky 40202.
Integrity Capital Advisors has overall responsibility, subject to the
supervision of the Board of Managers, for administering all operations of the
Divisions and for monitoring and evaluating the management of the assets of the
Divisions by the sub-adviser. Integrity Capital Advisors is also responsible
for monitoring and evaluating the sub-adviser on a periodic basis and will
consider its performance record with respect to the investment objective and
policies of the Divisions.
As investment adviser, Integrity Capital Advisors provides the overall business
management and administrative services necessary for each Division's operation.
Integrity Capital Advisors furnishes or procures on behalf of the Divisions the
services and information necessary to the proper conduct of the Divisions'
business. Integrity Capital Advisors also acts as liaison among the various
service providers to the Divisions, including the custodian, portfolio
accounting personnel, sub-adviser, counsel and auditors. Integrity Capital
Advisors is also responsible for ensuring that the Divisions operate in
compliance with applicable legal requirements and for monitoring the sub-
adviser for compliance with requirements under applicable law and with the
investment policies and restrictions of the Divisions.
Integrity Capital Advisors is authorized to exercise full investment discretion
and make all determinations with respect to the investment of each Division's
assets and the purchase and sale of securities for the Divisions in the event
that at any time a sub-adviser is not engaged to manage the assets of the
Divisions. In such event, Integrity Capital Advisors will be entitled to, in
addition to its usual compensation for services as investment adviser, a fee
that would otherwise be paid to the sub-adviser.
THE SUB-ADVISER
National Asset serves as the sub-adviser to the Divisions and in that capacity
provides investment advisory services for the Divisions including security
selection. Pursuant to the sub-advisory agreement, and subject to each
Division's investment objective and policies, National Asset makes all
determinations with respect to the investment of each Division's assets and the
purchase and sale of securities and other investments.
National Asset is a Kentucky corporation with executive offices at National City
Tower, Louisville, Kentucky 40202. Since its inception in 1979, National Asset
has provided customized investment management services to corporations,
governmental entities, foundations, endowments, and similar entities. As of
December 31, 1997, National Asset managed approximately $8.5 billion in assets.
56
<PAGE>
PRIOR CONTRACTS
DEATH BENEFIT INFORMATION FOR CONTRACTS ISSUED PRIOR TO JANUARY 1, 1997
Notwithstanding anything in the prospectus to the contrary, for contracts issued
prior to January 1, 1995, the amount of the death benefit is the greatest of:
- your Adjusted Account Value
- the Account Value at the beginning of the seventh contract year, plus
subsequent contributions and minus subsequent withdrawals
- your total contributions less the sum of withdrawals
- for Annuitants less than 70 years old on the birthday nearest the date
on which their contract was issued, an enhanced minimum death benefit.
Notwithstanding anything in the prospectus to the contrary, for contracts issued
during 1995, the amount of the death benefit is the greatest of:
- your Adjusted Account Value
- the highest Account Value at the beginning of any contract year, plus
subsequent contributions and minus subsequent withdrawals
- your total contributions less the sum of withdrawals
Notwithstanding anything in the prospectus to the contrary, for contracts issued
during 1996, the amount of the death benefit is the greatest of:
- your Account Value
- the highest Account Value at the beginning of any contract year, plus
subsequent contributions and minus subsequent withdrawals
- your total contributions less the sum of withdrawals
"Subsequent withdrawals" for purposes of calculation of a death benefit reflect
any market value adjustments applicable to such withdrawals and reduce the death
benefit on a pro rata basis.
The enhanced minimum death benefit is equal to the guaranteed death benefit,
except that the guaranteed death benefit may not exceed the maximum guaranteed
death benefit. The guaranteed death benefit on your Participation Date is your
initial contribution. On a monthly basis thereafter we recalculate that portion
of your guaranteed death benefit allocated to the Separate Account by adding
interest at an annual rate of 7% until the contract anniversary on which your
nearest birthday is your 70th, subject to the maximum, and subtracting the sum
of any withdrawals or transfers from the Separate Account during the month and a
pro rata amount of the interest accumulated relative to such withdrawn or
transferred amount. Therefore, your guaranteed death benefit at any time,
subject to the maximum, is equal to the sum of (1) your Guarantee Period Values,
and (2) your Separate Account contributions and the amount of interest
calculated on your Separate Account values for purposes of determining the
guaranteed death benefit less any withdrawals or transfers and less the interest
calculated on a pro rata basis on such withdrawn or transferred amount. Your
maximum guaranteed death benefit is determined by totaling your contributions
during your first five participation years, subtracting all withdrawals
inclusive of any market value adjustments made under the contract, multiplying
the result by two, and then adding to that amount your total contributions made
after the first five participation years.
57
<PAGE>
REDUCTION IN CHARGES
If your contract was issued on or after January 1, 1995, but before January 1,
1997, the effective annual rate of mortality, expense and administrative charges
will reduce to 1.10% after your contract has been in effect for six years.
CONTINGENT WITHDRAWAL CHARGE
For contracts issued prior to February 15, 1997 (2/27/97 in Washington, 5/30/97
in Pennsylvania, 7/7/97 in Maryland, 10/16/97 in Oregon) then the following
rules apply:
Contributions withdrawn will be subject to a withdrawal charge of up to 7%. As
shown below, this percentage charge varies, depending upon the "age" of the
contributions included in the withdrawal, that is, the contribution year in
which each contribution was made. The maximum percentage of 7% would apply if
the entire amount of the withdrawal consisted of contributions made during your
current contract year. No withdrawal charge applies when you withdraw
contributions made earlier than your fifth prior contribution year. For purposes
of calculating the withdrawal charge, (1) the oldest contributions will be
treated as the first withdrawn and more recent contributions next, and (2)
partial withdrawals up to the free withdrawal amount will not be considered a
withdrawal of any contributions. For partial withdrawals, the total amount
deducted from your Account Value will include the withdrawal amount requested,
any applicable Market Value Adjustment and any applicable withdrawal charge, so
that the net amount you receive will be the amount requested.
During any contract year, no charge will be applied to your partial withdrawals
that do not exceed the free withdrawal amount. On any Business Day, the free
withdrawal amount is the greater of (i) 10% of your Account Value and (ii) any
investment gain during the prior contract year, less withdrawals during the
current contract year. Investment gain is calculated as the increase in the
Account Value during the prior contract year, minus contributions during such
year, plus withdrawals made during such year. If any partial withdrawal exceeds
the free withdrawal amount, we will deduct the applicable contingent withdrawal
charge with respect to such excess amount. The contingent withdrawal charge is a
sales charge to defray our costs of selling and promoting the contracts. We do
not expect that revenues from contingent withdrawal charges will cover all of
such costs. Any shortfall will be made up from our General Account assets,
including any profits from other charges under the contracts.
<TABLE>
<CAPTION>
Contribution Year in Which Charge as a % of the
Withdrawn Contribution Was Made Contribution Withdrawn
------------------------------- ----------------------
<S> <C>
Current . . . . . . . . . . . . . . . . . 7%
First Prior . . . . . . . . . . . . . . . 6
Second Prior. . . . . . . . . . . . . . . 5
Third Prior . . . . . . . . . . . . . . . 4
Fourth Prior. . . . . . . . . . . . . . . 3
Fifth Prior . . . . . . . . . . . . . . . 2
Sixth Prior and Earlier . . . . . . . . . 0
</TABLE>
No contingent withdrawal charge will be applied to any amount withdrawn if the
Annuitant uses the withdrawal either to purchase from Integrity an immediate
annuity benefit with life contingencies or an immediate annuity without life
contingencies that provides for level payments over five or more years, with a
restricted prepayment option. Similarly, no charge will be applied if the
Annuitant dies and the withdrawal is made by the Annuitant's beneficiary. See
"Death Benefits and Similar Benefit Distributions" in Part 5.
Unless specifically instructed otherwise, Integrity will make withdrawals
(including any applicable charges) from the Investment Options in the same ratio
the Annuitant's Account Value in each Investment Option bears to the Annuitant's
total Account Value. The minimum withdrawal permitted is $300.
58
<PAGE>
RETIREMENT DATE
For Contract issued prior to January 1, 1997, the Retirement Date will be the
date you specify, but no later than your 85th birthday or the 10th Contract
Anniversary, whichever is later.
CONTRACTS ISSUED TO OREGON RESIDENTS
If you are a resident of Oregon and your Contract was issued before 10/16/97
(Contract Form No. 11960CNQ-I-OR), additional contributions into Investment
Options are accepted, including the 10-Year GRO Account, and the prospectus
provisions relating to these items hereby apply.
59
<PAGE>
APPENDIX A
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
Contribution: $50,000.00
GRO Account duration: 7 Years
Guaranteed Interest Rate: 5% Annual Effective Rate
The following examples illustrate how the Market Value Adjustment and the
contingent withdrawal charge may affect the values of a contract upon a
withdrawal. The 5% assumed Guaranteed Interest Rate is the same rate used in the
Example under "Table of Annual Fees and Expenses" in this Prospectus. In these
examples, the withdrawal occurs three years after the initial contribution. The
Market Value Adjustment operates in a similar manner for transfers. No
contingent withdrawal charge applies to transfers.
The GRO Value for this $50,000 contribution is $70,355.02 at the expiration of
the GRO Account. After three years, the GRO Value is $57,881.25. It is also
assumed, for the purposes of these examples, that no prior partial withdrawals
or transfers have occurred.
The Market Value Adjustment will be based on the rate we are then crediting (at
the time of the withdrawal) on new contributions to GRO Accounts of the same
duration as the time remaining in your GRO Account, rounded to the next higher
number of complete months. If we do not declare a rate for the exact time
remaining, we will interpolate between the Guaranteed Interest Rates for GRO
Accounts of durations closest to (next higher and next lower) the remaining
period described above. Three years after the initial contribution, there would
have been four years remaining in your GRO Account. These examples also show the
withdrawal charge which would be calculated separately.
EXAMPLE OF A DOWNWARD MARKET VALUE ADJUSTMENT:
A downward Market Value Adjustment results from a full or partial withdrawal
that occurs when interest rates have increased. Assume interest rates have
increased three years after the initial contribution and we are then crediting
6.25% for a four-year GRO Account. Upon a full withdrawal, the Market Value
Adjustment, applying the above formula would be:
48/12 48/12
-0.0551589 = [(1 + .05) / (1 + .0625 + .0025) ] - 1
The Market Value Adjustment is a reduction of $3,192.67 from the GRO Value:
-$3,192.67 = -0.0551589 X $57,881.25
The Market Adjusted Value would be:
$54,688.58 = $57,881.25 - $3,192.67
A withdrawal charge of 5% would be assessed against the $50,000 original
contribution:
$2,500.00 = $50,000.00 X .05
Thus, the amount payable on a full withdrawal would be:
$52,188.58 = $57,881.25 - $3,192.67 - $2,500.00
60
<PAGE>
If instead of a full withdrawal, $20,000 was requested, we would first determine
the free withdrawal amount:
$5,788.13 = $57,881.25 X .10
Free Amount = $5,788.13
The non-free amount would be:
$14,211.87 = $20,000.00 - $5,788.13
The Market Value Adjustment, which is only applicable to the non-free amount,
would be
- $783.91 = -0.0551589 X $14,211.87
The withdrawal charge would be:
$789.25 = [($14,211.87+ $783.91)/(1 - .05)] - ($14,211.87+ 783.91)
Thus, the total amount needed to provide $20,000 after the Market Value
Adjustment and withdrawal charge would be:
$21,573.16 = $20,000.00 + $783.91 + $789.25
The ending Account Value would be:
$36,308.09 = $57,881.25 - $21,573.16
EXAMPLE OF AN UPWARD MARKET VALUE ADJUSTMENT:
An upward Market Value Adjustment results from a full or partial withdrawal that
occurs when interest rates have decreased. Assume interest rates have decreased
three years after the initial contribution and we are then crediting 4% for a
four-year GRO Account. Upon a full withdrawal, the Market Value Adjustment,
applying the formula set forth in the prospectus, would be:
48/12 48/12
.0290890 = [(1 + .05) / (1 + .04 + .0025) ] - 1
The Market Value Adjustment is an increase of $1,683.71 to the GRO Value:
$1,683.71 = .0290890 X $57,881.25
The Market Adjusted Value would be:
$59,564.96 = $57,881.25 + $1,683.71
A withdrawal charge of 5% would be assessed against the $50,000 original
contribution:
$2,500.00 = $50,000.00 X .05
Thus, the amount payable on a full withdrawal would be:
$57,064.96 = $57,881.25 + $1,683.71 - $2,500.00
61
<PAGE>
If instead of a full withdrawal, $20,000 was requested, the free withdrawal
amount and non-free amount would first be determined as above:
Free Amount = $ 5,788.13
Non-Free Amount = $14,211.87
The Market Value Adjustment would be:
$413.41 = .0290890 X $14,211.87
The withdrawal charge would be:
$726.23 = [($14,211.87 - $413.41)/(1 - .05)] - ($14,211.87 - $413.41)
Thus, the total amount needed to provide $20,000 after the Market Value
Adjustment and withdrawal charge would be:
$20,312.82 = $20,000.00 - $413.41 + $726.23
The ending Account Value would be:
$37,568.43 = $57,881.25 - $20,312.82
Actual Market Value Adjustments may have a greater or lesser impact than shown
in the examples, depending on the actual change in interest crediting rate and
the timing of the withdrawal or transfer in relation to the time remaining in
the GRO Account. Also, the Market Value Adjustment can never decrease the
Account Value below premium plus 3% interest, before any applicable charges.
Account values less than $50,000 will be subject to a $30 annual charge.
The above examples will be adjusted to comply with applicable state regulation
requirements for contracts issued in certain states.
62
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1998
FOR
PINNACLE (version III)
FLEXIBLE PREMIUM VARIABLE ANNUITY
ISSUED BY
INTEGRITY LIFE INSURANCE COMPANY
AND
FUNDED THROUGH ITS SEPARATE ACCOUNT II
AND SEPARATE ACCOUNT TEN
Table of Contents
Page
Part 1 - Integrity and Custodian . . . . . . . . . . . . . . . . . . . . . . 2
Part 2 - Distribution of the Contracts . . . . . . . . . . . . . . . . . . . 3
Part 3 - Investment Restrictions and Policies of the Select Ten Plus Divisions 3
Part 4 - Management of Separate Account Ten. . . . . . . . . . . . . . . . . 5
Part 5 - Portfolio Transactions and Brokerage. . . . . . . . . . . . . . . . 7
Part 6 - Performance Information . . . . . . . . . . . . . . . . . . . . . . 9
Part 7 - Determination of Accumulation Unit Values . . . . . . . . . . . . . 16
Part 8 - Determination of Annuity Unit Values. . . . . . . . . . . . . . . . 16
Part 9 - Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . 17
This Statement of Additional Information (SAI) is not a prospectus. It should
be read in conjunction with the prospectus for the contracts, dated May 1, 1998.
For definitions of special terms used in the SAI, please refer to the
prospectus.
A copy of the prospectus to which this SAI relates is available at no charge by
writing the Administrative Office at Integrity Life Insurance Company
("Integrity"), P.O. Box 740074, Louisville, Kentucky 40201-0074, or by calling
1-800-325-8583.
1
<PAGE>
Part 1 - INTEGRITY AND CUSTODIAN
Integrity is an Ohio stock life insurance company that sells life insurance and
annuities. Its principal executive offices are located at 515 West Market
Street, Louisville, Kentucky, 40202. Integrity, the depositor of Separate
Account II and Separate Account Ten, is a wholly owned subsidiary of Integrity
Holdings, Inc., a Delaware corporation which is a holding company engaged in no
active business. Integrity owns 100% of the stock of National Integrity Life
Insurance Company, a New York stock life insurance corporation. All outstanding
shares of Integrity Holdings, Inc. are owned by ARM Financial Group, Inc. (ARM),
a Delaware corporation which is a financial services company focusing on the
long-term savings and retirement marketplace by providing retail and
institutional products and services throughout the United States. ARM owns 100%
of the stock of (i) ARM Securities Corporation (ARM SECURITIES), a Minnesota
corporation, registered with the SEC as a broker-dealer and a member of the
National Association of Securities Dealers, Inc., (ii) Integrity Capital
Advisors, Inc., a New York corporation registered with the SEC as an investment
adviser, (iii) SBM Certificate Company, a Minnesota corporation registered with
the SEC as an issuer of face-amount certificates, and (iv) ARM Transfer Agency,
Inc., a Delaware corporation registered with the SEC as a transfer and dividend
disbursing agency.
In June 1997, ARM completed an initial public offering (the "Offering") of 9.2
million shares of Class A common stock, par value of $.01 per share (the "New
Class A Common Stock"), of which 5.75 million shares were sold by ARM and 3.45
million shares were sold by the Morgan Stanley Stockholders (as defined below).
Concurrent with the closing of the Offering, ARM amended and restated its
Certificate of Incorporation to effectuate a recapitalization such that (i) the
common equity of ARM consists of New Class A Common Stock and Class B
Non-Voting Common Stock, par value of $.01 per share (the "New Class B Common
Stock" and, together with the New Class A Common Stock, the "New Common Stock"),
(ii) authorized shares of the New Class A Common Stock and New Class B Common
Stock were increased to 150 million shares and 50 million shares, respectively,
(iii) each outstanding share of common stock of ARM was converted into one
share of New Class A Common Stock, (iv) certain shares of the New Class A Common
Stock owned by private equity funds sponsored by Morgan Stanley, Dean Witter,
Discover & Co. (the successor to Morgan Stanley Group Inc. in its merger with
Dean Witter, Discover & Co.) (the "Morgan Stanley Stockholders") were converted
into New Class B Common Stock such that, after giving effect to such conversion,
but not giving effect to the Offering, the Morgan Stanley Stockholders owned, in
the aggregate, 49% of the outstanding New Class A Common Stock, and (v) each
share of New Common Stock was split into 706 shares of New Common Stock.
Holders of New Class B Common Stock have no right to vote on matters submitted
to a vote of stockholders, except in certain circumstances. Shares of the New
Class B Common Stock have no preemptive or other subscription rights and are
convertible into an equal number of shares of New Class A Common Stock (1) at
the option of the holder thereof to the extent that, following such conversion,
the Morgan Stanley Stockholders will not, in the aggregate, own more than 49% of
the outstanding shares of New Class A Common Stock, and (2) automatically upon
the transfer of such shares by any Morgan Stanley Stockholder to a person that
is not a Morgan Stanley Stockholder or an affiliate of a Morgan Stanley
Stockholder. The Morgan Stanley Stockholders owned approximately 91% of the
outstanding shares of ARM's common stock prior to the Offering and approximately
53% following the Offering.
No person has the direct or indirect power to control Morgan Stanley, Dean
Witter, Discover & Co., except insofar as he or she may have such power by
virtue of his or her capacity as a director or executive officer thereof.
Morgan Stanley, Dean Witter, Discover & Co., is publicly held; no individual
beneficially owns more than 5% of the common shares; however, approximately 13%
of such shares are subject to a stockholders' agreement or voting agreement
among certain current and former principals and employees of Morgan Stanley,
Dean Witter, Discover & Co., and its predecessor.
On April 22, 1998, ARM filed a registration statement with the SEC for a
secondary offering of 10 million shares of its Class A Common Stock (the
"Secondary Offering"). The Morgan Stanley Stockholders propose to sell all 10
million shares and, if the underwriters' over-allotment is exercised, up to an
additional 1.5 million shares. The Secondary Offering is expected to be made in
May 1998 through a syndicate of underwriters led by Morgan Stanley & Co.
Incorporated.
Beginning in 1994, ARM provided substantially all of the services required to be
performed on behalf of Separate Account II. Total fees paid to ARM by Integrity
for management services in 1996 and 1997, including services applicable to
Separate Account II, were $13,823,048 and $19,307,552, respectively.
2
<PAGE>
Integrity is the custodian for the shares of Portfolios owned by Separate
Account II. Investors Fiduciary Trust Company is the custodian for the shares
of stocks owned by Separate Account Ten. The shares are held in book-entry
form. Reports and marketing materials, from time to time, may include
information concerning the rating of Integrity, as determined by A.M. Best
Company, Moody's Investors Service, Inc., Standard & Poor's Corporation, Duff &
Phelps Corporation, or other recognized rating services. Integrity is currently
rated "A" (Excellent) by A.M. Best Company, and has received claims paying
ability ratings of "A" (Good) from Standard & Poor's Corporation, "Baa1" from
Moody's Investors Service, Inc., and "A+" (High) from Duff and Phelps Credit
Rating Company. However, Integrity does not guarantee the investment
performance of the portfolios, and these ratings do not reflect protection
against investment risk.
Under prior management, Integrity was subject to a consent order in the State of
Florida under which it was precluded from writing new business in Florida from
May, 1992 to November, 1994. The consent order was entered into on May 6, 1992
as a result of noncompliance with certain investment restrictions under Florida
law. Due to the substantial asset restructuring and capital infusions involved
with Integrity's acquisition by ARM in November, 1993, Integrity came to be
fully in compliance with the investment limitations of the State of Florida and
a request for full relief from the consent order was granted by the Florida
Department of Insurance on November 4, 1994.
On April 1, 1996, Integrity purchased for its own account approximately 478,900
shares of the J.P. Morgan Bond Option, at net asset value, for an aggregate
purchase price of $5.1 million, for the purpose of "seeding" the Option.
Integrity intends to redeem its shares on a dollar-for-dollar basis to the
extent, and at the same time as, the Options have sales in respect to
policyholders. As of December 31, 1997, the shares of the Option purchased by
Integrity constituted approximately 24.5% of the outstanding shares of the
Option. Integrity has indicated it will vote its shares in the same proportion
as other shareholders of the Option.
On October 1, 1997, Integrity purchased for its own account approximately
1,000,000 shares of the BT Equity 500 Option, at net asset value, for an
aggregate purchase price of $10 million, for the purpose of "seeding" the
Option. Integrity intends to redeem its shares on a dollar-for-dollar basis to
the extent the Options have sales in respect to policyholders. As of December
31, 1997, the shares of the Option purchased by Integrity constituted
approximately 74.1% of the outstanding shares of the Option. Integrity has
indicated it will vote its shares in the same proportion as other shareholders
of the Option.
Part 2 - DISTRIBUTION OF THE CONTRACTS
ARM Securities, a wholly owned subsidiary of ARM, is the principal underwriter
of the contracts. ARM Securities is registered with the SEC as a broker-dealer
and is a member in good standing of the National Association of Securities
Dealers, Inc. ARM Securities' address is 515 West Market Street, Louisville,
Kentucky 40202. The contracts are offered through ARM Securities on a
continuous basis.
We generally pay a maximum distribution allowance of 7.5% of initial
contributions, plus .50% trail commission paid on Account Value after the eighth
Contract Year. The amount of distribution allowances paid was $1,570,251,
$617,264, $937,352, and $6,200,036 and for the years ended December 31, 1997,
1996, 1995, and 1994, respectively. No distribution allowances were retained by
ARM Securities during these years. Integrity may from time to time pay or allow
additional promotional incentives, in the form of cash or other compensation, to
broker-dealers that sell contracts. In some instances, such other incentives may
be offered only to certain broker-dealers that sell or are expected to sell
during specified time periods certain minimum amounts of the contracts.
Part 3 - INVESTMENT RESTRICTIONS AND POLICIES OF THE SELECT TEN PLUS DIVISIONS
INVESTMENT RESTRICTIONS
The investment objective of each Division is to seek total return. The
Divisions' investment strategy, objective and policies are described in Part II
of the prospectus under the captions "Investment Strategy" and "Investment
Objective and Policies." The following are the Divisions' fundamental
investment limitations which cannot be changed without shareholder approval.
3
<PAGE>
Each Division :
1. May not borrow money, except that each Division may borrow up to 5% of its
total assets (not including the amount borrowed) from a bank for temporary or
emergency purposes (but not for leverage or the purchase of investments).
2. May not issue senior securities, except as permitted under the 1940 Act.
May not act as an underwriter of another issuer's securities, except to the
extent that the Divisions may be deemed to be an underwriter within the meaning
of the Securities Act of 1933 in connection with the purchase and sale of
portfolio securities.
3. May not purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments.
4. May not make loans if, as a result, more than 33 1/3% of that Division's
total assets would be lent to other persons, except through (i) purchases of
debt securities or other debt instruments, or (ii) engaging in repurchase
agreements.
5. May not purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not prohibit the
Divisions from purchasing or selling securities or other instruments backed by
real estate or of issuers engaged in real estate activities).
The following are the Divisions' non-fundamental operating policies which may be
changed by the Board of Managers of the Divisions without shareholder approval.
Each Division may not:
1. Sell securities short, unless the Division owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short, or unless
it covers such short sale as required by the current rules and positions of the
SEC or its staff.
2. Purchase securities on margin, except that each Division may obtain such
short-term credits as are necessary for the clearance of transactions.
3. Invest in illiquid securities if, as a result of such investment, more than
15% of its net assets would be invested in illiquid securities, or such other
amounts as may be permitted under the 1940 Act.
4. Purchase securities of other investment companies except in compliance with
the 1940 Act and applicable state law.
5. Make any loans other than loans of portfolio securities, except through (i)
purchases of debt securities or other debt instruments, or (ii) engaging in
repurchase agreements.
Except for the fundamental investment limitations listed above and the
Divisions' investment objective, the other investment policies described in the
prospectus and this SAI are not fundamental and may be changed with the approval
of the Divisions' Board of Managers. Unless noted otherwise, if a percentage
restriction is adhered to at the time of investment, a later increase or
decrease in percentage resulting from a change in the Divisions' assets (i.e.,
due to cash inflows or redemptions) or in market value of the investment or the
Divisions' assets will not constitute a violation of that restriction.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Divisions'
investment strategy, objective, policies and techniques that are described in
Part II of the prospectus under the captions "Investment Strategy," "Investment
Objective and Policies" and "Risk Factors."
4
<PAGE>
LENDING OF PORTFOLIO SECURITIES. Each Division is authorized to lend up to 33
1/3% of the total value of its portfolio securities to broker-dealers or
institutional investors that the investment adviser and sub-adviser deem
qualified, but only when the borrower maintains with the Divisions' custodian
bank collateral either in cash or money market instruments in an amount at least
equal to the market value of the securities loaned, plus accrued interest and
dividends, determined on a daily basis and adjusted accordingly. Although each
Division is authorized to lend, the Divisions do not presently intend to engage
in lending. In determining whether to lend securities to a particular
broker-dealer or institutional investor, the investment adviser and sub-adviser
will consider, and during the period of the loan will monitor, all relevant
facts and circumstances, including the creditworthiness of the borrower. The
Divisions will retain authority to terminate any loans at any time. The
Divisions may pay reasonable administrative and custodial fees in connection
with a loan and may pay a negotiated portion of the interest earned on the cash
or money market instruments held as collateral to the borrower or placing
broker. The Divisions will receive reasonable interest on the loan or a flat
fee from the borrower and amounts equivalent to any dividends, interest or other
distributions on the securities loaned. The Divisions will retain record
ownership of loaned securities to exercise beneficial rights, such as voting and
subscription rights and rights to dividends, interest or other distributions,
when retaining such rights is considered to be in the Divisions' interest.
REPURCHASE AGREEMENTS. The Divisions may enter into repurchase agreements with
certain banks or non-bank dealers. In a repurchase agreement, a Division buys a
security at one price, and at the time of sale, the seller agrees to repurchase
the obligation at a mutually agreed upon time and price (usually within seven
days). The repurchase agreement, thereby, determines the yield during the
purchaser's holding period, while the seller's obligation to repurchase is
secured by the value of the underlying security. The investment adviser and
sub-adviser will monitor, on an ongoing basis, the value of the underlying
securities to ensure that the value always equals or exceeds the repurchase
price plus accrued interest. Repurchase agreements could involve certain risks
in the event of a default or insolvency of the other party to the agreement,
including possible delays or restrictions upon the Divisions' ability to dispose
of the underlying securities. Although no definitive creditworthiness criteria
are used, the investment adviser reviews the creditworthiness of the banks and
non-bank dealers with which any Division enters into repurchase agreements to
evaluate those risks. The Divisions may, under certain circumstances, deem
repurchase agreements collateralized by U.S. government securities to be
investments in U.S. government securities.
Part 4 - MANAGEMENT OF SEPARATE ACCOUNT TEN
BOARD OF MANAGERS OF SEPARATE ACCOUNT TEN
The business and affairs of Separate Account Ten are managed under the direction
of a Board of Managers, currently consisting of five (5) members (MANAGERS),
according to a set of rules adopted by the Board of Managers called "Rules and
Regulations of Separate Account Ten." The Board of Managers has responsibility
for the investment management related operations of Separate Account Ten and
matters arising under the 1940 Act. The Board of Managers does not have
responsibility for the payment of obligations under the contracts and
administration of the contracts. These matters are Integrity's responsibility.
The day-to-day operations of Separate Account Ten are the responsibility of its
officers. The names, addresses, and ages of the Managers and the officers of
Separate Account Ten, together with information as to their principal business
occupations during the past five years, are set forth below.
Name, Age and Address Other Business Activities in Past 5 Years
--------------------- -----------------------------------------
John R. Lindholm (49)* Director of ARM since April 1998; President-Retail
515 West Market Street B u s iness Division of ARM since January 1997;
Louisville, KY 40202 President of Integrity since November 1993; President
of National Integrity since September 1997; he had
b e en Executive Vice President- Chief Marketing
Officer of ARM Financial Group, Inc., since July
1993; Chief Marketing Officer of Analytical Risk
Management, L.P., since March 1992; Chief Marketing
Officer and a Managing Director of the ICH Capital
M a n agement Group, ICH Corporation, Louisville,
Kentucky, June 1990 to February 1992; prior thereto,
Chief Marketing Officer and Managing Director of
C a p ital Holding Corporation's Accumulation and
Investment Group. Director of the mutual funds in
the State Bond Group of mutual funds, June 1995 to
December 1996.
5
<PAGE>
Name, Age and Address Other Business Activities in Past 5 Years
--------------------- -----------------------------------------
John Katz (59) Investment banker, since January 1991; Chairman and
10 Hemlock Road Chief Executive Officer, Sam's Restaurant Group, Inc.
Hartsdale, NY 10530 (a restaurant holding company), June 1991 to August
1992; Executive Vice President, Equitable Investment
Corporation (an indirect wholly owned subsidiary of
The Equitable Life Assurance Society of the United
States, through which it owned and managed its
investment operations), January 1989 to January 1991;
and Senior Vice President, Equitable Investment
Corporation, December 1985 to January 1989. Director
of the mutual funds in the State Bond Group of mutual
funds, June 1995 to December 1996.
Theodore S. Rosky (60) Retired, since April 1992; Executive Vice President,
2304 Speed Avenue Capital Holding Corporation, December 1991 to April
Louisville, KY 40205 1992; prior thereto, Executive Vice President and
Chief Financial Officer, Capital Holding Corporation.
Director of the mutual funds in the State Bond Group
of mutual funds, June 1995 to December 1996.
William B. Faulkner President, William Faulkner and Associates, business
(70) and institutional adviser, since 1986; Consultant to
240 East Plato Blvd. A m erican Hoist & Derrick Company, construction
St. Paul, Minnesota equipment manufacturer, 1986 to 1989; prior thereto,
55107 Vice President and Assistant to the President,
American Hoist & Derrick Company. Director of the
mutual funds in the State Bond Group of mutual funds,
June 1984 to December 1996.
Chris LaVictoire Mahai Senior Vice President, Markets and Products Unit,
(42) Star Tribune/Cowles Media Company, since August 1995;
425 Portland Avenue Vice President, Marketing Director, Star Tribune,
Minneapolis, MN 55488 s i nce September 1992; self-employed consultant,
marketing services, 1990 to 1992; prior thereto,
Senior Vice President of Corporate Relations and
marketing, First Bank System, Inc. Director of the
funds in the State Bond Group of mutual funds,
January 1992 to December 1996.
* Mr. Lindholm is an INTERESTED PERSON, as defined in the 1940 Act, by virtue
of his position with ARM Financial Group, Inc.
THE INVESTMENT ADVISER
Integrity Capital Advisors serves as the investment adviser to Separate Account
Ten pursuant to an investment advisory agreement. Integrity Capital Advisors is
a wholly owned subsidiary of ARM and is registered as an investment adviser
under the Investment Advisers Act of 1940. Its offices are located at 515 West
Market Street, Louisville, Kentucky 40202.
Subject to the direction of the Board of Managers, Integrity Capital Advisors
is responsible for providing all supervisory and management services
reasonably necessary for the operation of Separate Account Ten other than
those investment advisory services performed by the sub-adviser. These
services include, but are not limited to, (i) coordinating all matters
relating to the functions of the sub-adviser, custodian, accountants,
attorneys, and other parties performing services or operational functions for
Separate Account Ten, (ii) providing Separate Account Ten, at Integrity
Capital Advisor's expense, with the services of a sufficient number of
persons competent to perform such administrative and clerical functions as
are necessary to provide effective supervision and administration of Separate
Account Ten, (iii) making its officers and employees available to the Board
of Managers and officers of Separate Account Ten for consultation and
discussions regarding the supervision and administration of Separate Account
Ten, (iv) maintaining or supervising the maintenance by the sub-adviser or
third parties approved by Separate Account Ten of such books and records as
may be required by applicable federal or state law, (v) preparing or
supervising the preparation by third parties approved by Separate Account Ten
of all federal, state and local tax returns and reports of Separate Account
Ten required by applicable law, (vi) preparing, filing and arranging for the
distribution of proxy materials and periodic reports to Owners as required by
applicable law, (vii) preparing and arranging for the filing of such
registration statements and other documents with the SEC and other federal
and state regulatory authorities as may be required by
6
<PAGE>
applicable law, (viii) taking such other action with respect to Separate
Account Ten as may be required by applicable law, including without
limitation, the rules and regulations of the SEC and other regulatory
agencies, and (ix) providing Separate Account Ten, at Integrity Capital
Advisor's expense, with adequate personnel, office space, communications
facilities, and other facilities necessary for its operations as contemplated
in the investment advisory agreement. Other responsibilities of Integrity
Capital Advisors are described in the prospectus.
Integrity Capital Advisors is authorized to exercise full investment discretion
and make all determinations with respect to the investment of the Division's
assets and the purchase and sale of securities for the Divisions in the event
that at any time a sub-adviser is not engaged to manage the assets of the
Divisions. In such event, Integrity Capital Advisors will be entitled to, in
addition to its usual compensation for services as investment adviser, a fee
that would otherwise be paid to the sub-adviser. The Divisions pay Integrity
Capital Advisors a monthly fee based on an annual rate of .50% of the Division's
average daily net assets. Integrity Capital Advisors will pay a portion of
those fees to National Asset Management Corporation (NATIONAL ASSET) for its
services under the sub-advisory agreement at an annual rate of .10% of the
Division's average daily net assets up to $100 million and .05% of the
Division's average daily net assets in excess of $100 million. Integrity
Capital Advisers has guaranteed a minimum sub-advisory fee of $25,000 to
National Asset during the Divisions' first year of operations.
Integrity Capital Advisors has agreed to reimburse the Divisions for operating
expenses (excluding management fees) above an annual rate of .35% of average net
assets for the Divisions. Integrity Capital Advisors has reserved the right to
withdraw or modify its policy of expense reimbursement for the Portfolios, but
has no current intention to do so during 1998.
THE SUB-ADVISER
National Asset serves as the sub-adviser to the Divisions and in that capacity
provides investment advisory services for the Divisions including security
selection. Subject to the supervision of the Board of Managers and Integrity
Capital Advisors, National Asset will provide a continuous investment program
for the Divisions and will determine the composition of its assets, including
determinations with respect to the purchase, retention and sale of securities,
cash and other investments contained in the Division's portfolio. National
Asset will also provide investment research and conduct a continuous program of
evaluation, investment, sales and reinvestment of the Division's assets.
National Asset will receive a monthly fee for its services based on an annual
rate of .10% of the Division's average daily net assets up to $100 million and
.05% of the Division's average daily net assets in excess of $100 million.
Integrity Capital Advisers has guaranteed a minimum sub-advisory fee of $25,000
to National Asset during the Divisions' first year of operations.
PART 5 - PORTFOLIO TRANSACTIONS AND BROKERAGE
Investment decisions for the Divisions are made by National Asset, subject to
the supervision of the Board of Managers of Separate Account Ten and Integrity
Capital Advisors. National Asset has investment advisory clients other than the
Divisions. A particular security may be bought or sold by National Asset for
certain clients even though it could have been bought or sold for other clients
at the same time. In the event that two or more clients simultaneously purchase
or sell the same security, each day's transactions in such security are, insofar
as possible, allocated between such clients in a manner deemed fair and
reasonable by National Asset. Although there is no specified formula for
allocating such transactions, the various allocation methods used by National
Asset, and the results of such allocations, are subject to the periodic review
by Integrity Capital Advisors and the Board of Managers of Separate Account Ten.
National Asset places all orders for the purchase and sale of securities,
options, and futures contracts for the Divisions through a substantial number of
brokers and dealers. In executing transactions, National Asset will attempt to
obtain the best execution for the Divisions taking into account such factors as
price (including the applicable brokerage commission or dollar spread), size of
order, the nature of the market for the security, the timing of the transaction,
the reputation, experience and financial stability of the broker-dealer
involved, the quality of the service, the difficulty of execution and
operational facilities of the firms involved, and the firm's risk in positioning
a block of securities. In transactions on stock exchanges in the United States,
payments of brokerage commissions are negotiated. In effecting purchases and
sales of securities in transactions on U.S. stock exchanges for the Divisions,
National Asset may pay higher commission rates than the lowest available when
National Asset believes it is reasonable to do so in light of the value of the
brokerage and research services provided by the broker effecting the
transaction, as described below. In the case of securities traded on some
foreign stock exchanges, brokerage commissions may be fixed and National Asset
7
<PAGE>
may be unable to negotiate commission rates for these transactions. In the case
of securities traded on the over-the-counter markets, there is generally no
stated commission, but the price includes an undisclosed commission or markup.
It has for many years been a common practice in the investment advisory business
for advisers of investment companies and other institutional investors to
receive research services from broker-dealers which execute portfolio
transactions for the clients of such advisers. Consistent with this practice,
National Asset may receive research services for the Divisions from many
broker-dealers with which National Asset places the Division's portfolio
transactions. These services, which in some cases may also be purchased for
cash, include such matters as general economic and security market reviews,
industry and company reviews, evaluations of securities and recommendations as
to the purchase and sale of securities. Some of these services may be of value
to National Asset and its affiliates in advising its various clients (including
the Divisions), although not all of these services are necessarily useful and of
value in managing the Divisions. The sub-advisory fee paid by Integrity Capital
Advisors to National Asset is not reduced because National Asset and its
affiliates receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, National
Asset may cause the Divisions to pay a broker-dealer a disclosed commission for
effecting a securities transaction for the Divisions in excess of the commission
which another broker-dealer would have charged for effecting that transaction in
recognition of the value of the "brokerage and research services" provided by
the broker-dealer. Brokerage and research services include (i) furnishing
advice as to the value of securities, the advisability of investing in
purchasing or selling securities, and the availability of securities or
purchasers or sellers of securities, (ii) furnishing analyses and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts, and (iii) effecting
securities transactions and performing functions incidental thereto (e.g.,
clearance, settlement, and custody).
National Asset may place orders for the purchase and sale of exchange-listed
portfolio securities with a broker-dealer that is an affiliate of National Asset
where, in the judgment of National Asset, such firm will be able to obtain a
price and execution at least as favorable as other qualified brokers. Pursuant
to rules of the SEC, a broker-dealer that is an affiliate of the investment
adviser or sub-adviser, or, if it is also a broker-dealer, the sub-adviser, may
receive and retain compensation for effecting portfolio transactions for an
account on a national securities exchange of which the broker-dealer is a member
if the transaction is "executed" on the floor of the exchange by another broker
that is not an "associated person" of the affiliated broker-dealer or
sub-adviser, and if there is in effect a written contract between the
sub-adviser and the account expressly permitting the affiliated broker-dealer or
sub-adviser to receive and retain such compensation. The sub-advisory agreement
provides that National Asset may retain compensation on transactions effected
for the Divisions in accordance with the terms of these rules.
SEC rules further require that commissions paid to such an affiliated
broker-dealer or sub-adviser by the account on exchange transactions not exceed
"usual and customary brokerage commission." The rules define "usual and
customary" commissions to include amounts which are "reasonable and fair
compared to the commission, fee or other remuneration received or to be received
by other brokers in connection with comparable transactions involving similar
securities being purchased or sold on a securities exchange during a comparable
period of time." The Board of Managers has adopted procedures for evaluating
the reasonableness of commissions paid to broker-dealers that are affiliated
with National Asset and will review these procedures periodically.
PART 6 - PERFORMANCE INFORMATION
Each Variable Account Option may from time to time include the Average Annual
Total Return, the Cumulative Total Return, and Yield of its units in
advertisements or in other information furnished to shareholders. The Janus
Aspen Money Market Option may also from time to time include the Yield and
Effective Yield of its units in information furnished to shareholders.
Performance information is computed separately for each Option in accordance
with the formulas described below. At any time in the future, total return and
yields may be higher or lower than in the past and there can be no assurance
that any historical results will continue.
TOTAL RETURNS
Total returns reflect all aspects of an Option's return, including the automatic
reinvestment by the Option of all distributions and the deduction of all
applicable charges to the Option on an annual basis, including mortality risk
and expense charges, the annual administrative charge and other charges against
contract values. Quotations also will
8
<PAGE>
assume a termination (surrender) at the end of the particular period and reflect
the deductions of the contingent withdrawal charge, if applicable. Total returns
may be shown simultaneously that do not take into account deduction of the
contingent withdrawal charge, and/or the annual administrative charge.
Nonstandardized "total return" will be calculated in a similar manner and for
the same time periods as the average annual total return and for three years
except total return will assume an initial investment of $60,000 and will not
reflect the deduction of any applicable contingent withdrawal charge, which, if
reflected, would decrease the level of performance shown. The contingent
withdrawal charge is not reflected because the contracts are designed for long
term investment. An assumed initial investment of $60,000 will be used because
that figure more closely approximates the size of a typical contract than does
the $1,000 figure used in calculating the standardized average annual total
return quotations. The amount of the hypothetical initial investment assumed
affects performance because the annual administrative charge is a fixed per
contract charge. For purposes of determining these investment results, the
actual investment performance of each fund is reflected as of the date each fund
commenced operations, although the Contracts were not available at that time.
AVERAGE ANNUAL TOTAL RETURNS are calculated by determining the growth or decline
in the value of a hypothetical historical investment in the Option over certain
periods, including 1, 5, and 10 years (up to the life of the Option), and then
calculating the annually compounded percentage rate that would have produced the
same result if the rate of growth or decline in value had been constant over the
period. Investors should realize that the Option's performance is not constant
over time, but changes from year to year, and that the average annual returns
represent the averages of historical figures as opposed to the actual historical
performance of an Option during any portion of the period illustrated. Average
annual returns are calculated pursuant to the following formula: P(1+T)n = ERV,
where P is a hypothetical initial payment of $1,000, T is the average annual
total return, n is the number of years, and ERV is the withdrawal value at the
end of the period.
CUMULATIVE TOTAL RETURNS ARE UNAVERAGED and reflect the simple percentage change
in the value of a hypothetical investment in the Option over a stated period of
time. In addition to the period since inception, cumulative total returns may be
calculated on a year-to-date basis at the end of each calendar month in the
current calendar year. The last day of the period for year-to-date returns is
the last day of the most recent calendar month at the time of publication.
YIELDS
Some Options may advertise yields. Yields quoted in advertising reflect the
change in value of a hypothetical investment in the Option over a stated period
of time, not taking into account capital gains or losses or the imposition of
any contingent withdrawal charge. Yields are annualized and stated as a
percentage.
CURRENT YIELD AND EFFECTIVE YIELD are calculated for the Janus Money Market
Option. Current Yield is based on the change in the value of a hypothetical
investment (exclusive of capital changes) over a particular 7-day period, less a
hypothetical charge reflecting deductions from contract values during the period
(the BASE PERIOD), and stated as a percentage of the investment at the start of
the base period (the BASE PERIOD return). The base period return is then
annualized by multiplying by 365/7, with the resulting yield figure carried to
at least the nearest hundredth of one percent. Effective yield assumes that all
dividends received during an annual period have been reinvested. This
compounding effect causes effective yield to be higher than current yield.
Calculation of effective yield begins with the same base period return used in
the calculation of current yield, which is then annualized to reflect weekly
compounding pursuant to the following formula:
365/7
Effective Yield = {(Base Period Return) + 1) } - 1
9
<PAGE>
<TABLE>
<CAPTION>
SEC STANDARDIZED ALL FIGURES ARE UNAUDITED
AVERAGE ANNUAL RETURN (1)
---------------------------------------------------------------
FOR THE PERIOD ENDING: 12/31/97 ACCOUNT
VARIABLE OPTIONS INCEPTION LIFE OF
DATE (2) 1 YEAR 5 YEAR 10 YEAR ACCOUNT
<S> <C> <C> <C> <C> <C>
BT Insurance Funds Trust - EAFE Equity Index 10/22/97 n/a n/a n/a x.xx%
BT Insurance Funds Trust - Equity 500 Index 10/1/97 n/a n/a n/a x.xx
BT Insurance Funds Trust - Small Cap Index 10/7/97 n/a n/a n/a x.xx
Fidelity's VIP Equity-Income 10/2/97 n/a n/a n/a x.xx
Fidelity's VIP II Contrafund 10/2/97 n/a n/a n/a x.xx
Fidelity's VIP III Growth & Income 10/2/97 n/a n/a n/a x.xx
Fidelity's VIP III Growth Opportunities 10/2/97 n/a n/a n/a x.xx
Harris Bretall Sullivan & Smith Equity Growth 12/7/92 25.92 14.47 n/a 14.03
Janus Aspen Series Balanced 10/9/97 n/a n/a n/a x.xx
Janus Aspen Series Capital Appreciation 10/10/97 n/a n/a n/a x.xx
Janus Aspen Series Worldwide Growth 10/2/97 n/a n/a n/a x.xx
JP Morgan Bond 10/2/97 n/a n/a n/a x.xx
JP Morgan International Opportunities 10/2/97 n/a n/a n/a x.xx
Morgan Stanley Asian Equity 10/22/97 n/a n/a n/a x.xx
Morgan Stanley Emerging Markets Debt 10/3/97 n/a n/a n/a x.xx
Morgan Stanley High Yield 10/16/97 n/a n/a n/a x.xx
Morgan Stanley U.S. Real Estate 10/16/97 n/a n/a n/a x.xx
Scudder Kemper Value 12/21/92 21.71 18.44 n/a 18.20
Zweig Asset Allocation 12/14/92 13.30 12.88 n/a 12.38
Zweig Equity (Small Cap) 1/4/93 16.42 n/a n/a 12.19
Select Ten Plus n/a n/a n/a n/a n/a
</TABLE>
(1) Standard average annual return reflects past fund performance based on a
$1,000 hypothetical investment over the period indicted. The performance
figures reflect the deduction of mortality and expense and administrative
charges totaling 1.35%. They also reflect any withdrawal charges that
would apply if any owner terminated the policy at the end of the period,
but exclude deductions for applicable premium tax charges. Surrender
charges are 8% in year one, declining 1% annually in years one through
seven, 0% thereafter.
(2) Inception date of the variable account option represents first trade
date. Returns for accounts in operation for less than one year are not
annualized.
(3) Non-standard returns reflect all historical investment results, less
mortality and expense and administrative charges totaling 1.35%. The
calculation assumes the policy is still in force and therefore does not
take withdrawal charges into consideration.
(4) Italicized returns are calculated from the inception date through
year-end.
(5) Represents the inception date of the underlying funds. Performance data
for periods prior to the actual inception of the variable account options
is hypothetical and based on the performance of the underlying funds.
This performance data has been adjusted to include all insurance company
contract charges and management fees of the underlying funds.
10
<PAGE>
<TABLE>
<CAPTION>
FOR THE PERIOD ENDING: 12/31/97 PLEASE SEE PRIOR PAGE FOR FOOTNOTES 3, 4, AND 5
RETURNS WITHOUT SURRENDER CHARGES (3)
CUMMULATIVE TOTAL RETURN AVERAGE ANNUAL RETURN
------------------------ ---------------------
FUND LIFE OF
INCEPTION
VARIABLE OPTIONS DATE (5) 3 YEAR 5 YEAR 10 YEAR FUND 1 YEAR 3 YEAR
<S> <C> <C> <C> <C> <C> <C> <C>
BT Insurance Funds Trust - EAFE Equity Index 6/21/96 n/a n/a n/a 1.35% 0.40% n/a
BT Insurance Funds Trust - Equity 500 Index 12/31/92 101.61 104.29 n/a 104.29 26.76 26.33
BT Insurance Funds Trust - Small Cap Index 8/13/96 n/a n/a n/a 37.32 23.98 n/a
Fidelity's VIP Equity-Income 10/9/86 90.98 134.04 309.79 299.24 26.38 24.07
Fidelity's VIP II Contrafund 1/3/95 n/a n/a n/a 101.88 22.47 n/a
Fidelity's VIP III Growth & Income 12/31/96 n/a n/a n/a 28.34 28.34 n/a
Fidelity's VIP III Growth Opportunities 1/3/95 n/a n/a n/a 95.57 28.20 n/a
Harris Bretall Sullivan & Smith Equity Growth 12/7/92 94.14 96.52 n/a 97.41 32.92 24.75
Janus Aspen Series Balanced 9/13/93 69.95 n/a n/a 80.52 20.45 19.34
Janus Aspen Series Capital Appreciation 5/1/97 n/a n/a n/a 25.46 n/a n/a
Janus Aspen Series Worldwide Growth 9/13/93 92.74 n/a n/a 129.01 20.51 24.45
JP Morgan Bond 1/3/95 n/a n/a n/a 22.49 7.47 n/a
JP Morgan International Opportunities 1/3/95 n/a n/a n/a 24.41 4.01 n/a
Morgan Stanley Asian Equity 12/31/91 -39.30 1.86 n/a 26.80 -43.37 -15.33
Morgan Stanley Emerging Markets Debt 2/1/94 116.32 n/a n/a 64.68 15.74 29.33
Morgan Stanley High Yield 8/31/92 52.60 70.14 n/a 70.91 11.24 15.13
Morgan Stanley U.S. Real Estate 1/31/95 n/a n/a n/a 102.09 22.89 n/a
Scudder Kemper Value 12/21/92 126.99 133.10 n/a 134.73 28.71 31.42
Zweig Asset Allocation 12/14/92 63.24 83.27 n/a 83.24 20.30 17.75
Zweig Equity (Small Cap) 1/4/93 72.44 n/a n/a 81.52 23.42 19.92
Select Ten Plus n/a n/a n/a n/a n/a n/a
ALL FIGURES ARE UNAUDITED.
CALENDAR YEAR RETURN(4)
-----------------------
LIFE OF
VARIABLE OPTIONS 5 YEAR 10 YEAR FUND 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BT Insurance Funds Trust - EAFE Equity Index n/a n/a 0.88% n/a n/a n/a 0.94% 0.40%
BT Insurance Funds Trust - Equity 500 Index 15.36 n/a 15.36 4.55 -3.08 32.15 20.35 26.76
BT Insurance Funds Trust - Small Cap Index n/a n/a 25.78 n/a n/a n/a 10.76 23.98
Fidelity's VIP Equity-Income 18.54 15.15 13.12 16.70 5.01 34.05 12.73 26.38
Fidelity's VIP II Contrafund n/a n/a 26.46 n/a n/a 37.86 19.57 22.47
Fidelity's VIP III Growth & Income n/a n/a 28.36 n/a n/a n/a n/a 28.34
Fidelity's VIP III Growth Opportunities n/a n/a 25.12 n/a n/a 30.76 16.67 28.20
Harris Bretall Sullivan & Smith Equity Growth 14.47 n/a 14.37 -1.38 2.64 29.93 12.42 32.92
Janus Aspen Series Balanced n/a n/a 14.73 6.77 -.51 23.11 14.60 20.45
Janus Aspen Series Capital Appreciation n/a n/a 40.43 n/a n/a n/a n/a 25.46
Janus Aspen Series Worldwide Growth n/a n/a 21.26 18.62 .17 25.66 27.28 20.51
JP Morgan Bond n/a n/a 7.01 n/a n/a 13.36 .54 7.47
JP Morgan International Opportunities n/a n/a 7.57 n/a n/a 7.16 11.62 4.01
Morgan Stanley Asian Equity .37 n/a 4.04 102.53 -17.14 5.21 1.88 -43.37
Morgan Stanley Emerging Markets Debt n/a n/a 13.60 n/a -23.87 25.75 48.64 15.74
Morgan Stanley High Yield 11.21 n/a 10.57 18.31 -5.76 21.29 13.10 11.24
Morgan Stanley U.S. Real Estate n/a n/a 27.29 n/a n/a 19.58 37.53 22.89
Scudder Kemper Value 18.44 n/a 18.50 4.86 -2.07 43.65 22.78 28.71
Zweig Asset Allocation 12.88 n/a 12.75 13.32 -.92 19.75 13.32 20.30
Zweig Equity (Small Cap) n/a n/a 12.70 7.38 -1.97 19.54 16.87 23.42
Select Ten Plus n/a n/a n/a n/a n/a n/a n/a n/a
</TABLE>
11
<PAGE>
PERFORMANCE COMPARISONS
Performance information for an Option may be compared, in reports and
advertising, to: (1) Standard & Poor's Stock Index (S&P 500), Dow Jones
Industrial Averages, (DJIA), Donoghue Money Market Institutional Averages, or
other unmanaged indices generally regarded as representative of the securities
markets; (2) other variable annuity separate accounts or other investment
products tracked by Lipper Analytical Services, Inc. or the Variable Annuity
Research and Data Service, which are widely used independent research firms that
rank mutual funds and other investment companies by overall performance,
investment objectives, and assets; and (3) the Consumer Price Index (measure of
inflation) to assess the real rate of return from an investment in a contract.
Unmanaged indices may assume the reinvestment of dividends but generally do not
reflect deductions for annuity charges, investment management costs, brokerage
costs and other transaction costs that are normally paid when directly investing
in securities.
Each Option may from time to time also include the ranking of its performance
figures relative to such figures for groups of mutual funds categorized by
Lipper Analytical Services (LIPPER) as having the same or similar investment
objectives or by similar services that monitor the performance of mutual funds.
Each Option may also from time to time compare its performance to average mutual
fund performance figures compiled by Lipper in LIPPER PERFORMANCE ANALYSIS.
Advertisements or information furnished to present shareholders or prospective
investors may also include evaluations of an Option published by nationally
recognized ranking services and by financial publications that are nationally
recognized such as BARRON'S, BUSINESS WEEK, CDA TECHNOLOGIES, INC., CHANGING
TIMES, CONSUMER'S DIGEST, DOW JONES INDUSTRIAL AVERAGE, FINANCIAL PLANNING,
FINANCIAL TIMES, FINANCIAL WORLD, FORBES, FORTUNE, GLOBAL INVESTOR, HULBERT'S
FINANCIAL DIGEST, INSTITUTIONAL INVESTOR, INVESTORS DAILY, MONEY, MORNINGSTAR
MUTUAL FUNDS, THE NEW YORK TIMES, PERSONAL INVESTOR, STANGER'S INVESTMENT
ADVISER, VALUE LINE, THE WALL STREET JOURNAL, WIESENBERGER INVESTMENT COMPANY
SERVICE AND USA TODAY.
The performance figures described above may also be used to compare the
performance of an Option's units against certain widely recognized standards or
indices for stock and bond market performance. The following are the indices
against which the Options may compare performance:
The Standard & Poor's Composite Index of 500 Stocks (the S&P 500) is a market
value-weighted and unmanaged index showing the changes in the aggregate market
value of 500 stocks relative to the base period 1941-43. The S&P 500 Index is
composed almost entirely of common stocks of companies listed on the NYSE,
although the common stocks of a few companies listed on the American Stock
Exchange or traded OTC are included. The 500 companies represented include 381
industrial, 37 utility, 11 transportation and 71 financial services concerns.
The S&P 500 Index represents about 80% of the market value of all issues traded
on the NYSE.
The Dow Jones Composite Average (or its component averages) is an unmanaged
index composed of 30 blue-chip industrial corporation stocks (Dow Jones
Industrial Average), 15 utilities company stocks and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
The New York Stock Exchange composite or component indices are unmanaged indices
of all industrial, utilities, transportation and finance company stocks listed
on the New York Stock Exchange.
The Wilshire 5000 Equity Index (or its component indices) represents the return
of the market value of all common equity securities for which daily pricing is
available. Comparisons of performance assume reinvestment of dividends.
The Morgan Stanley Capital International EAFE Index is an arithmetic, market
value-weighted average of the performance of over 900 securities on the stock
exchanges of countries in Europe, Australia and the Far East.
The Morgan Stanley Capital International World Index - An arithmetic, market
value-weighted average of the performance of over 1,470 securities listed on the
stock exchanges of countries in Europe, Australia, the Far East, Canada and the
United States.
12
<PAGE>
The Goldman Sachs 100 Convertible Bond Index currently includes 67 bonds and 33
preferred stocks. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
The Lehman Brothers Government Bond Index (the LEHMAN GOVERNMENT INDEX) is a
measure of the market value of all public obligations of the U.S. Treasury; all
publicly issued debt of all agencies of the U.S. Government and all
quasi-federal corporations; and all corporate debt guaranteed by the U.S.
Government. Mortgage-backed securities, flower bonds and foreign targeted
issues are not included in the Lehman Government Index.
The Lehman Brothers Government/Corporate Bond Index (the LEHMAN
GOVERNMENT/CORPORATE INDEX) is a measure of the market value of approximately
5,300 bonds with a face value currently in excess of $1 million, which have at
least one year to maturity and are rated "Baa" or higher (INVESTMENT GRADE) by a
nationally recognized statistical rating agency.
The Lehman Brothers Government/Corporate Intermediate Bond Index (the LEHMAN
GOVERNMENT/CORPORATE INTERMEDIATE INDEX) is composed of all bonds covered by the
Lehman Brothers Government/Corporate Bond Index with maturities between one and
9.99 years. Total return comprises price appreciation/depreciation and income
as a percentage of the original investment. Indexes are rebalanced monthly by
market capitalization.
The Lehman Brothers Intermediate Treasury Bond Index includes bonds with
maturities between one and ten years with a face value currently in excess of $1
million, that are rated investment grade or higher by a nationally recognized
statistical rating agency.
The Shearson Lehman Long-Term Treasury Bond Index is composed of all bonds
covered by the Shearson Lehman Hutton Treasury Bond Index with maturities of 10
years or greater.
The National Association of Securities Dealers Automated Quotation System
(NASDAQ) Composite Index covers 4,500 stocks traded over the counter. It
represents many small company stocks but is heavily influenced by about 100 of
the largest NASDAQ stocks. It is a value-weighted index calculated on price
change only and does not include income.
The NASDAQ Industrial Index is composed of more than 3,000 industrial issues.
It is a value-weighted index calculated on price change only and does not
include income.
The Value Line (Geometric) Index is an unweighted index of the approximately
1,700 stocks followed by the VALUE LINE INVESTMENT SURVEY.
The Salomon Brothers GNMA Index includes pools of mortgages originated by
private lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.
The Salomon Brothers' World Market Index is a measure of the return of an
equally weighted basket of short-term (three month U.S. Government securities
and bank deposits) investments in eight major currencies: the U.S. dollars, UK
pounds sterling, Canadian dollars, Japanese yen, Swiss francs, French francs,
German Deutsche mark and Netherlands guilder.
The Salomon Brothers Broad Investment-Grade Bond Index contains approximately
3,800 Treasury and agency, corporate and mortgage bonds with a rating of BBB or
higher, a stated maturity of at least one year, and a par value outstanding of
$25 million or more. The index is weighted according to the market value of all
bond issues included in the index.
The Salomon Brothers High Grade Corporate Bond Index consists of publicly
issued, non-convertible corporate bonds rated AA or AAA. It is a
value-weighted, total return index, including approximately 800 issues with
maturities of 12 years or grater.
13
<PAGE>
The Salomon Brothers World Bond Index measures the total return performance of
high-quality securities in major sectors of the international bond market. The
index covers approximately 600 bonds from 10 currencies: Australian dollars,
Canadian dollars, European Currency Units, French francs, Japanese yen,
Netherlands guilder, Swiss francs, UK pounds sterling, U.S. dollars, and German
deutsche marks.
The J.P. Morgan Global Government Bond Index is a total return, market
capitalization weighted index, rebalanced monthly consisting of the following
countries: Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan,
Netherlands, Spain, Sweden, United Kingdom and United States.
The 50/50 Index assumes a static mix of 50% of the S&P 500 Index and 50% of the
Lehman Government Corporate Index.
Other Composite Indices: 70% S&P 500 Index and 30% NASDAQ Industrial Index; 35%
S&P 500 Index and 65% Salomon Brothers High Grade Bond Index; and 65% S&P Index
and 35% Salomon Brothers High Grade Bond Index.
The SEI Median Balanced Fund Universe measures a group of funds with an average
annual equity commitment and an average annual bond - plus - private - placement
commitment greater than 5% each year. SEI must have at least two years of data
for a fund to be considered for the population.
The Russell 2000/Small Stock Index comprises the smallest 2000 stocks in the
Russell 3000 Index, and represents approximately 11% of the total U.S. equity
market capitalization. The Russell 3000 Index comprises the 3,000 largest U.S.
companies by market capitalization. The smallest company has a market value of
roughly $20 million.
The Russell 2500 Index is comprised of the bottom 500 stocks in the Russell 1000
Index which represents the universe of stocks from which most active money
managers typically select; and all the stocks in the Russell 2000 Index. The
largest security in the index has a market capitalization of approximately 1.3
billion.
The Consumer Price Index (or Cost of Living Index), published by the United
States Bureau of Labor Statistics is a statistical measure of change, over time,
in the price of goods and services in major expenditure groups.
STOCKS, BONDS, BILLS AND INFLATION, published by Hobson Associates, presents an
historical measure of yield, price and total return for common and small company
stocks, long-term government bonds, Treasury bills and inflation.
Savings and Loan Historical Interest Rates as published in the United States
Savings & Loan League Fact Book.
Historical data supplied by the research departments of First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch, Pierce,
Fenner & Smith, Shearson Lehman Hutton and Bloomberg L.P.
The MSCI Combined Far East Free ex Japan Index is a market-capitalization
weighted index comprising stocks in Hong Kong, Indonesia, Korea, Malaysia,
Philippines, Singapore and Thailand. Korea is included in the MSCI Combined
Far East Free ex Japan Index at 20% of its market capitalization.
The First Boston High Yield Index generally includes over 180 issues with an
average maturity range of seven to ten years with a minimum capitalization of
$100 million. All issues are individually trader-priced monthly.
In reports or other communications to shareholders, the Funds may also describe
general economic and market conditions affecting the Portfolios and may compare
the performance of the Portfolios with (1) that of mutual funds included in the
rankings prepared by Lipper or similar investment services that monitor the
performance of insurance company separate accounts or mutual funds, (2)
IBC/Donoghue's Money Fund Report, (3) other appropriate indices of investment
securities and averages for peer universe of funds which are described in this
SAI, or (4) data developed by Integrity or any of the sub-advisers derived from
such indices or averages.
For those Variable Account Options which have not been investment divisions
within the Separate Accounts for one of the quoted periods, the standardized
average annual total return and nonstandardized total return quotations will
show
14
<PAGE>
the investment performance such Options would have achieved (reduced by the
applicable charges) had they been investment divisions within the Separate
Accounts for the period quoted.
INDIVIDUALIZED COMPUTER GENERATED ILLUSTRATIONS
Integrity may from time to time use computer-based software available through
Morningstar, CDA/Wiesenberger and/or other firms to provide registered
representatives and existing and/or potential owners of the contracts with
individualized hypothetical performance illustrations for some or all of the
Variable Account Options. Such illustrations may include, without limitation,
graphs, bar charts and other types of formats presenting the following
information: (i) the historical results of a hypothetical investment in a single
Option; (ii) the historical fluctuation of the value of a single Option (actual
and hypothetical); (iii) the historical results of a hypothetical investment in
more than one Option; (iv) the historical performance of two or more market
indices in relation to one another and/or one or more Options; (v) the
historical performance of two or more market indices in comparison to a single
Option or a group of Options; (vi) a market risk/reward scatter chart showing
the historical risk/reward relationship of one or more mutual funds or Options
to one or more indices and a broad category of similar anonymous variable
annuity subaccounts; and (vii) Option data sheets showing various information
about one or more Options (such as information concerning total return for
various periods, fees and expenses, standard deviation, alpha and beta,
investment objective, inception date and net assets). We reserve the right to
republish figures independently provided by Morningstar or any similar agency or
service.
PART 7 - DETERMINATION OF ACCUMULATION UNIT VALUES
The accumulation unit value of an Option will be determined on each day the New
York Stock Exchange is open for trading. The accumulation units are valued as
of the close of business on the New York Stock Exchange, which currently is 4:00
p.m., Eastern time. Each Option's accumulation unit value is calculated
separately. For all Options other than the Janus Money Market Option, the
accumulation unit value is computed by dividing the value of the securities held
by the Option plus any cash or other assets, less its liabilities, by the number
of outstanding units. For the Janus Money Market Option, accumulation unit
value is computed by dividing the value of the investments and other assets
minus liabilities by the number of units outstanding. Securities are valued
using the amortized cost method of valuation, which approximates market value.
Under this method of valuation, the difference between the acquisition cost and
value at maturity is amortized by assuming a constant (straight-line) accretion
of a discount or amortization of a premium to maturity. Cash, receivables and
current payables are generally carried at their face value.
PART 8 - DETERMINATION OF ANNUITY UNIT VALUES
The annuity unit value was initially fixed at $1.00 for contracts with assumed
base rates of net investment return of 5% or 3.5% a year. For each valuation
period thereafter, it is the annuity value for the preceding valuation period
multiplied by the adjusted net investment factor under the contracts. For each
valuation period, the adjusted net investment factor is equal to the net
investment factor reduced for each day in the valuation period by:
* .00013366 for a contract with an assumed base rate of net investment return
of 5% a year; or
* .00009425 for a contract with an assumed base rate of net investment return
of 3.5% a year.
Because of this adjustment, the annuity unit value rises and falls depending on
whether the actual rate of net investment return (after charges) is higher or
lower than the assumed base rate.
All certificates have a 5% assumed base rate, except in states where that rate
is not permitted. Annuity payments under contracts with an assumed base rate of
3.5% will at first be smaller than those under contracts with a 5% assumed base
rate. Payments under the 3.5% contracts, however, will rise more rapidly when
unit values are rising, and payments will fall more slowly when unit values are
falling, than those under 5% contracts.
The amounts of variable annuity payments are determined as follows:
15
<PAGE>
Payments normally start on the Annuitant's retirement date. The first three
monthly payments are the same. Each of the first three monthly payments will be
based on the amount taken from the tables in the contract or on our current
rates, whichever is more favorable to the participant. Where Integrity's
current annuity rates are used, contributions in the current and five prior
participation years will qualify for Integrity's current individual annuity
rates applicable to funds derived from sources outside Integrity. The balance
of the proceeds will qualify for Integrity's current individual annuity rates
for payment of proceeds.
The first three monthly payments depend on the assumed base rate of net
investment return and the forms of annuity chosen (and any fixed period). If the
annuity involves a life contingency, the risk class and the age of the
annuitants will affect payments.
Payments after the first three months will vary according to the investment
performance of the Variable Account Option or Options selected. After that,
each payment will be calculated by multiplying the number of annuity units
credited by the average annuity unit value for the second calendar month before
the due date of the payment. The number of annuity units credited equals the
initial periodic payment divided by the annuity unit value for the valuation
period that includes the due date of the first annuity payment. The average
annuity unit value is the average of the annuity unit values for the valuation
periods ending in that month. Each business day together with any non-business
day or consecutive non-business day immediately preceding such business day
will constitute a valuation period.
ILLUSTRATION OF CHANGES IN ANNUITY UNIT VALUES. To show how we determine
variable annuity payments from month to month, assume that the contract value on
a retirement date is enough to fund an annuity with a monthly payment of $363
and that the annuity unit value for the valuation period that includes the due
date of the first annuity payment is $1.05. The number of annuity units
credited under your contract would be 345.71 (363 divided by 1.05 = 345.71).
If the fourth monthly payment is due in March, and the average annuity unit
value for January was $1.10, the annuity payment for March would be the number
of units (345.71) times the average annuity unit value ($1.10), or $380.28. If
the average annuity unit value was $1.00 in February, the annuity payment for
April would be 345.71 times $1.00, or $345.71.
For period certain life annuities and life income annuities, the participant may
not surrender or redeem once annuity payments commence. For period certain life
annuities only, if the payee (or the payee and the other annuitant under a joint
and survivor annuity) dies before the period selected ends, the remaining
payments will go to another named payee who may have the right to redeem the
annuity and secure the present value of future guaranteed payments in a lump
sum. The present value of future guaranteed payments for a period certain is
based on the number of payments left, the assumed base rate of net return, the
number of annuity units and the annuity unit value for the date Integrity
receives a written request for lump sum payment of remaining values. Assets held
in each of the Separate Accounts are at least equal to all statutory reserves
required for such Separate Account.
PART 9 - FINANCIAL STATEMENTS
Ernst & Young LLP, Suite 2100, 400 West Market Street, Louisville, Kentucky
40202, is our independent auditor and serves as independent auditor of the
Separate Accounts. Ernst & Young LLP on an annual basis will audit certain
financial statements prepared by management and express an opinion on such
financial statements based on their audits.
The financial statements of the Separate Account II as of December 31, 1997, and
for the periods indicated in the financial statements, and the statutory-basis
financial statements of Integrity as of and for the years ended December 31,
1997 and 1996 included herein have been audited by Ernst & Young LLP as set
forth in their reports. No financial statements of Separate Account Ten are
included because as of the date of this SAI, Separate Account Ten had not yet
commenced operations.
The financial statements of Integrity should be distinguished from the financial
statements of the Separate Accounts and should be considered only as they relate
to the ability of Integrity to meet its obligations under the contracts. They
should not be considered as relating to the investment performance of the assets
held in the Separate Accounts.
16
<PAGE>
Financial Statements
Separate Account II
of
Integrity Life Insurance Company
DECEMBER 31, 1997
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
Separate Account II
of
Integrity Life Insurance Company
Financial Statements
December 31, 1997
CONTENTS
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . 1
Audited Financial Statements
Statement of Assets and Liabilities. . . . . . . . . . . . . . . . . . . . . . 2
Statement of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Statements of Changes in Net Assets. . . . . . . . . . . . . . . . . . . . . . 6
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . 9
<PAGE>
Report of Independent Auditors
Contract Holders
Separate Account II of Integrity Life Insurance Company
We have audited the accompanying statement of assets and liabilities of Separate
Account II of Integrity Life Insurance Company (comprising, respectively, the
Renaissance Balanced, Zweig Asset Allocation, Nicholas-Applegate Balanced,
Harris Bretall Sullivan & Smith Equity Growth, Scudder Kemper Value, Zweig
Equity (Small Cap), Pinnacle Fixed Income, ARM Capital Advisors Money Market,
Morgan Stanley Asian Growth, Morgan Stanley Worldwide High Income, EAFE Equity
Index, Equity 500 Index, Small Cap Index, VIP Equity-Income, VIP II Contrafund,
VIP III Growth & Income, VIP III Growth Opportunities, Janus Aspen Capital
Appreciation, Janus Aspen Balanced, Janus Aspen Worldwide Growth, Janus Aspen
Money Market, JPM International Equity, JPM Bond, Morgan Stanley Asian
Equity, Morgan Stanley Emerging Markets Debt, Morgan Stanley High Yield, and
Morgan Stanley U.S. Real Estate Divisions) as of December 31, 1997 and the
related statements of operations and changes in net assets for the periods
indicated therein. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of mutual fund shares owned in The Legends Fund, Inc., BT Insurance
Funds Trust, Variable Insurance Products Fund, Variable Insurance Products Fund
II, Variable Insurance Products Fund III, Janus Aspen Series, J.P. Morgan Series
Trust II and Morgan Stanley Universal Funds, Inc. (collectively the "Funds") as
of December 31, 1997, by correspondence with the transfer agents of the Funds.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective
divisions constituting Separate Account II of Integrity Life Insurance Company
at December 31, 1997, the results of their operations and changes in their net
assets for each of the periods indicated therein, in conformity with generally
accepted accounting principles.
Louisville, Kentucky
April 17, 1998
1
<PAGE>
Separate Account II of Integrity Life Insurance Company
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
HARRIS BRETALL
NICHOLAS- SULLIVAN & SCUDDER ZWEIG PINNACLE
RENAISSANCE ZWEIG ASSET APPLEGATE SMITH EQUITY KEMPER EQUITY FIXED
BALANCED ALLOCATION BALANCED GROWTH VALUE (SMALL CAP) INCOME
DIVISION (1) DIVISION DIVISION (1) DIVISION DIVISION (2) DIVISION DIVISION (1)
------------ ----------- ------------ -------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments at value
(cost of $185,882,279
in the aggregate) $ - $38,613,258 $ - $ 25,568,235 $ 30,002,646 $10,747,160 $ -
LIABILITIES
Account retained in
Separate Account II
by Integrity - - - - - - -
Payable to (receivable
from) the general
account of Integrity - 8,530 - 1,283 1,039 1,271 -
------------------------------------------------------------------------------------------------------
Total liabilities - 8,530 - 1,283 1,039 1,271 -
------------------------------------------------------------------------------------------------------
NET ASSETS $ - $38,604,728 $ - $ 25,566,952 $ 30,001,607 $10,745,889 $ -
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Unit value $ - $ 18.32 $ - $ 19.74 $ 23.47 $ 18.15 $ -
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Units outstanding - 2,107,245 - 1,295,185 1,278,296 592,060 -
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
<CAPTION>
ARM CAPITAL MORGAN STANLEY
ADVISORS MORGAN STANLEY WORLDWIDE EAFE EQUITY EQUITY 500 SMALL CAP VIP EQUITY-
MONEY MARKET ASIAN GROWTH HIGH INCOME INDEX INDEX INDEX INCOME
DIVISION (1) DIVISION (1) DIVISION (1) DIVISION DIVISION DIVISION DIVISION
------------ -------------- -------------- ----------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments at value
(cost of $185,882,279
in the aggregate) $ - $ - $ - $ 185,111 $10,972,042 $ 662,926 $ 1,564,837
LIABILITIES
Account retained in
Separate Account II
by Integrity - - - - 8,690,000 - -
Payable to (receivable
from) the general
account of Integrity - - - (11) (971) (121) 306
-----------------------------------------------------------------------------------------------------
Total liabilities - - - (11) 8,689,029 (121) 306
-----------------------------------------------------------------------------------------------------
NET ASSETS $ - $ - $ - $ 185,122 $ 2,283,013 $ 663,047 $ 1,564,531
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
Unit value $ - $ - $ - $ 9.42 $ 10.16 $ 9.44 $ 10.06
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
Units outstanding - - - 19,652 224,706 70,238 155,520
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
</TABLE>
(1) Effective November 14, 1997, the net assets of the division were
transferred to a new division through a substitution
(2) Effective December 31, 1997, Scudder Kemper became the sub-adviser to the
portfolio (formerly Dreman Value or Zurich Kemper Value)
SEE ACCOMPANYING NOTES.
2
<PAGE>
Separate Account II of Integrity Life Insurance Company
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
VIP III VIP III JANUS ASPEN JANUS ASPEN
VIP II GROWTH & GROWTH CAPITAL JANUS ASPEN WORLDWIDE JANUS ASPEN
CONTRAFUND INCOME OPPORTUNITIES APPRECIATION BALANCED GROWTH MONEY MARKET
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
---------- ---------- ------------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments at value
(cost of $185,882,279
in the aggregate) $1,258,365 $1,224,985 $ 802,515 $ 872,945 $56,355,035 $ 1,436,742 $ 6,395,761
LIABILITIES
Account retained in
Separate Account II
by Integrity - - - - - - -
Payable to (receivable
from) the general
account of Integrity (318) 527 388 (132) 27,209 (56) 2,531
-------------------------------------------------------------------------------------------------
Total liabilities (318) 527 388 (132) 27,209 (56) 2,531
-------------------------------------------------------------------------------------------------
NET ASSETS $1,258,683 $1,224,458 $ 802,127 $ 873,077 $56,327,826 $ 1,436,798 $ 6,393,230
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
Unit value $ 9.73 $ 10.24 $ 10.26 $ 9.47 $ 9.95 $ 9.47 $ 10.08
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
Units outstanding 129,361 119,576 78,180 92,194 5,661,088 151,721 634,249
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
<CAPTION>
JPM MORGAN STANLEY MORGAN STANLEY
INTERNATIONAL MORGAN STANLEY EMERGING MORGAN STANLEY U.S. REAL
EQUITY JPM BOND ASIAN EQUITY MARKETS DEBT HIGH YIELD ESTATE
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION TOTAL
------------- ------------ -------------- -------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments at value
(cost of $185,882,279
in the aggregate) $ 383,076 $8,169,633 $ 4,120,133 $ 6,027,970 $ 705,744 $ 683,914 $206,753,033
LIABILITIES
Account retained in
Separate Account II
by Integrity - 3,912,700 - - - - 12,602,700
Payable to (receivable
from) the general
account of Integrity (3,566) (2,783) 24,706 (2,589) (167) 240 57,316
----------------------------------------------------------------------------------------------------------
Total liabilities (3,566) 3,909,917 24,706 (2,589) (167) 240 12,660,016
----------------------------------------------------------------------------------------------------------
NET ASSETS $ 386,642 $4,259,716 $ 4,095,427 $ 6,030,559 $ 705,911 $ 683,674 $194,093,017
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
Unit value $ 9.28 $ 10.19 $ 8.46 $ 9.23 $ 10.11 $ 10.15
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
Units outstanding 41,664 418,029 484,093 653,365 69,823 67,357
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
</TABLE>
(1) Effective November 14, 1997, the net assets of the division were
transferred to a new division through a substitution
(2) Effective December 31, 1997, Scudder Kemper became the sub-adviser to the
portfolio (formerly Dreman Value or Zurich Kemper Value)
SEE ACCOMPANYING NOTES.
3
<PAGE>
Separate Account II of Integrity Life Insurance Company
Statement of Operations
Year Ended December 31, 1997
<TABLE>
<CAPTION>
HARRIS BRETALL
NICHOLAS- SULLIVAN & SCUDDER ZWEIG PINNACLE
RENAISSANCE ZWEIG ASSET APPLEGATE SMITH EQUITY KEMPER EQUITY FIXED
BALANCED ALLOCATION BALANCED GROWTH VALUE (SMALL CAP) INCOME
DIVISION (1) DIVISION DIVISION (1) DIVISION DIVISION DIVISION DIVISION (1)
------------ ----------- ------------ -------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends $ 2,797,648 $ 455,490 $ 5,196,480 $ 1,652,011 $ 4,941,089 $ 458,143 $ 624,989
EXPENSES
Mortality and expense
risk and administrative
charges 222,794 509,212 460,362 292,884 333,486 126,411 39,309
------------------------------------------------------------------------------------------------------
NET INVESTMENT
INCOME (LOSS) 2,574,854 (53,722) 4,736,118 1,359,127 4,607,603 331,732 585,680
REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss)
on sales of investments 390,362 1,826,513 6,643,936 1,657,678 2,895,358 581,172 119,741
Net unrealized
appreciation
(depreciation)
of investments:
Beginning of period 1,075,003 4,051,089 4,981,432 2,469,362 4,678,834 1,160,972 178,025
End of period - 9,197,585 - 5,303,939 3,271,286 2,206,200 -
------------------------------------------------------------------------------------------------------
Change in net unrealized
appreciation/
depreciation during the
period (1,075,003) 5,146,496 (4,981,432) 2,834,577 (1,407,548) 1,045,228 (178,025)
------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (684,641) 6,973,009 1,662,504 4,492,255 1,487,810 1,626,400 (58,284)
------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS $ 1,890,213 $ 6,919,287 $ 6,398,622 $ 5,851,382 $ 6,095,413 $ 1,958,132 $ 527,396
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
<CAPTION>
ARM CAPITAL MORGAN STANLEY
ADVISORS MORGAN STANLEY WORLDWIDE EAFE EQUITY EQUITY 500 SMALL CAP VIP EQUITY-
MONEY MARKET ASIAN GROWTH HIGH INCOME INDEX INDEX INDEX INCOME
DIVISION (1) DIVISION (1) DIVISION (1) DIVISION (2) DIVISION (2) DIVISION (2) DIVISION (2)
------------ -------------- -------------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends $ 258,129 $ 30,081 $ 1,392,730 $ - $ - $ - $ -
EXPENSES
Mortality and expense
risk and administrative
charges 77,914 105,953 72,702 237 3,380 1,256 1,962
------------------------------------------------------------------------------------------------------
NET INVESTMENT
INCOME (LOSS) 180,215 (75,872) 1,320,028 (237) (3,380) (1,256) (1,962)
REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss)
on sales of investments - (3,580,422) (307,315) (1,410) 24,320 (2,087) (1,026)
Net unrealized
appreciation
(depreciation)
of investments:
Beginning of period - 643,373 582,804 - - - -
End of period - - - 229 211,601 (3,373) 32,071
------------------------------------------------------------------------------------------------------
Change in net unrealized
appreciation/
depreciation during
the period - (643,373) (582,804) 229 211,601 (3,373) 32,071
------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS - (4,223,795) (890,119) (1,181) 235,921 (5,460) 31,045
------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS $ 180,215 $ (4,299,667) $ 429,909 $ (1,418) $ 232,541 $ (6,716) $ 29,083
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the period January 1, 1997 to November 14, 1997 (date of substitution)
(2) For the period October 1, 1997 (commencement of operations) to December 31,
1997
SEE ACCOMPANYING NOTES.
4
<PAGE>
Separate Account II of Integrity Life Insurance Company
Statement of Operations (Continued)
Year Ended December 31, 1997
<TABLE>
<CAPTION>
VIP III VIP III JANUS ASPEN JANUS ASPEN
VIP II GROWTH & GROWTH CAPITAL JANUS ASPEN WORLDWIDE JANUS ASPEN
CONTRAFUND INCOME OPPORTUNITIES APPRECIATION BALANCED GROWTH MONEY MARKET
DIVISION (2) DIVISION (2) DIVISION (2) DIVISION (2) DIVISION (2) DIVISION (2) DIVISION (2)
------------ ------------ ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends $ - $ 26,609 $ - $ 2,616 $ 481,762 $ 3,003 $ 46,480
EXPENSES
Mortality and expense
risk and administrative
charges 1,911 1,670 1,102 1,175 97,981 2,753 12,379
-------------------------------------------------------------------------------------------------------
NET INVESTMENT
INCOME (LOSS) (1,911) 24,939 (1,102) 1,441 383,781 250 34,101
REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS
Net realized gain
(loss) on sales
of investments (1,143) 871 719 (275) 7,630 (6,364) -
Net unrealized
appreciation
(depreciation) of
investments:
Beginning of period - - - - - - -
End of period 9,019 5,855 20,242 17,388 741,775 25,860 268
-------------------------------------------------------------------------------------------------------
Change in net unrealized
appreciation/
depreciation during
the period 9,019 5,855 20,242 17,388 741,775 25,860 268
-------------------------------------------------------------------------------------------------------
NET REALIZED AND
UNREALIZED GAIN (LOSS)
ON INVESTMENTS 7,876 6,726 20,961 17,113 749,405 19,496 268
-------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS $ 5,965 $ 31,665 $ 19,859 $ 18,554 $ 1,133,186 $ 19,746 $ 34,369
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
<CAPTION>
JPM MORGAN STANLEY MORGAN STANLEY
INTERNATIONAL MORGAN STANLEY EMERGING MORGAN STANLEY U.S. REAL
EQUITY JPM BOND ASIAN EQUITY MARKETS DEBT HIGH YIELD ESTATE
DIVISION (2) DIVISION (2) DIVISION (2) DIVISION (2) DIVISION (2) DIVISION (2) TOTAL
------------- ------------ -------------- --------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends $ 44,586 $ 221,104 $ 5,436 $ 220,506 $ 43,003 $ 18,332 $18,920,227
EXPENSES
Mortality and
expense risk and
administrative charges 678 8,140 7,319 10,639 962 986 2,395,557
-----------------------------------------------------------------------------------------------------------
NET INVESTMENT
INCOME (LOSS) 43,908 212,964 (1,883) 209,867 42,041 17,346 16,524,670
REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS
Net realized gain
(loss) on sales
of investments (3,034) 6,293 (9,713) 15,980 40 (2,302) 10,255,522
Net unrealized
appreciation
(depreciation) of
investments:
Beginning of period - - - - - - 19,820,894
End of period (43,743) (94,734) (270,549) 272,291 (33,966) 1,510 20,870,754
-----------------------------------------------------------------------------------------------------------
Change in net
unrealized
appreciation/
depreciation during
the period (43,743) (94,734) (270,549) 272,291 (33,966) 1,510 1,049,860
-----------------------------------------------------------------------------------------------------------
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON INVESTMENTS (46,777) (88,441) (280,262) 288,271 (33,926) (792) 11,305,382
-----------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS $ (2,869) $ 124,523 $ (282,145) $ 498,138 $ 8,115 $ 16,554 $27,830,052
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the period January 1, 1997 to November 14, 1997 (date of substitution)
(2) For the period October 1, 1997 (commencement of operations) to December 31,
1997
SEE ACCOMPANYING NOTES.
5
<PAGE>
Separate Account II of Integrity Life Insurance Company
Statement of Changes in Net Assets
Year Ended December 31, 1997
<TABLE>
<CAPTION>
HARRIS BRETALL
NICHOLAS- SULLIVAN & SCUDDER PINNACLE
RENAISSANCE ZWEIG ASSET APPLEGATE SMITH EQUITY KEMPER ZWEIG EQUITY FIXED
BALANCED ALLOCATION BALANCED GROWTH VALUE (SMALL CAP) INCOME
DIVISION (1) DIVISION DIVISION (1) DIVISION DIVISION DIVISION DIVISION (1)
------------ ----------- ------------ -------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS FROM OPERATIONS
Net investment
income (loss) $ 2,574,854 $ (53,722) $ 4,736,118 $ 1,359,127 $ 4,607,603 $ 331,732 $ 585,680
Net realized gain (loss)
on sales of investments 390,362 1,826,513 6,643,936 1,657,678 2,895,358 581,172 119,741
Change in net unrealized
appreciation/depreciation
during the period (1,075,003) 5,146,496 (4,981,432) 2,834,577 (1,407,548) 1,045,228 (178,025)
------------------------------------------------------------------------------------------------------
Net increase (decrease) in
net assets resulting
from operations 1,890,213 6,919,287 6,398,622 5,851,382 6,095,413 1,958,132 527,396
INCREASE (DECREASE) IN NET
ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from
contract holders 239,307 960,854 553,462 1,849,299 3,061,202 372,847 99,454
Contract terminations
and benefits (1,955,314) (3,276,103) (5,444,946) (2,068,659) (2,362,975) (686,221) (499,685)
Net transfers among
investment options (19,426,994) (3,072,161) (40,879,178) 2,350,763 2,785,843 385,912 (3,247,591)
------------------------------------------------------------------------------------------------------
Net increase (decrease) in
net assets from contract
related transactions (21,143,001) (5,387,410) (45,770,662) 2,131,403 3,484,070 72,538 (3,647,822)
Contribution by Integrity - - - - - - -
Transfer of Integrity
contributions - - - - - - (4,393,502)
Redemption of contributions
by Integrity - - - - - - (829,601)
Change in amounts retained
in Separate Account II
by Integrity - - - - - - 4,889,484
------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN
NET ASSETS (19,252,788) 1,531,877 (39,372,040) 7,982,785 9,579,483 2,030,670 (3,454,045)
Net assets,
beginning of year 19,252,788 37,072,851 39,372,040 17,584,167 20,422,124 8,715,219 3,454,045
------------------------------------------------------------------------------------------------------
NET ASSETS,
END OF YEAR $ - $38,604,728 $ - $ 25,566,952 $30,001,607 $10,745,889 $ -
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 15,583 54,696 30,942 99,659 140,705 21,227 8,404
Terminations and benefits (134,658) (196,743) (319,281) (114,760) (110,644) (42,891) (42,854)
Net transfers (1,295,531) (184,907) (2,268,287) 126,167 128,601 21,255 (266,425)
------------------------------------------------------------------------------------------------------
Increase (decrease)
in units (1,414,606) (326,954) (2,556,626) 111,066 158,662 (409) (300,875)
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
<CAPTION>
ARM CAPITAL MORGAN STANLEY
ADVISORS MORGAN STANLEY WORLDWIDE EAFE EQUITY EQUITY 500 SMALL CAP VIP EQUITY-
MONEY MARKET ASIAN GROWTH HIGH INCOME INDEX INDEX INDEX INCOME
DIVISION (1) DIVISION (1) DIVISION (1) DIVISION (2) DIVISION (2) DIVISION (2) DIVISION (2)
------------ -------------- -------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE)
IN NET ASSETS
FROM OPERATIONS
Net investment
income (loss) $ 180,215 $ (75,872) $ 1,320,028 $ (237) $ (3,380) $ (1,256) $ (1,962)
Net realized gain
(loss) on sales
of investments - (3,580,422) (307,315) (1,410) 24,320 (2,087) (1,026)
Change in net
unrealized
appreciation/
depreciation during
the period - (643,373) (582,804) 229 211,601 (3,373) 32,071
--------------------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets resulting
from operations 180,215 (4,299,667) 429,909 (1,418) 232,541 (6,716) 29,083
INCREASE (DECREASE) IN
NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from
contract holders 2,377,697 200,769 273,104 156,248 1,369,486 412,616 1,086,187
Contract terminations
and benefits (1,914,055) (717,549) (404,944) - (2,233) (1,119) (3,254)
Net transfers among
investment options (4,783,860) (5,457,768) (6,293,754) 30,292 873,219 258,266 452,515
--------------------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets from
contract related
transactions (4,320,218) (5,974,548) (6,425,594) 186,540 2,240,472 669,763 1,535,448
Contribution
by Integrity - - - - 10,000,000 - -
Transfer of
Integrity contributions - - - - - - -
Redemption of contributions
by Integrity - - - - (1,500,000) - -
Change in amounts retained
in Separate Account II
by Integrity - - - - (8,690,000) - -
--------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN
NET ASSETS (4,140,003) (10,274,215) (5,995,685) 185,122 2,283,013 663,047 1,564,531
Net assets,
beginning of year 4,140,003 10,274,215 5,995,685 - - - -
--------------------------------------------------------------------------------------------------------
NET ASSETS,
END OF YEAR $ - $ - $ - $ 185,122 $ 2,283,013 $ 663,047 $ 1,564,531
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 215,787 20,532 18,520 16,374 137,771 43,324 110,542
Terminations and benefits (173,350) (73,751) (27,984) - (222) (122) (329)
Net transfers (422,952) (927,145) (425,321) 3,278 87,157 27,036 45,307
--------------------------------------------------------------------------------------------------------
Increase (decrease)
in units (380,515) (980,364) (434,785) 19,652 224,706 70,238 155,520
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the period January 1, 1997 to November 14, 1997 (date of substitution)
(2) For the period October 1, 1997 (commencement of operations) to December 31,
1997
SEE ACCOMPANYING NOTES.
6
<PAGE>
Separate Account II of Integrity Life Insurance Company
Statement of Changes in Net Assets
Year Ended December 31, 1997
<TABLE>
<CAPTION>
VIP III VIP III JANUS ASPEN JANUS ASPEN
VIP II GROWTH & GROWTH CAPITAL JANUS ASPEN WORLDWIDE JANUS ASPEN
CONTRAFUND INCOME OPPORTUNITIES APPRECIATION BALANCED GROWTH MONEY MARKET
DIVISION (2) DIVISION (2) DIVISION (2) DIVISION (2) DIVISION (2) DIVISION (2) DIVISION (2)
------------ ------------ ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS FROM
OPERATIONS
Net investment
income (loss) $ (1,911) $ 24,939 $ (1,102) $ 1,441 $ 383,781 $ 250 $ 34,101
Net realized gain
(loss) on sales
of investments (1,143) 871 719 (275) 7,630 (6,364) -
Change in net
unrealized
appreciation/
depreciation during
the period 9,019 5,855 20,242 17,388 741,775 25,860 268
--------------------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets resulting
from operations 5,965 31,665 19,859 18,554 1,133,186 19,746 34,369
INCREASE (DECREASE) IN
NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from
contract holders 943,451 723,054 496,323 435,970 636,465 1,035,639 939,640
Contract terminations
and benefits (3,648) (2,262) (1,547) (2,522) (616,133) (2,927) (492,006)
Net transfers among
investment options 312,915 472,001 287,492 421,075 55,174,308 384,340 5,911,227
--------------------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets from
contract related
transactions 1,252,718 1,192,793 782,268 854,523 55,194,640 1,417,052 6,358,861
Contribution by
Integrity - - - - - - -
Transfer of
Integrity contributions - - - - - - -
Redemption of
contributions by
Integrity - - - - - - -
Change in amounts
retained in Separate
Account II by Integrity - - - - - - -
--------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN
NET ASSETS 1,258,683 1,224,458 802,127 873,077 56,327,826 1,436,798 6,393,230
Net assets,
beginning of year - - - - - - -
--------------------------------------------------------------------------------------------------------
NET ASSETS,
END OF YEAR $ 1,258,683 $ 1,224,458 $ 802,127 $ 873,077 $ 56,327,826 $ 1,436,798 $ 6,393,230
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 98,124 72,438 49,718 47,193 64,763 109,924 93,550
Terminations
and benefits (380) (228) (154) (273) (62,625) (310) (48,943)
Net transfers 31,617 47,366 28,616 45,274 5,658,950 42,107 589,642
--------------------------------------------------------------------------------------------------------
Increase (decrease)
in units 129,361 119,576 78,180 92,194 5,661,088 151,721 634,249
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
<CAPTION>
JPM MORGAN STANLEY MORGAN STANLEY
INTERNATIONAL MORGAN STANLEY EMERGING MORGAN STANLEY U.S. REAL
EQUITY JPM BOND ASIAN EQUITY MARKETS DEBT HIGH YIELD ESTATE
DIVISION (2) DIVISION (2) DIVISION (2) DIVISION (2) DIVISION (2) DIVISION (2) TOTAL
------------- ------------ -------------- --------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS FROM
OPERATIONS
Net investment
income (loss) $ 43,908 $ 212,964 $ (1,883) $ 209,867 $ 42,041 $ 17,346 $ 16,524,670
Net realized gain
(loss) on sales
of investments (3,034) 6,293 (9,713) 15,980 40 (2,302) 10,255,522
Change in net
unrealized
appreciation/
depreciation during
the period (43,743) (94,734) (270,549) 272,291 (33,966) 1,510 1,049,860
--------------------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets resulting
from operations (2,869) 124,523 (282,145) 498,138 8,115 16,554 27,830,052
INCREASE (DECREASE) IN
NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from
contract holders 170,010 556,426 203,790 281,945 547,063 603,425 20,585,733
Contract terminations
and benefits (1,401) (7,958) (31,589) (53,434) (191) (1,043) (20,553,718)
Net transfers among
investment options 220,902 3,647,188 4,205,371 5,303,910 150,924 64,738 531,895
--------------------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets from
contract related
transactions 389,511 4,195,656 4,377,572 5,532,421 697,796 667,120 563,910
Contribution by
Integrity - - - - - - 10,000,000
Transfer of
Integrity contributions - 4,393,502 - - - - -
Redemption of
contributions by
Integrity - (541,265) - - - - (2,870,866)
Change in amounts
retained in Separate
Account II by Integrity - (3,912,700) - - - - (7,713,216)
--------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN
NET ASSETS 386,642 4,259,716 4,095,427 6,030,559 705,911 683,674 27,809,880
Net assets,
beginning of year - - - - - 166,283,137
--------------------------------------------------------------------------------------------------------
NET ASSETS,
END OF YEAR $ 386,642 $ 4,259,716 $ 4,095,427 $ 6,030,559 $ 705,911 $ 683,674 $194,093,017
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 18,674 55,298 22,387 31,830 54,841 61,162
Terminations
and benefits (152) (787) (3,706) (5,948) (19) (105)
Net transfers 23,142 363,518 465,412 627,483 15,001 6,300
------------------------------------------------------------------------------------------
Increase (decrease)
in units 41,664 418,029 484,093 653,365 69,823 67,357
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
</TABLE>
(1) For the period January 1, 1997 to November 14, 1997 (date of substitution)
(2) For the period October 1, 1997 (commencement of operations) to December 31,
1997
SEE ACCOMPANYING NOTES.
7
<PAGE>
Separate Account II of Integrity Life Insurance Company
Statement of Changes in Net Assets
Year Ended December 31, 1996
<TABLE>
<CAPTION>
HARRIS BRETALL
NICHOLAS- SULLIVAN & ZWEIG PINNACLE
RENAISSANCE ZWEIG ASSET APPLEGATE SMITH EQUITY DREMAN EQUITY FIXED
BALANCED ALLOCATION BALANCED GROWTH VALUE (SMALL CAP) INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION (1)
----------- ----------- ----------- --------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS FROM OPERATIONS
Net investment
income (loss) $ 2,117,717 $ 3,978,456 $ 3,635,292 $ 1,027,018 $ 650,393 $ 668,314 $ 228,188
Net realized gain on
sales of investments 655,789 842,466 931,615 1,671,001 691,112 314,094 47,286
Change in net unrealized
appreciation/
depreciation during
the period (1,340,992) (440,941) 376,969 (582,235) 1,962,344 274,520 (43,021)
------------------------------------------------------------------------------------------------------
Net increase in net assets
resulting from operations 1,432,514 4,379,981 4,943,876 2,115,784 3,303,849 1,256,928 232,453
INCREASE IN NET ASSETS
FROM CONTRACT RELATED
TRANSACTIONS
Contributions from
contract holders 953,601 1,594,693 1,465,809 948,583 1,968,441 597,739 294,247
Contract terminations
and benefits (2,403,466) (3,120,656) (3,535,059) (985,699) (885,620) (458,034) (496,471)
Net transfers among
investment options (553,222) 67,484 (1,107,719) (2,235,148) 4,055,187 (76,315) 257,435
------------------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets derived
from contract related
transactions (2,003,087) (1,458,479) (3,176,969) (2,272,264) 5,138,008 63,390 55,211
Contribution by Integrity - - - - - - 5,100,000
Redemption of contributions
by Integrity - - - - - - (427,404)
Change in amounts retained
in Separate Account II
by Integrity - - - - - - (4,889,484)
------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN
NET ASSETS (570,573) 2,921,502 1,766,907 (156,480) 8,441,857 1,320,318 70,776
Net assets,
beginning of year 19,823,361 34,151,349 37,605,133 17,740,647 11,980,267 7,394,901 3,383,269
------------------------------------------------------------------------------------------------------
NET ASSETS,
END OF YEAR $19,252,788 $37,072,851 $39,372,040 $ 17,584,167 $ 20,422,124 $ 8,715,219 $ 3,454,045
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 74,451 113,298 103,241 69,303 121,912 44,288 26,149
Terminations and benefits (186,197) (224,554) (247,769) (70,256) (53,978) (33,536) (44,297)
Net transfers (45,683) 4,432 (78,235) (157,899) 244,948 (6,113) 23,024
------------------------------------------------------------------------------------------------------
Increase (decrease)
in units (157,429) (106,824) (222,763) (158,852) 312,882 4,639 4,876
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
<CAPTION>
ARM CAPITAL MORGAN STANLEY
ADVISORS MORGAN STANLEY WORLDWIDE
MONEY MARKET ASIAN GROWTH HIGH INCOME
DIVISION (2) DIVISION DIVISION TOTAL
------------ -------------- -------------- -------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ 188,275 $ (149,868) $ 496,787 $ 12,840,572
Net realized gain on sales of investments - 112,991 324,824 5,591,178
Change in net unrealized appreciation/
depreciation during the period - 357,164 280,935 844,743
---------------------------------------------------------------
Net increase in net assets resulting from operations 188,275 320,287 1,102,546 19,276,493
INCREASE IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS
Contributions from contract holders 1,268,496 713,034 387,603 10,192,246
Contract terminations and benefits (4,338,106) (467,378) (478,432) (17,168,921)
Net transfers among investment options 1,440,917 195,818 801,549 2,845,986
---------------------------------------------------------------
Net increase (decrease) in net assets derived
from contract related transactions (1,628,693) 441,474 710,720 (4,130,689)
Contribution by Integrity - - - 5,100,000
Redemption of contributions by Integrity - - (1,712,890) (2,140,294)
Change in amounts retained in Separate Account II by Integrity - - 1,583,037 (3,306,447)
---------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS (1,440,418) 761,761 1,683,413 14,799,063
Net assets, beginning of year 5,580,421 9,512,454 4,312,272 151,484,074
---------------------------------------------------------------
NET ASSETS, END OF YEAR $ 4,140,003 $ 10,274,215 $ 5,995,685 $ 166,283,137
---------------------------------------------------------------
---------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 118,338 63,417 31,518
Terminations and benefits (401,374) (45,176) (39,959)
Net transfers 135,102 17,490 58,888
-----------------------------------------------
Increase (decrease) in units (147,934) 35,731 50,447
-----------------------------------------------
-----------------------------------------------
</TABLE>
(1) Effective April 1, 1996, J.P. Morgan Investment Management, Inc. replaced
Mitchell Hutchins Institutional Investors, Inc. as sub-adviser to the
portfolio.
(2) Effective April 1, 1996, ARM Capital Advisors, Inc. became the sole
investment manager of the portfolio.
SEE ACCOMPANYING NOTES.
8
<PAGE>
Separate Account II
OF
Integrity Life Insurance Company
Notes to Financial Statements
December 31, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS
Integrity Life Insurance Company ("Integrity") established Separate Account II
(the "Separate Account") on May 21, 1992, for the purpose of issuing flexible
premium variable annuity contracts ("contracts"). The Separate Account is a unit
investment trust registered with the Securities and Exchange Commission ("SEC")
under the Investment Company Act of 1940, as amended (the "Investment Company
Act"). The operations of the Separate Account are part of Integrity.
Integrity is an indirect wholly owned subsidiary of ARM Financial Group, Inc.
("ARM"). ARM specializes in the growing asset accumulation business with
particular emphasis on retirement savings and investment products.
Contract holders may allocate or transfer their account values to one or more
investment divisions of the Separate Account or to one or more fixed guaranteed
rate options or systematic transfer options of Integrity's Separate Account
GPO. The Separate Account divisions invest in shares of the corresponding
portfolios of the following funds or insurance trust funds ("Funds"): BT
Insurance Funds Trust ("BT Funds Trust"); Variable Insurance Products Fund
("VIP"), Variable Insurance Products Fund II ("VIP II"), and Variable Insurance
Products Fund III ("VIP III"), part of the Fidelity Investments group of
companies (collectively, "Fidelity's VIP Funds"); The Legends Fund, Inc.
("Legends Fund"); Janus Aspen Series; J.P. Morgan Series Trust II ("JPM
Series"); and Morgan Stanley Universal Funds, Inc. ("Morgan Stanley Universal
Funds"). Bankers Trust Global Asset Management Services, a unit of Bankers Trust
Company, is the investment manager of the BT Funds Trust. Fidelity Management
and Research Company serves as investment adviser to Fidelity's VIP Funds.
Integrity Capital Advisors, Inc. (formerly known as ARM Capital Advisors, Inc.),
a wholly owned subsidiary of ARM, is the investment adviser of the Legends Fund.
Janus Capital Corporation serves as investment adviser to the Janus Aspen
Series. J.P. Morgan Investment Management Inc. is the investment adviser to the
JPM Series. Morgan Stanley Asset Management Inc. ("MSAM") serves as investment
adviser to the Morgan
9
<PAGE>
Separate Account II
OF
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stanley Universal Funds except for Morgan Stanley High Yield Portfolio, for
which Miller Anderson & Sherrerd, LLP serves as investment adviser. MSAM is a
wholly owned subsidiary of Morgan Stanley Dean Witter & Co. ("Morgan Stanley").
At December 31, 1997, approximately 53% of the outstanding shares of voting
stock of ARM is owned by certain private equity funds sponsored by Morgan
Stanley, therefore these two entities are considered affiliates.
On July 23, 1997, Integrity filed an application (amended on October 9, 1997)
with the Securities and Exchange Commission ("SEC") pursuant to Section 26(b) of
the Investment Company Act for an order to approve a substitution of certain
divisions of the Separate Account (the "Substitution"). The Substitution
involved the transfer of assets from a division within the Separate Account to a
new division which invests in shares of corresponding investment portfolios of
an insurance trust mutual fund ("New Division") deemed to have (i) substantially
similar investment strategies and (ii) historically stronger investment
performance and/or lower expense ratios (after waivers and reimbursements). The
Substitution was approved by the SEC on November 14, 1997, and was effected on
that day. The divisions of the Separate Account affected by the Substitution and
the New Divisions which received the assets are as follows:
<TABLE>
<CAPTION>
Original Division New Division
- ----------------- ------------
<S> <C>
Renaissance Balanced Janus Aspen Balanced
Nicholas-Applegate Balanced Janus Aspen Balanced
Pinnacle Fixed Income JPM Bond
ARM Capital Advisors Money Market Janus Aspen Money Market
Morgan Stanley Asian Growth Morgan Stanley Asian Equity
Morgan Stanley Worldwide High Income Morgan Stanley Emerging Markets Debt
</TABLE>
Units of each division of the Separate Account affected by the Substitution
were redeemed in-kind and the redemption proceeds were used to purchase units
of the New Division. The costs of the Substitution were borne by Integrity,
and no fees, transfer
10
<PAGE>
Separate Account II
OF
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
charges or sales charges to effect the Substitution were imposed on the
Separate Account or the contract holders. Prior to and immediately following
the Substitution, the account values of contract holders were the same. In
addition, the Substitution did not alter the tax or insurance benefits to
contract holders or the contractual obligation of Integrity.
The contract holder's account value in a Separate Account division will vary
depending on the performance of the corresponding portfolio. The Separate
Account currently has twenty-one investment divisions available. The investment
objective of each division and its corresponding portfolio are the same. Set
forth below is a summary of the investment objectives of the portfolios of the
Funds.
ZWEIG ASSET ALLOCATION PORTFOLIO seeks long-term capital appreciation. It
invests primarily in blue chip stocks, consistent with preservation of
capital and the reduction of portfolio exposure to market risk, as
determined by the sub-adviser to the portfolio. Blue chip stocks are stocks
which the sub-adviser considers comparable to the stocks included in the
Standard & Poor's 500 Composite Stock Price Index ("S&P 500") at the time
of purchase, and that have a minimum of $400 million market capitalization,
average daily trading volume of 50,000 shares or $425 million in total
assets, and which are traded on the New York Stock Exchange ("NYSE"),
American Stock Exchange ("AMEX"), over-the-counter ("OTC") or on foreign
exchanges. Zweig/Glaser Advisers is the sub-adviser to the portfolio.
HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH PORTFOLIO seeks long-term
capital appreciation. It primarily invests in stocks of established
companies with proven records of superior and consistent growth. The
portfolio may invest all or a portion of its assets in cash and cash
equivalents if the sub-adviser considers the equity markets to be
overvalued. The portfolio may invest in United States government securities
when this appears desirable in light of the portfolio's investment
objective or when market conditions warrant. Harris Bretall Sullivan &
Smith, LLC is the sub-adviser to the portfolio.
SCUDDER KEMPER VALUE PORTFOLIO seeks primarily long-term capital
appreciation with a secondary objective of current income. It invests
principally in a diversified portfolio of securities believed by the
sub-adviser to be undervalued. The sub-adviser's philosophy centers on
identifying stocks of large, well-known companies with solid financial
strength and generous dividend yields that have low price-
11
<PAGE>
Separate Account II
OF
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
earnings ratios and have been generally overlooked by the market. On
December 31, 1997, Zurich Kemper Value, Inc. (formerly Dreman Value
Advisors, Inc.) and Scudder Kemper Investments, Inc. were appointed
sub-advisors following the merger of Zurich Kemper Investments, Inc.
into Scudder, Stevens and Clark, Inc.
ZWEIG EQUITY (SMALL CAP) PORTFOLIO seeks long-term capital appreciation. It
invests primarily in "small company stocks," consistent with preservation
of capital and reduction of portfolio exposure to market risk, as
determined by the sub-adviser. Current income is not an objective. "Small
company stocks" are the 2,500 stock positions immediately after the 500
largest stocks ranked in terms of market capitalization and/or trading
volume, and which are traded on the NYSE, AMEX, OTC or on foreign
exchanges. Zweig/Glaser Advisers is the sub-adviser to the portfolio.
EAFE EQUITY INDEX PORTFOLIO seeks to replicate as closely as possible
(before the deduction of expenses) the total return of the Morgan Stanley
Capital International Europe, Australia, Far East (EAFE) Index, a
capitalization-weighted index containing approximately 1,100 equity
securities of companies located outside the United States. The portfolio
will be invested primarily in equity securities of business enterprises
organized and domiciled outside of the United States or for which the
principal trading market is outside the United States. Statistical methods
will be employed to replicate the EAFE Index by buying most of the EAFE
Index securities. Securities purchased for the portfolio will generally,
but not necessarily, be traded on a foreign securities exchange. Bankers
Trust Global Asset Management Services is the investment adviser to the
portfolio.
EQUITY 500 INDEX PORTFOLIO seeks to replicate as closely as possible
(before the deduction of expenses) the total return of the S&P 500, an
index emphasizing large-capitalization stocks. The portfolio will include
the common stock of those companies included in the S&P 500, other than
Bankers Trust New York Corporation, selected on the basis of computer
generated statistical data, that are deemed representative of the industry
diversification of the entire S&P 500. Bankers Trust Global Asset
Management Services is the investment adviser to the portfolio.
12
<PAGE>
Separate Account II
OF
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SMALL CAP INDEX PORTFOLIO seeks to replicate as closely as possible (before
the deduction of expenses) the total return of the Russell 2000 Small Stock
Index (the "Russell 2000"), an index consisting of 2,000 small-
capitalization common stocks. The portfolio will include the common stock
of companies included in the Russell 2000, on the basis of computer-
generated statistical data, that are deemed representative of the industry
diversification of the entire Russell 2000. Bankers Trust Global Asset
Management Services is the investment adviser to the portfolio.
VIP EQUITY-INCOME PORTFOLIO seeks reasonable income by investing primarily
in income producing equity securities, with the potential for capital
appreciation as a consideration. It normally invests at least 65% of its
assets in income-producing common or preferred stocks and the remainder in
debt securities. Fidelity Management and Research Company serves as the
investment adviser to the portfolio.
VIP II CONTRAFUND PORTFOLIO is a growth fund which seeks to increase the
value of the investment over the long-term by investing in equity
securities of companies that are undervalued or out of favor. This approach
focuses on companies that are currently out of public favor but show
potential for capital appreciation. The portfolio invests primarily in
common stocks and securities convertible into common stock, but it has the
flexibility to invest in any type of security that may produce capital
appreciation. Fidelity Management and Research Company serves as the
investment adviser to the portfolio.
VIP III GROWTH & INCOME PORTFOLIO seeks high total return through a
combination of current income and capital appreciation by investing mainly
in equity securities. It invests primarily in stocks of companies that
offer potential for growth in earnings while paying dividends, but offer
the potential for capital appreciation on future income. Investments may
include common and preferred stocks, convertible securities, fixed-income
securities and foreign securities. Fidelity Management and Research Company
serves as the investment adviser to the portfolio.
VIP III GROWTH OPPORTUNITIES PORTFOLIO seeks to provide capital growth by
investing primarily in common stocks and securities convertible into common
stock. Although the portfolio invests in common stocks and securities
convertible into common stock, it has the ability to purchase other
securities, such as preferred stocks and bonds, that may produce capital
growth. Fidelity Management and Research Company serves as the investment
adviser to the portfolio.
13
<PAGE>
Separate Account II
OF
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
JANUS ASPEN CAPITAL APPRECIATION PORTFOLIO seeks long-term growth of
capital. It is a non-diversified portfolio that pursues its objective by
investing primarily in common stocks of issuers of any size, which may
include larger well-established issuers and/or smaller emerging growth
companies. The portfolio invests primarily in common stocks of foreign and
domestic companies, and may invest to a lesser degree in other types of
securities including preferred stocks, warrants, convertible securities and
debt securities when its portfolio manager perceives an opportunity for
capital growth from such securities or to receive a return on idle cash.
Janus Capital Corporation serves as the investment adviser to the
portfolio.
JANUS ASPEN BALANCED PORTFOLIO seeks long-term capital growth, consistent
with preservation of capital and balanced by current income. It is a
diversified portfolio that, under normal circumstances, pursues its
objective by investing 40-60% of its assets in securities selected
primarily for their growth potential and 40-60% of its assets in securities
selected primarily for their income potential. The portfolio normally
invests at least 25% of its assets in fixed-income senior securities, which
include debt securities and preferred stocks. Janus Capital Corporation
serves as the investment adviser to the portfolio.
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO seeks long-term growth of capital in
a manner consistent with the preservation of capital. It is a diversified
portfolio that pursues its objective primarily through investments in
common stocks of foreign and domestic issuers. The portfolio has the
flexibility to invest on a worldwide basis in companies and other
organizations of any size, regardless of country of organization or place
of principal business activity. Janus Aspen Worldwide Growth portfolio
normally invests in issuers from at least five different countries,
including the United States. The portfolio may at any time invest in fewer
than five countries or even a single country. Janus Capital Corporation
serves as the investment adviser to the portfolio.
JANUS ASPEN MONEY MARKET PORTFOLIO seeks maximum current income to the
extent consistent with stability of capital. There can be no assurance that
the portfolio will achieve its investment objective or be able to maintain
a stable net asset value of $1.00 per share. The portfolio will invest only
in eligible high quality, short-term money market instruments that present
minimal credit risks, as determined by Janus Capital Corporation, the
portfolio's investment adviser, pursuant to procedures
14
<PAGE>
Separate Account II
OF
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
adopted by the Trustees. The portfolio may at any time invest only in
United States dollar-denominated instruments that have a remaining
maturity of 397 days or less and will maintain a dollar-weighted average
portfolio maturity of 90 days or less. Janus Capital Corporation serves
as the investment adviser to the portfolio.
JPM INTERNATIONAL EQUITY PORTFOLIO seeks to provide a high total return
from a portfolio of equity securities of foreign corporations. Total
return will consist of realized and unrealized capital gains and losses
plus income less expenses. The portfolio is designed for investors with
a long-term investment horizon who want to diversify their investments
by adding international equities and take advantage of investment
opportunities outside the United States. The portfolio seeks to achieve
its investment objective through country allocation and stock valuation
and selection. J.P Morgan Investment Management Inc. is the investment
adviser to the portfolio.
JPM BOND PORTFOLIO seeks to provide a high total return consistent with
moderate risk of capital and maintenance of liquidity. Total return will
consist of realized and unrealized capital gains and losses plus income
less expenses. Although the net asset value of the portfolio will
fluctuate, the portfolio attempts to preserve the value of its investments
to the extent consistent with its objective. J.P Morgan Investment
Management Inc. is the investment adviser to the portfolio.
MORGAN STANLEY ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of Asian issuers (excluding
Japan) using an approach that is oriented to the selection of individual
stocks that the adviser believes are undervalued. The portfolio intends to
invest primarily in equity securities that are traded on recognized stock
exchanges of countries in Asia and in equity securities of companies
organized under the laws of an Asian country whose business is conducted
principally in Asia. MSAM serves as the investment adviser to the
portfolio.
MORGAN STANLEY EMERGING MARKETS DEBT PORTFOLIO seeks high total return by
investing primarily in fixed income securities of government and
government-related issuers located in emerging market countries, which
securities provide a high level of current income, while at the same time
holding the potential for capital appreciation if the perceived
creditworthiness of the issuer improves due to improving economic,
financial, political, social or other conditions in the country in which
the issuer is located. MSAM serves as the investment adviser to the
portfolio.
15
<PAGE>
Separate Account II
OF
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MORGAN STANLEY HIGH YIELD PORTFOLIO seeks above-average total return over a
market cycle of three to five years by investing primarily in a diversified
portfolio of high yield securities, including corporate bonds and other
fixed income securities and derivatives. High yield securities are rated
below investment grade and are commonly referred to as "junk bonds." The
portfolio's average weighted maturity will ordinarily exceed five years and
will usually be between five and fifteen years. Miller Anderson & Sherrerd,
LLP serves as the investment adviser to the portfolio.
MORGAN STANLEY U.S. REAL ESTATE PORTFOLIO seeks above-average current
income and long-term capital appreciation by investing primarily in equity
securities of United States and non-United States companies principally
engaged in the United States real estate industry, including real estate
investment trusts ("REITs"). MSAM serves as the investment adviser to the
portfolio.
The assets of the Separate Account are owned by Integrity. The portion of the
Separate Account's assets supporting the contracts may not be used to satisfy
liabilities arising out of any other business of Integrity.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for unit investment trusts.
INVESTMENTS
Investments in shares of the Funds are valued at the net asset values of the
respective portfolios, which approximates fair value. The difference between
cost and fair value is reflected as unrealized appreciation and depreciation of
investments.
16
<PAGE>
Separate Account II
OF
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Share transactions are recorded on the trade date. Realized gains and losses on
sales of the Funds' shares are determined based on the identified cost basis.
Dividends from income and capital gain distributions are recorded on the
ex-dividend date. Dividends and distributions from the Funds' portfolios are
reinvested in the respective portfolios and are reflected in the unit value
of the divisions of the Separate Account.
UNIT VALUE
Unit values for the Separate Account divisions are computed at the end of each
business day. The unit value is equal to the unit value for the preceding
business day multiplied by a net investment factor. This net investment factor
is determined based on the value of the underlying mutual fund portfolios of the
Separate Account, reinvested dividends and capital gains, new premium deposits
or withdrawals, and the daily asset charge for the mortality and expense risk
and administrative charges. Unit values are adjusted daily for all activity in
the Separate Account.
TAXES
Operations of the Separate Account are included in the income tax return of
Integrity, which is taxed as a life insurance company under the Internal Revenue
Code. The Separate Account will not be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code. Under existing federal income
tax law, no taxes are payable on the investment income or on the capital gains
of the Separate Account.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
17
<PAGE>
Separate Account II
OF
Integrity Life Insurance Company
Notes to Financial Statements (continued)
2. INVESTMENTS
The aggregate cost of portfolio shares purchased and proceeds from portfolio
shares sold during the year ended December 31, 1997 and the cost of shares held
at December 31, 1997 for each division were as follows:
<TABLE>
<CAPTION>
DIVISION PURCHASES SALES COST
- --------------------------------------- ----------- ----------- ------------
<S> <C> <C> <C>
Renaissance Balanced $ 3,279,430 $21,837,178 $ -
Zweig Asset Allocation 2,340,973 7,781,386 29,415,673
Nicholas-Applegate Balanced 6,361,197 47,349,784 -
Harris Bretall Sullivan & Smith Equity
Growth 7,379,822 3,892,787 20,264,296
Scudder Kemper Value 14,722,202 6,619,326 26,731,360
Zweig Equity (Small Cap) 2,662,644 2,252,697 8,540,960
Pinnacle Fixed Income 815,185 9,099,272 -
ARM Capital Advisors Money Market 13,942,968 18,084,059 -
Morgan Stanley Asian Growth 702,799 6,757,797 -
Morgan Stanley Worldwide High Income 2,584,939 7,690,160 -
EAFE Equity Index 206,049 19,757 184,882
Equity 500 Index 12,400,498 1,664,377 10,760,441
Small Cap Index 705,568 37,182 666,299
VIP Equity-Income 1,558,961 25,169 1,532,766
VIP II Contrafund 1,273,937 23,448 1,249,346
VIP III Growth & Income 1,311,454 93,195 1,219,130
VIP III Growth Opportunities 897,603 116,049 782,273
Janus Aspen Capital Appreciation 859,546 3,714 855,557
Janus Aspen Balanced 57,749,723 2,144,093 55,613,260
Janus Aspen Worldwide Growth 1,727,064 309,818 1,410,882
Janus Aspen Money Market 8,592,228 2,196,735 6,395,493
JPM International Equity 457,965 28,112 426,819
JPM Bond 9,371,433 1,113,359 8,264,367
Morgan Stanley Asian Equity 4,790,850 390,455 4,390,682
Morgan Stanley Emerging Markets Debt 6,180,636 440,937 5,755,679
Morgan Stanley High Yield 755,372 15,702 739,710
Morgan Stanley U.S. Real Estate 786,326 101,620 682,404
------------
$185,882,279
------------
------------
</TABLE>
18
<PAGE>
Separate Account II
OF
Integrity Life Insurance Company
Notes to Financial Statements (continued)
3. EXPENSES
Integrity assumes mortality and expense risks and incurs certain administrative
expenses related to the operations of the Separate Account and deducts a charge
from the assets of the Separate Account at an annual rate of 1.20% and 0.15% of
net assets, respectively, to cover these risks and expenses. In addition, an
annual charge of $30 per contract is assessed if the participant's account value
is less than $50,000 at the end of any participation year prior to the
participant's retirement date (as defined by the participant's contract).
4. AMOUNT RETAINED BY INTEGRITY
The amount retained in the Separate Account by Integrity is comprised of amounts
which Integrity allocated to certain Separate Account divisions to facilitate
the commencement of operations and amounts accruing to Integrity from the
operations of the Separate Account. Such amounts are not subject to charges for
mortality and expense risks and administrative expenses. Amounts retained in
the Separate Account by Integrity may be transferred by Integrity to its general
account.
During 1996, Integrity allocated $5.1 million to the Pinnacle Fixed Income
Division. Also during 1996, Integrity transferred to its general account all
amounts retained by Integrity in the Morgan Stanley Worldwide High Income
Division and $427,404 retained in the Pinnacle Fixed Income Division. In 1997,
Integrity allocated $10.0 million to the Equity 500 Index Division and, as a
part of the Substitution, transferred all amounts retained by Integrity in the
Pinnacle Fixed Income Division to the JPM Bond Division. Also during 1997,
Integrity transferred to its general account $1.5 million and $541,265 retained
by Integrity in the Equity 500 Index Division and JPM Bond Division,
respectively.
19
<PAGE>
Financial Statements
(Statutory Basis)
Integrity Life Insurance Company
YEARS ENDED DECEMBER 31, 1997 AND 1996
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
Integrity Life Insurance Company
Financial Statements
(Statutory Basis)
Years Ended December 31, 1997 and 1996
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . .1
Audited Financial Statements
Balance Sheets (Statutory Basis) . . . . . . . . . . . . . . . . . . . . .3
Statements of Income (Statutory Basis) . . . . . . . . . . . . . . . . . .5
Statements of Changes in Capital and Surplus (Statutory Basis) . . . . . .6
Statements of Cash Flows (Statutory Basis) . . . . . . . . . . . . . . . .7
Notes to Financial Statements (Statutory Basis). . . . . . . . . . . . . .9
</TABLE>
<PAGE>
Report of Independent Auditors
Board of Directors
Integrity Life Insurance Company
We have audited the accompanying statutory basis balance sheets of Integrity
Life Insurance Company as of December 31, 1997 and 1996, and the related
statutory basis statements of income, changes in capital and surplus, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the Ohio Department of Insurance, which practices differ from
generally accepted accounting principles. The variances between such practices
and generally accepted accounting principles and the effects on the accompanying
financial statements are described in Note 1.
In our opinion, because of the effects of the matter described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of Integrity Life Insurance Company at December 31, 1997 and 1996, or the
results of its operations or its cash flows for the years then ended.
1
<PAGE>
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Integrity Life
Insurance Company at December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting practices prescribed or permitted by the Ohio Department of
Insurance.
Louisville, Kentucky
February 10, 1998
2
<PAGE>
Integrity Life Insurance Company
Balance Sheets (Statutory Basis)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
--------------------------
(IN THOUSANDS)
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Bonds $3,444,659 $2,482,392
Preferred stocks 58,369 42,234
Subsidiaries 54,028 48,272
Mortgage loans 13,186 32,946
Policy loans 99,531 98,212
Cash and short-term investments 201,242 87,009
Other invested assets 27,591 6,807
--------------------------
Total cash and invested assets 3,898,606 2,797,872
Separate account assets 1,822,557 764,060
Accrued investment income 38,247 29,182
Reinsurance balances receivable 4,837 1,702
Other admitted assets 207 1,400
--------------------------
Total admitted assets $5,764,454 $3,594,216
--------------------------
--------------------------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
-------------------------
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Policy and contract liabilities:
Life and annuity reserves $1,603,893 $1,722,182
Funding agreement and GIC deposit
fund liabilities 2,039,202 891,936
Unpaid claims 207 232
Deposits on policies to be issued, net (1,715) 348
-------------------------
Total policy and contract liabilities 3,641,587 2,614,698
Separate account liabilities 1,798,069 759,170
Accounts payable and accrued expenses 2,538 3,187
Transfers to separate accounts due or
accrued, net (42,028) (37,533)
Reinsurance balances payable 14,602 13,473
Federal income taxes 763 -
Asset valuation reserve 23,368 13,805
Interest maintenance reserve 42,272 38,594
Other liabilities 71,523 24,988
-------------------------
Total liabilities 5,552,694 3,430,382
Capital and surplus:
Common stock, $2 par value, 1,500,000 shares
authorized, issued and outstanding 3,000 3,000
Paid-in surplus 113,109 87,535
Unassigned surplus 95,651 73,299
-------------------------
Total capital and surplus 211,760 163,834
-------------------------
Total liabilities and capital and surplus $5,764,454 $3,594,216
-------------------------
-------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
Integrity Life Insurance Company
Statements of Income (Statutory Basis)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
-------------------------
(IN THOUSANDS)
<S> <C> <C>
Premiums and other revenues:
Premiums and annuity considerations $ 13,386 $ 7,803
Deposit-type funds 2,191,350 737,791
Net investment income 239,514 171,811
Amortization of the interest maintenance
reserve 2,561 3,090
Income from separate account seed money
investment 469 347
Other revenues 16,988 13,085
-------------------------
Total premiums and other revenues 2,464,268 933,927
Benefits paid or provided:
Death benefits 5,136 3,196
Annuity benefits 136,630 78,058
Surrender benefits 408,615 248,282
Interest on funds left on deposit 84,652 25,204
Payments on supplementary contracts 10,659 10,261
Increase in reserves and deposit fund
liabilities 945,161 372,699
-------------------------
Total benefits paid or provided 1,590,853 737,700
Insurance and other expenses:
Commissions 29,189 20,270
General expenses 15,869 8,955
Taxes, licenses and fees 1,111 549
Net transfers to separate accounts 785,374 137,570
Other expenses 3,354 1,085
-------------------------
Total insurance and other expenses 834,897 168,429
-------------------------
Gain from operations before federal income
taxes and net realized capital gains (losses) 38,518 27,798
Federal income tax expense (benefit) 2,871 (3,259)
-------------------------
Gain from operations before net realized
capital gains (losses) 35,647 31,057
Net realized capital gains (losses), excluding
realized capital gains, net of tax,
transferred to the interest maintenance
reserve (1997-$6,239; 1996-$6,467) 2,512 (5,015)
-------------------------
Net income $ 38,159 $ 26,042
-------------------------
-------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
Integrity Life Insurance Company
Statements of Changes in Capital and Surplus (Statutory Basis)
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
TOTAL
COMMON PAID-IN UNASSIGNED CAPITAL AND
STOCK SURPLUS SURPLUS SURPLUS
------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, January 1, 1996 $ 3,000 $ 87,535 $ 55,492 $146,027
Net income 26,042 26,042
Net change in unrealized gain
of subsidiary 9,133 9,133
Decrease in nonadmitted assets 27 27
Increase in asset valuation reserve (1,395) (1,395)
Dividends to shareholder (16,000) (16,000)
------------------------------------------------------
Balance, December 31, 1996 3,000 87,535 73,299 163,834
Net income 38,159 38,159
Net change in unrealized gain
of subsidiary 5,756 5,756
Increase in asset valuation reserve (9,563) (9,563)
Capital contribution, net 25,574 25,574
Dividends to shareholder (12,000) (12,000)
------------------------------------------------------
Balance, December 31, 1997 $ 3,000 $113,109 $ 95,651 $211,760
------------------------------------------------------
------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
6
<PAGE>
Integrity Life Insurance Company
Statements of Cash Flows (Statutory Basis)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
--------------------------
(IN THOUSANDS)
<S> <C> <C>
OPERATIONS:
Premiums, policy proceeds, and other
considerations received $2,204,736 $ 745,594
Net investment income received 230,747 171,376
Commission and expense allowances
received on reinsurance ceded 3,838 1,905
Benefits paid (561,208) (341,767)
Insurance expenses paid (46,819) (30,246)
Other income received net of other
expenses paid 9,092 10,100
Net transfers to separate accounts (789,869) (144,958)
Federal income taxes paid (5,501) (3,702)
--------------------------
Net cash provided by operations 1,045,016 408,302
INVESTMENT ACTIVITIES:
Proceeds from sales, maturities, or
repayments of investments:
Bonds 3,407,120 1,604,304
Preferred stocks 87,435 57,895
Mortgage loans 19,760 5,668
Real estate 359 -
Other invested assets 10,216 7,233
Net gains (losses) on cash and
short-term investments (24) 9
Miscellaneous proceeds 3,436 211
--------------------------
Total investment proceeds 3,528,302 1,675,320
Benefits recovered (taxes paid) on
capital gains 175 (2,312)
--------------------------
Net proceeds from sales, maturities,
or repayments of investments 3,528,477 1,673,008
</TABLE>
7
<PAGE>
Integrity Life Insurance Company
Statements of Cash Flows (Statutory Basis) (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
-------------------------
(IN THOUSANDS)
<S> <C> <C>
Cost of investments acquired:
Bonds 4,376,185 1,960,794
Preferred and common stocks 101,175 92,077
Other invested assets 31,931 -
-------------------------
Total cost of investments acquired 4,509,291 2,052,871
Net increase in policy loans and premium notes 1,320 3,569
-------------------------
Net cash used in investment activities (982,134) (383,432)
FINANCING AND MISCELLANEOUS ACTIVITIES:
Other cash provided:
Capital and surplus paid-in 40,000 -
Other sources 52,548 40,403
-------------------------
Total other cash provided 92,548 40,403
Other cash applied:
Dividends to shareholder 12,000 16,000
Other applications, net 29,197 16,740
-------------------------
Total other cash applied 41,197 32,740
-------------------------
Net cash provided by financing and
miscellaneous activities 51,351 7,663
-------------------------
Net increase in cash and short-term investments 114,233 32,533
Cash and short-term investments at beginning
of year 87,009 54,476
-------------------------
Cash and short-term investments at end of year $ 201,242 $ 87,009
-------------------------
-------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
8
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)
December 31, 1997
1. ORGANIZATION AND ACCOUNTING POLICIES
ORGANIZATION
Integrity Life Insurance Company ("Integrity" or the "Company") is an indirect
wholly owned subsidiary of ARM Financial Group, Inc. ("ARM"). ARM acquired the
Company and its wholly owned insurance subsidiary, National Integrity Life
Insurance Company ("National Integrity"), on November 26, 1993 from The National
Mutual Life Association of Australasia Limited ("National Mutual"). The Company
is domiciled in the state of Ohio. The Company, currently licensed in 45 states
and the District of Columbia, and National Integrity specialize in the growing
asset accumulation business with particular emphasis on retirement savings and
investment products.
In June 1997, ARM completed an initial public offering of 9.2 million shares
of its common stock of which 5.75 million shares were sold by ARM for net
proceeds of $78.8 million. The remaining 3.45 million shares were sold by
certain private equity funds sponsored by Morgan Stanley Dean Witter & Co.
("Morgan Stanley Stockholders"). On June 30, 1997, ARM used a portion of such
net proceeds to make a $40 million capital contribution to the Company,
thereby strengthening the Company's capital base to provide for future
growth. Simultaneously, the Company paid a $14.4 million dividend of bonds
held by the Company to ARM for a net capital contribution of $25.6 million.
The Morgan Stanley Stockholders owned approximately 91% of the outstanding
shares of ARM's common stock prior to the offering and, as a result of the
offering, owned approximately 53% at December 31, 1997.
BASIS OF PRESENTATION
The accompanying financial statements of the Company have been prepared in
conformity with accounting practices prescribed or permitted by the Ohio
Department of Insurance. Such practices vary from generally accepted accounting
principles ("GAAP"). The more significant variances from GAAP are as follows:
INVESTMENTS
Investments in bonds and preferred stocks are reported at amortized cost or fair
value based on the National Association of Insurance Commissioners' ("NAIC")
rating; for GAAP, such fixed maturity investments are designated at purchase as
held-to-maturity, trading or available-for-sale. Held-to-maturity fixed
investments are reported at amortized
9
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
cost, and the remaining fixed maturity investments are reported at fair value
with unrealized holding gains and losses reported in operations for those
designated as trading and as a separate component of shareholder's equity for
those designated as available-for-sale. In addition, fair values of certain
investments in bonds and stocks are based on values specified by the NAIC,
rather than on actual or estimated fair values used for GAAP.
Realized gains and losses are reported in income net of income tax and transfers
to the interest maintenance reserve. Changes between cost and admitted
investment asset amounts are credited or charged directly to unassigned surplus
rather than to a separate surplus account. The Asset Valuation Reserve is
determined by an NAIC prescribed formula and is reported as a liability rather
than unassigned surplus. Under a formula prescribed by the NAIC, the Company
defers the portion of realized gains and losses on sales of fixed income
investments, principally bonds and mortgage loans, attributable to changes in
the general level of interest rates and amortizes those deferrals over the
remaining period to maturity of the individual security sold using the seriatim
method. The net deferral is reported as the Interest Maintenance Reserve in the
accompanying balance sheets. Under GAAP, realized gains and losses are reported
in the income statement on a pretax basis in the period that the asset giving
rise to the gain or loss is sold and include provisions when there has been a
decline in asset values deemed other than temporary.
SUBSIDIARY
The accounts and operations of the Company's subsidiary are not consolidated
with the accounts and operations of the Company as would be required under GAAP.
POLICY ACQUISITION COSTS
Costs of acquiring and renewing business are expensed when incurred. Under GAAP,
acquisition costs related to investment-type products, to the extent recoverable
from future gross profits, are amortized generally in proportion to the
emergence of future gross profits over the estimated term of the underlying
policies.
10
<PAGE>
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
NONADMITTED ASSETS
Certain assets designated as "nonadmitted," principally receivables greater than
90 days past due, are excluded from the accompanying balance sheets and are
charged directly to unassigned surplus.
PREMIUMS AND BENEFITS
Revenues include premiums and deposits received and benefits include death
benefits paid and the change in policy reserves. Under GAAP, such premiums and
deposits received are accounted for as a deposit liability and therefore not
recognized as premium revenue; benefits paid equal to the policy account value
are accounted for as a return of deposit instead of benefit expense.
BENEFIT RESERVES
Certain policy reserves are calculated using statutorily prescribed interest and
mortality assumptions rather than on expected experience or actual account
balances as would be required under GAAP.
FEDERAL INCOME TAXES
Deferred federal income taxes are not provided for differences between the
financial statement amounts and tax bases of assets and liabilities.
STATEMENT OF CASH FLOWS
Cash and short-term investments in the statement of cash flows represent cash
balances and investments with initial maturities of one year or less. Under
GAAP, the corresponding captions of cash and cash equivalents include cash
balances and investments with initial maturities of three months or less.
11
<PAGE>
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
The effects of the foregoing variances from GAAP on the accompanying statutory
basis financial statements are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
------------------------
(IN THOUSANDS)
<S> <C> <C>
Net income as reported in the accompanying
statutory basis financial statements $ 38,159 $ 26,042
Deferred policy acquisition costs,
net of amortization 19,174 11,036
Adjustments to customer deposits (10,224) (1,883)
Adjustments to invested asset carrying values
at acquisition date (69) (412)
Amortization of value of insurance in force (8,423) (5,850)
Amortization of interest maintenance reserve (2,561) (3,090)
Adjustments for realized investment gains 217 3,373
Adjustments for federal income tax expense (4,419) (6,516)
Investment in subsidiary 6,009 9,498
Other 3,300 (2,108)
------------------------
Net income, GAAP basis $ 41,163 $ 30,090
------------------------
------------------------
</TABLE>
12
<PAGE>
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
-------------------------
(IN THOUSANDS)
<S> <C> <C>
Capital and surplus as reported in the
accompanying statutory basis
financial statements $ 211,760 $ 163,834
Adjustments to customer deposits (179,265) (169,041)
Adjustments to invested asset carrying
values at acquisition date (15,432) (15,580)
Asset valuation reserve and interest
maintenance reserve 88,089 81,246
Value of insurance in force 76,929 85,352
Goodwill 6,571 6,826
Deferred policy acquisition costs 73,528 54,354
Net unrealized gains on available-for-sale
securities 2,912 (9,211)
Other 25,035 8,238
-------------------------
Shareholder's equity, GAAP basis $ 290,127 $ 206,018
-------------------------
-------------------------
</TABLE>
Other significant accounting practices are as follows:
INVESTMENTS
Bonds, preferred stocks, common stocks, and short-term investments are stated at
values prescribed by the NAIC, as follows:
Bonds and short-term investments are reported at cost or amortized cost. The
discount or premium on bonds is amortized using the interest method. For
loan-backed bonds and structured securities, anticipated prepayments are
considered when determining the amortization of discount or premium. Prepayment
assumptions for loan-backed bonds and structured securities are obtained from
broker-dealer survey values or internal estimates. These assumptions are
consistent with the current interest rate and economic environment. The
retrospective adjustment method is used to value all such securities.
13
<PAGE>
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
Preferred stocks are reported at cost.
The Company's investment in its insurance subsidiary is reported at the equity
in the underlying statutory basis of National Integrity's net assets. Changes in
the admitted asset carrying amount of the investment are credited or charged
directly to unassigned surplus.
Short-term investments includes investments with maturities of less than one
year at the date of acquisition.
Mortgage loans and policy loans are reported at unpaid principal balances.
Realized capital gains and losses are determined using the specific
identification method.
BENEFITS
Life and annuity reserves are developed by actuarial methods and are determined
based on published tables using statutorily specified interest rates and
valuation methods that will provide, in the aggregate, reserves that are greater
than or equal to the minimum or guaranteed policy cash values or the amounts
required by the Ohio Department of Insurance. The Company waives deduction of
deferred fractional premiums upon the death of life and annuity policy insureds
and does not return any premium beyond the date of death. Surrender values on
policies do not exceed the corresponding benefit reserve. Policies issued
subject to multiple table substandard extra premiums are valued on the standard
reserve basis which recognizes the non-level incidence of the excess mortality
costs. Additional reserves are established when the results of cash flow testing
under various interest rate scenarios indicate the need for such reserves.
Tabular interest, tabular less actual reserve released, and tabular cost have
been determined by formula as prescribed by the NAIC.
REINSURANCE
Reinsurance premiums, benefits and expenses are accounted for on bases
consistent with those used in accounting for the original policies issued and
the terms of the reinsurance contracts. Premiums, benefits and expenses, and the
reserves for policy and contract liabilities are reported net, rather than
gross, of reinsured amounts.
14
<PAGE>
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
SEPARATE ACCOUNTS
Separate account assets and liabilities reported in the accompanying financial
statements represent funds that are separately administered, principally for
variable annuity contracts and institutional funding agreements. Separate
account assets are reported at fair value. Surrender charges collectible by the
general account in the event of variable annuity contract surrenders are
reported as a negative liability rather than an asset pursuant to prescribed
NAIC accounting practices. Investment income and interest credited on deposits
held in guaranteed separate accounts are included in the accompanying statements
of income. The Company receives administratives fees for managing the
non-guaranteed separate accounts and other fees for assuming mortality and
certain expense risks. Such fees are included in other revenues.
USE OF ESTIMATES
The preparation of financial statements in compliance with statutory accounting
practices requires management to make estimates and assumptions that affect
amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
presentation of the 1997 financial statements. These reclassifications had no
effect on previously reported net income or surplus.
2. PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory basis financial statements are prepared in accordance
with accounting practices prescribed or permitted by the Ohio Department of
Insurance. "Prescribed" statutory accounting practices include state laws,
regulations, and general administrative rules, as well as a variety of
publications of the NAIC. "Permitted" statutory accounting practices encompass
all accounting practices that are not prescribed; such practices may differ from
state to state, may differ from company to company within a state, and may
change in the future. The NAIC is in the process of codifying statutory
accounting practices ("Codification"). Codification will likely change, to some
extent, prescribed statutory accounting practices and may result in changes to
the accounting practices that the
15
<PAGE>
2. PERMITTED STATUTORY ACCOUNTING PRACTICES (CONTINUED)
Company uses to prepare its statutory basis financial statements. Codification
has been approved by the NAIC in March 1998, but it will require adoption by the
various states before it becomes the prescribed statutory basis of accounting
for insurance companies domesticated within those states. Accordingly, before
Codification becomes effective for the Company, Ohio must adopt Codification as
the prescribed basis of accounting on which domestic insurers must report their
statutory basis results to the Department of Insurance. At this time it is
unclear whether Ohio will adopt Codification. The Company is monitoring
developments related to codification and assessing the potential effects any
changes would have on the Company's statutory basis financial statements.
3. INVESTMENTS
The cost or amortized cost and the fair value of investments in bonds are
summarized as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
At December 31, 1997:
Mortgage-backed securities $ 1,606,968 $ - $ - $1,606,968
Corporate securities 1,132,531 13,329 7,533 1,138,327
Asset-backed securities 374,841 - - 374,841
U.S. Treasury securities and
obligations of U.S. government
agencies 276,801 714 7 277,508
Foreign governments 49,513 121 437 49,197
States and political subdivisions 4,005 160 - 4,165
---------------------------------------------------------
Total bonds $ 3,444,659 $14,324 $7,977 $3,451,006
---------------------------------------------------------
---------------------------------------------------------
</TABLE>
16
<PAGE>
3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
At December 31, 1996:
Mortgage-backed securities $ 1,182,448 $ - $ 170 $1,182,278
Corporate securities 746,732 5,315 19,741 732,306
Asset-backed securities 282,903 - - 282,903
U.S. Treasury securities and
obligations of U.S. government
agencies 226,928 778 1,343 226,363
Foreign governments 39,336 160 296 39,200
States and political subdivisions 4,045 121 - 4,166
---------------------------------------------------------
Total bonds $ 2,482,392 $6,374 $21,550 $2,467,216
---------------------------------------------------------
---------------------------------------------------------
</TABLE>
Fair values are based on published quotations of the Securities Valuation
Office of the NAIC. Fair values generally represent quoted market value
prices for securities traded in the public marketplace, or analytically
determined values using bid or closing prices for securities not traded in
the public marketplace. However, for certain investments for which the NAIC
does not provide a value, the Company uses the amortized cost amount as a
substitute for fair value in accordance with prescribed guidance. As of
December 31, 1997 and 1996, the fair value of investments in bonds includes
$2.9 billion and $1.9 billion, respectively, of bonds that were valued at
amortized cost.
17
<PAGE>
3. INVESTMENTS (CONTINUED)
A summary of the cost or amortized cost and fair value of the Company's
investments in bonds at December 31, 1997, by contractual maturity, is as
follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED
COST FAIR VALUE
-------------------------
(IN THOUSANDS)
<S> <C> <C>
Years to maturity:
One or less $ 3,455 $ 3,458
After one through five 115,951 116,123
After five through ten 283,999 282,881
After ten 1,059,445 1,066,735
Asset-backed securities 374,841 374,841
Mortgage-backed securities 1,606,968 1,606,968
-------------------------
Total $3,444,659 $3,451,006
-------------------------
-------------------------
</TABLE>
The expected maturities in the foregoing table may differ from the
contractual maturities because certain borrowers have the right to call or
prepay obligations with or without call or prepayment penalties and because
asset-backed and mortgage-backed securities (including floating-rate
securities) provide for periodic payments throughout their life.
Proceeds from the sales of investments in bonds during 1997 and 1996 were
$2.9 billion and $1.4 billion; gross gains of $34.9 million and $26.2
million, and gross losses of $26.9 million and $14.4 million were realized on
those sales, respectively.
At December 31, 1997 and 1996, bonds with an admitted asset value of
$7,664,000 and $7,693,000, respectively, were on deposit with state insurance
departments to satisfy regulatory requirements.
At December 31, 1997 and 1996, the fair value of future contracts, call and
put options and interest rate swaps held by the Company was, in its separate
accounts, $11.3 million and $3.9
18
<PAGE>
3. INVESTMENTS (CONTINUED)
million, respectively. These derivative financial instruments are used to
hedge specific market value risks associated with the Company's
equity-indexed annuity products and separate account seed money investments
and interest rate risks associated with certain institutional spread
deposits. The derivative financial instruments are not held for trading
purposes and are classified on the Company's balance sheet as separate
account assets. The derivative financial instruments hedge items carried at
fair value and are therefore marked to market with unrealized gains and
losses recognized through the separate account statements of operations. The
Company is exposed to credit-related losses in the event of nonperformance by
counter parties to the derivative financial instruments, but does not expect
any counter parties to fail to meet their obligations given their high credit
ratings.
Unrealized gains and losses on investment in subsidiary are reported directly
in surplus and do not affect operations. The gross unrealized gains and
losses on, and the cost and fair value of, the investment are summarized as
follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
At December 31, 1997:
Subsidiary $ 17,823 $ 36,205 $ - $ 54,028
------------------------------------------------------
------------------------------------------------------
At December 31, 1996:
Subsidiary $ 17,823 $ 30,449 $ - $ 48,272
------------------------------------------------------
------------------------------------------------------
</TABLE>
The Company's mortgage loan portfolio is primarily comprised of agricultural
loans. The Company has made no new investments in mortgage loans during 1997.
The maximum percentage of any one loan to the value of the security at the
time of the loan exclusive of and purchase money mortgages is 75%. Fire
insurance is required on all properties covered by mortgage loans. As of
December 31, 1997, the Company held no mortgages with interest more than one
year past due. During 1997, no interest rates of outstanding mortgage loans
were reduced. No amounts have been advanced by the Company.
19
<PAGE>
3. INVESTMENTS (CONTINUED)
Major categories of the Company's net investment income are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
-----------------------
(IN THOUSANDS)
<S> <C> <C>
Income:
Bonds $216,166 $158,724
Preferred stocks 6,042 3,626
Mortgage loans 5,619 3,703
Real estate 158 218
Policy loans 6,842 6,729
Cash and short-term investments 7,072 3,849
Other investment income 880 168
-----------------------
Total investment income 242,779 177,017
Investment expenses (3,265) (5,206)
-----------------------
Net investment income $239,514 $171,811
-----------------------
-----------------------
</TABLE>
4. REINSURANCE
Consistent with prudent business practices and the general practice of the
insurance industry, the Company reinsures risks under certain of its
insurance products with other insurance companies through reinsurance
agreements. Through these reinsurance agreements, substantially all mortality
risks associated with single premium endowment and variable annuity deposits
and substantially all risks associated with variable life business have been
reinsured with non-affiliated insurance companies. A contingent liability
exists with respect to insurance ceded which would become a liability should
the reinsurer be unable to meet the obligations assumed under these
reinsurance agreements.
20
<PAGE>
4. REINSURANCE (CONTINUED)
The effect of reinsurance on premiums, annuity considerations and
deposit-type funds is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
-------------------------
(IN THOUSANDS)
<S> <C> <C>
Direct premiums and amounts assessed
against policyholders $1,005,583 $241,442
Reinsurance assumed 1,217,681 521,067
Reinsurance ceded (18,528) (16,915)
-------------------------
Net premiums, annuity considerations and
deposit-type funds $2,204,736 $745,594
-------------------------
-------------------------
</TABLE>
In 1997 and 1996, the Company assumed $1.1 billion and $0.5 billion,
respectively, in GIC deposits through a 50% coinsurance agreement with General
American Life Insurance Company.
5. FEDERAL INCOME TAXES
The Company files a consolidated return with National Integrity. The method
of allocation between the companies is based on separate return calculations
after consolidated losses and credits.
Income before income taxes differs from taxable income principally due to
value of insurance in force, interest maintenance reserves, and differences
in policy and contract liabilities and investment income for tax and
financial reporting purposes.
The current year and prior year tax provisions were calculated including
consolidated net operating loss carryover benefits of $12.4 million and $14.2
million, respectively.
21
<PAGE>
6. SURPLUS
Dividends that ARM may receive from the Company in any year without prior
approval of the Ohio Insurance Director are limited by statute to the greater
of (i) 10% of the Company's statutory capital and surplus as of the preceding
December 31, and (ii) the Company's statutory net income for the preceding
year. The maximum dividend payments that may be made by the Company to ARM
during 1998 are $38.2 million.
Under New York insurance laws, National Integrity may pay dividends to
Integrity only out of its earnings and surplus, subject to at least thirty
days' prior notice to the New York Insurance Superintendent and no
disapproval from the Superintendent prior to the date of such dividend. The
Superintendent may disapprove a proposed dividend if the Superintendent finds
that the financial condition of National Integrity does not warrant such
distribution.
The NAIC's Risk-Based Capital ("RBC") requirements attempt to evaluate the
adequacy of a life insurance company's adjusted statutory capital and surplus
in relation to investment, insurance and other business risks. The RBC
formula is used by the states as an early warning tool to identify possible
under-capitalized companies for the purpose of initiating regulatory action
and is not designed to be a basis for ranking the financial strength of
insurance companies. In addition, the formula defines a new minimum capital
standard which supplements the previous system of low fixed minimum capital
and surplus requirements. The RBC requirements provide for four different
levels of regulatory attention depending on the ratio of the company's
adjusted capital and surplus to its RBC. As of December 31, 1997 and 1996,
the adjusted capital and surplus of the Company is substantially in excess of
the minimum level of RBC that would require regulatory response.
22
<PAGE>
7. ANNUITY RESERVES
At December 31, 1997 and 1996, the Company's general and separate account
annuity reserves and deposit fund liabilities that are subject to
discretionary withdrawal (with adjustment), subject to discretionary
withdrawal without adjustment, and not subject to discretionary withdrawal
provisions are summarized as follows:
<TABLE>
<CAPTION>
AMOUNT PERCENT
-------------------------
(IN THOUSANDS)
<S> <C> <C>
At December 31, 1997:
Subject to discretionary withdrawal (with adjustment):
With market value adjustment $ 348,451 7.0%
At book value less surrender charge of 5% or more 235,360 4.7
At market value 711,105 14.3
-------------------------
Total with adjustment or at market value 1,294,916 26.0
Subject to discretionary withdrawal (without adjustment)
at book value with minimal or no charge or adjustment 3,095,701 62.1
Not subject to discretionary withdrawal 594,781 11.9
-------------------------
Total annuity reserves and deposit fund liabilities (before
reinsurance) 4,985,398 100.0%
Less reinsurance ceded (34,721) ----------
---------- ----------
Net annuity reserves and deposit fund liabilities $4,950,677
----------
----------
At December 31, 1996:
Subject to discretionary withdrawal (with adjustment):
With market value adjustment $ 121,549 4.0%
At book value less surrender charge of 5% or more 263,726 8.7
At market value 543,906 18.1
-------------------------
Total with adjustment or at market value 929,181 30.8
Subject to discretionary withdrawal (without adjustment)
at book value with minimal or no charge or adjustment 1,520,259 50.5
Not subject to discretionary withdrawal 561,616 18.7
-------------------------
Total annuity reserves and deposit fund liabilities (before
reinsurance) 3,011,056 100.0%
Less reinsurance ceded (44,653) ----------
---------- ----------
Net annuity reserves and deposit fund liabilities $2,966,403
----------
----------
</TABLE>
23
<PAGE>
8. SEPARATE ACCOUNTS
Separate accounts assets and liabilities represent funds segregated for the
benefit of variable annuity, certain fixed annuity and variable life
policyholders who generally bear the investment risk (mutual fund options),
or for certain policyholders who are guaranteed a fixed rate of return
(guaranteed rate options). In addition, the Company has begun marketing
institutional products (fixed rate guaranteed investment contracts and
funding agreements) through its separate accounts. Assets held in separate
accounts are carried at estimated fair values. Information regarding the
separate accounts of the Company as of and for the year ended December 31,
1997 is as follows:
<TABLE>
<CAPTION>
SEPARATE ACCOUNTS WITH
GUARANTEES
------------------------
NONINDEXED
GUARANTEED NONGUARANTEED
INDEXED MORE THAN 4% SEPARATE ACCOUNTS TOTAL
-----------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Premiums, deposits and other
considerations $521,179 $231,429 $ 121,977 $ 874,585
-----------------------------------------------------------
-----------------------------------------------------------
Reserves for separate accounts
with assets at fair value $546,379 $373,303 $ 742,203 $1,661,885
-----------------------------------------------------------
-----------------------------------------------------------
Reserves for separate accounts
by withdrawal characteristics:
Subject to discretionary withdrawal
(with adjustment):
With market adjustment $ - $343,032 $ - $ 343,032
At book value without
market value adjustment
and with current surrender
charge of 5% 5,420 30,271 - 35,691
At market value - - 742,203 742,203
-----------------------------------------------------------
Total with adjustment or
at market value 5,420 373,303 742,203 1,120,926
Not subject to discretionary
withdrawal 540,959 - - 540,959
-----------------------------------------------------------
Total separate accounts reserves $546,379 $373,303 $ 742,203 $1,661,885
-----------------------------------------------------------
-----------------------------------------------------------
</TABLE>
24
<PAGE>
8. SEPARATE ACCOUNTS (CONTINUED)
A reconciliation of the amounts transferred to and from the separate accounts
for the years ended December 31, 1997 and 1996 is presented below:
<TABLE>
<CAPTION>
1997 1996
-----------------------
(IN THOUSANDS)
<S> <C> <C>
Transfers as reported in the Summary of Operations
of the Separate Accounts Statement:
Transfers to separate accounts $874,585 $200,092
Transfers from separate accounts (99,876) (71,356)
-----------------------
Net transfers to separate accounts 774,709 128,736
Reconciling adjustments:
Mortality and expense charges reported as other revenues 8,838 6,977
Policy deductions and other expense reported as
other revenues 1,827 1,857
-----------------------
Transfers as reported in the Summary of Operations
of the Life, Accident and Health Annual Statement $785,374 $137,570
-----------------------
-----------------------
</TABLE>
9. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures
About Fair Value of Financial Instruments," requires disclosure of fair value
information about all financial instruments, including insurance liabilities
classified as investment contracts, unless specifically exempted. The fair
value of a financial instrument is the amount at which the instrument could
be exchanged in a current transaction between willing parties, other than in
a forced or liquidation sale. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. Accordingly, the aggregate fair value amounts presented do not
necessarily represent the underlying value of such instruments. For financial
instruments not separately disclosed below, the carrying amount is a
reasonable estimate of fair value.
25
<PAGE>
9. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------------------------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Bonds $3,444,659 $3,643,009 $2,482,392 $2,552,022
Preferred stocks 58,369 59,964 42,234 43,550
Mortgage loans 13,186 13,186 32,946 32,946
Liabilities:
Life and annuity reserves for
investment-type contracts $3,320,869 $3,379,388 $2,279,832 $2,297,739
Separate accounts annuity reserves 1,630,787 1,607,081 687,292 686,518
</TABLE>
BONDS AND PREFERRED STOCKS
Fair values for bonds and preferred stocks are based on quoted market prices
where available. For bonds and preferred stocks for which a quoted market
price is not available, fair values are estimated using internally calculated
estimate or quoted market price of comparable investments.
MORTGAGE LOANS
The carrying amount of mortgage loans approximates their fair value.
LIFE AND ANNUITY RESERVES AND DEPOSIT FUND LIABILITIES
The fair value of single premium immediate annuity reserves are based on
discounted cash flow calculations using a market yield rate for assets with
similar durations. The fair value amounts of deposit fund liabilities and the
remaining annuity reserves are primarily based on the cash surrender values
of the underlying contracts.
26
<PAGE>
9. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
SEPARATE ACCOUNTS ANNUITY RESERVES
The fair value of separate accounts annuity reserves for investment-type
products equals the cash surrender values.
10. RELATED PARTY TRANSACTIONS
Effective January 1, 1994, the Company entered into an Administrative
Services Agreement with ARM. ARM performs certain administrative and special
services for the Company to assist with its business operations. The services
include policyholder services; accounting, tax and auditing; underwriting;
marketing and product development; functional support services; payroll
functions; personnel functions; administrative support services; and
investment functions. During 1997 and 1996, the Company was charged $19.3
million and $13.8 million, respectively, for these services in accordance
with the requirements of applicable insurance law and regulations.
11. YEAR 2000 (UNAUDITED)
The Company is currently evaluating on an ongoing basis, its computer systems
and the systems of other companies on which the Company's operations rely to
determine if they will function properly with respect to dates in the year
2000 and beyond. These activities are designed to ensure that there is no
adverse effect on the Company's core business operations. While the Company
believes its planning efforts are adequate to address its Year 2000 concerns,
there can be no guarantee that the systems of other companies on which the
Company's operations rely will be converted on a timely basis and will not
have a material effect on the Company. The cost of the Company's Year 2000
initiatives is not expected to be material to the Company's results of
operations or financial condition.
27
<PAGE>
PART C
OTHER INFORMATION
ITEM 28. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS INCLUDED IN PART A:
Part 1 - Financial Information
FINANCIAL STATEMENTS INCLUDED IN PART B:
INTEGRITY LIFE INSURANCE COMPANY:
Report of Independent Auditors
Balance Sheets (Statutory Basis) as of December 31, 1997 and 1996
Statements of Income (Statutory Basis) for the Years Ended
December 31, 1997 and 1996
Statements of Changes in Capital and Surplus (Statutory Basis) for the
Years Ended
December 31, 1997 and 1996
Statements of Cash Flows (Statutory Basis) for the Years Ended
December 31, 1997 and 1996
Notes to Financial Statements (Statutory Basis)
(b) EXHIBITS:
The following exhibits are filed herewith unless indicated otherwise:
1. Resolutions of the Board of Directors of Integrity Life Insurance
Company (INTEGRITY) authorizing the establishment of Separate
Account Ten, the Registrant. Incorporated by reference from Form
N-3 registration statement filed on February 9, 1998.
2. Not applicable.
3. Form of Custodian Agreement.
4.(a) Form of Management Agreement.
4.(b) Form of Sub-Advisory Agreement.
5. Form of Principal Underwriter Agreement with ARM Securities
Corporation.
6.(a) Form of trust agreement. Incorporated by reference from Form N-4
registration statement filed on August 24, 1992.
6.(b) Form of group variable annuity contract. Incorporated by
reference from pre-effective amendment no. 1 to Form N-4
registration statement filed on November 9, 1992.
6.(c) Form of variable annuity certificate. Incorporated by reference
from N-4 registration statement filed on August 24, 1992.
6.(d) Form of individual variable annuity contract. Incorporated by
reference from pre-effective amendment no. 1 to Form N-4
registration statement (File No. 33-51270), filed on November
1
<PAGE>
9, 1992.
6.(e) Forms of riders to certificate for qualified plans. Incorporated
by reference from pre-effective amendment no. 1 to Form N-4
registration statement filed on November 9, 1992.
6.(f) Form of rider for use in certain states eliminating the Guarantee
Period Options. Incorporated by reference from Form N-4
registration statement (File No. 33-56654).
6.(g) Alternate form of variable annuity contract for use in certain
states. Incorporated by reference from Form N-4 registration
statement (File No. 33-51268) on May 1, 1996.
7. Form of application. Incorporated by reference to post-effective
amendment no. 1 to Form S-1 registration statement (File No.
33-51270).
8.(a) Certificate of Incorporation of Integrity. Incorporated by
reference to post-effective amendment no. 4 to Form N-4
registration statement (File No. 51268), filed on April 28, 1995.
8.(b) By-Laws of Integrity. Incorporated by reference to post-effective
amendment no. 4 to Form N-4 registration statement (File No.
33-51268), filed on April 28, 1995.
9.(a) Reinsurance Agreement between Integrity and Connecticut General
Life Insurance Company (CIGNA). Incorporated by reference to
post-effective amendment no. 4 to Form N-4 registration statement
(File No. 33-51268), filed on April 28, 1995.
9.(b) Reinsurance Agreement between Integrity and Connecticut General
Life Insurance Company (CIGNA) effective January 1, 1995.
Incorporated by reference from Form N-4 registration statement
(File No. 33-51268) on May 1, 1996.
10. Not applicable.
11. Not Applicable.
12. Opinion and Consent of Kevin L. Howard, Esq.
13. Consent of Ernst & Young LLP.
14. Not applicable.
15. Not applicable.
16. Schedule for computation of performance quotations. Incorporated
by reference from Form N-4 registration statement (File No.
33-51268) on May 1, 1996.
17. Not applicable.
ITEM 29. DIRECTORS AND OFFICERS OF THE INSURANCE COMPANY.
Set forth below is information regarding the directors and principal
officers of Integrity:
DIRECTORS:
Name and Principal Business Address Position and Offices with Depositor
- ----------------------------------- -----------------------------------
2
<PAGE>
Mark A. Adkins Director
Integrity Life Insurance Company
515 West Market Street
Louisville, KY 40202
John R. McGeeney Director
Integrity Life Insurance Company
515 West Market Street
Louisville, KY 40202
William H. Guth Director and Product Development
Integrity Life Insurance Company Officer
515 West Market Street
Louisville, KY 40202
John R. Lindholm Director and President
Integrity Life Insurance Company
515 West Market Street
Louisville, KY 40202
Martin H. Ruby Director, Chairman of the Board and
Integrity Life Insurance Company Chief Executive Officer
515 West Market Street
Louisville, KY 40202
Gerald J. Rusnak Director
Integrity Life Insurance Company
200 East Wilson Bridge Road
Worthington, OH 43085
Jeffrey A. Trainer Director
Integrity Life Insurance Company
200 East Wilson Bridge Road
Worthington, OH 43085
SELECTED OFFICERS: (The business address for each of the principal officers
listed below is 515 West Market Street, Louisville, Kentucky
40202.)
Name and Principal Business Address Position and Offices with Insurance
Company
- ----------------------------------- -----------------------------------
Dennis L. Carr Executive Vice President and Chief
Actuary
David E. Ferguson Executive Vice President and Chief
Technology Officer
John R. McGeeney Executive Vice President-Retail
Business Division
Robert H. Scott Executive Vice President, General
Counsel and Secretary
Edward L. Zeman Executive Vice President and Chief
Financial Officer
Patricia L. Winter Executive Vice President -
Investment Assurance and
Institutional Products
3
<PAGE>
Peter S. Resnik Treasurer
Barry G. Ward Controller
ITEM 30. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH INTEGRITY OR
REGISTRANT
Integrity, the depositor of Separate Account Ten, is a wholly owned
subsidiary of Integrity Holdings, Inc., a Delaware corporation which is a
holding company engaged in no active business. Integrity owns 100% of stock of
National Integrity Life Insurance Company, a New York stock life insurance
corporation. All outstanding shares of Integrity Holdings, Inc. are owned by
ARM Financial Group, Inc., (ARM) a Delaware corporation which is a financial
services company focusing on the long-term savings and retirement marketplace by
providing retail and institutional products and services throughout the United
States. ARM owns 100% of the stock of (i) ARM Securities Corporation (ARM
SECURITIES), a Minnesota corporation, registered with the SEC as a broker-dealer
and a member of the National Association of Securities Dealers, Inc., (ii)
Integrity Capital Advisors, Inc., a New York corporation registered with the SEC
as an investment adviser, (iii) SBM Certificate Company, a Minnesota corporation
registered with the SEC as an issuer of face-amount certificates, and (iv) ARM
Transfer Agency, Inc., a Delaware corporation registered with the SEC as a
transfer and dividend disbursing agency.
In June 1997, ARM completed an initial public offering (the
"Offering") of 9.2 million shares of Class A common stock, par value of $.01 per
share (the "New Class A Common Stock"), of which 5.75 million shares were sold
by ARM and 3.45 million shares were sold by the Morgan Stanley Stockholders (as
defined below). Concurrent with the closing of the Offering, ARM amended and
restated its Certificate of Incorporation to effectuate a recapitalization such
that (i) the common equity of ARM consists of New Class A Common Stock and Class
B Non-Voting Common Stock, par value of $.01 per share (the "New Class B Common
Stock" and, together with the New Class A Common Stock,, the "New Common
Stock"), (ii) authorized shares of the New Class A Common Stock and New Class B
common Stock were increased to 150 million shares and 50 million shares,
respectively, (iii) each outstanding share of common stock of ARM was converted
into one share of New Class A Common Stock, (iv) certain shares of the New Class
A Common Stock owned by private equity funds sponsored by Morgan Stanley, Dean
Witter, Discover & Co. (the successor to Morgan Stanley Group Inc. in its merger
with Dean Witter, Discover & Co.) (the "Morgan Stanley Stockholders") were
converted into New Class B Common Stock such that, after giving effect to such
conversion, but not giving effect to the Offering, the Morgan Stanley
Stockholders owned, in the aggregate, 49% of the outstanding New Class A Common
Stock, and (v) each share of New Common Stock was split into 706 shares of New
Common Stock. Holders of New Class B Common Stock have no right to vote on
matters submitted to a vote of stockholders, except in certain circumstances.
Shares of the New Class B Common Stock have no preemptive or other subscription
rights and are convertible into an equal number of shares of New Class A Common
Stock (1) at the option of the holder thereof to the extent that, following such
conversion, the Morgan Stanley Stockholders will not, in the aggregate, own more
than 49% of the outstanding shares of New Class A Common Stock, and (2)
automatically upon the transfer of such shares by any Morgan Stanley Stockholder
to a person that is not a Morgan Stanley Stockholder or an affiliate of a Morgan
Stanley Stockholder. The Morgan Stanley Stockholders owned approximately 91% of
the outstanding shares of ARM's common stock prior to the Offering and
approximately 53% following the Offering.
On April 22, 1998, ARM filed a registration statement with the SEC for
a secondary offering of 10 million shares of its Class A Common Stock (the
"Secondary Offering"). The Morgan Stanley Stockholders propose to sell all 10
million shares and, if the underwriters' over-allotment is exercised, up to an
additional 1.5 million shares. The Secondary Offering is expected to be made in
May 1998 through a syndicate of underwriters led by Morgan Stanley & Co.
Incorporated.
No person has the direct or indirect power to control Morgan Stanley,
Dean Witter, Discover & Co., except insofar as he or she may have such power by
virtue of his or her capacity as a director or executive officer thereof.
Morgan Stanley, Dean Witter, Discover & Co., is publicly held; no individual
beneficially owns more than 5% of the common shares; however, approximately 13%
of such shares are subject to a stockholders' agreement or voting agreement
among certain current and former principals and employees of Morgan Stanley,
Dean Witter, Discover & Co., and its predecessor.
4
<PAGE>
The following list shows the subsidiaries of Morgan Stanley, Dean Witter,
Discover & Co. All subsidiaries are wholly owned by their immediate parent
company and are incorporated in Delaware, except where noted otherwise in
parentheses.
"MORGAN STANLEY" COMPANIES
Fourth Street Development Co. Incorporated
Fourth Street Ltd.
Jolter Investments Inc.
Morgan Rundle Inc.
MR Ventures Inc.
Morgan Stanley & Co. Incorporated
Morgan Stanley Flexible Agreements Inc.
MS Securities Services Inc.
Prime Dealer Services Corp.
Morgan Stanley ABS Capital I Inc.
Morgan Stanley ABS Capital II Inc.
Morgan Stanley Advisory Partnership Inc.
Morgan Stanley Asset Funding Inc.
Morgan Stanley Asset Management (CPO) Inc.
Morgan Stanley Asset Management Inc.
Morgan Stanley Asset Management Holdings Inc.
Miller Anderson & Sherrerd, LLP (Pennsylvania)
MAS Fund Distribution, Inc. (Pennsylvania)
Morgan Stanley Global Franchise Inc.
Morgan Stanley Baseball, Inc.
Morgan Stanley Capital Group Inc.
Morgan Stanley Capital I Inc.
Morgan Stanley Capital (Jersey) Limited (Jersey, Channel Is.)
Morgan Stanley Capital Partners III, Inc.
Morgan Stanley Capital Services Inc.
Morgan Stanley Commercial Mortgage Capital, Inc.
Morgan Stanley Commodities Management, Inc.
Morgan Stanley Derivative Products Inc.
Morgan Stanley Developing Country Debt II, Inc.
Morgan Stanley Emerging Markets Inc.
Morgan Stanley Equity (C.I.) Limited (Jersey, Channel Is.)
Morgan Stanley Equity Finance Limited (England)
Morgan Stanley Equity Investors Inc.
Morgan Stanley Finance (Jersey) Limited (Jersey)
Morgan Stanley Global Emerging Markets, Inc. (Jersey, Channel Is.)
Morgan Stanley Insurance Agency Inc.
Morgan Stanley International Incorporated
Bank Morgan Stanley AG (Switzerland)
Morgan Stanley AOZT (Russia)
Morgan Stanley Asia (China) Limited (Hong Kong)
Morgan Stanley Asia Holdings I Inc.
Morgan Stanley Asia Holdings II Inc.
Morgan Stanley Asia Holdings III Inc.
Morgan Stanley Asia Holdings IV Inc.
Morgan Stanley Asia Holdings V Inc.
Morgan Stanley Asia Holdings VI Inc.
Morgan Stanley Asia Pacific (Holdings) Limited (Cayman Islands)
Morgan Stanley Asia Regional (Holdings) I LLC (Cayman Islands)
Morgan Stanley Asia Limited (Hong Kong)
5
<PAGE>
Morgan Stanley Futures (Hong Kong) Limited (Hong Kong)
Morgan Stanley Hong Kong Securities Limited (Hong Kong)
Morgan Stanley Pacific Limited (Hong Kong)
Morgan Stanley Asia Regional (Holdings) Ii LLC (Cayman Islands)
Morgan Stanley Asia Regional (Holdings) III LLC (Cayman Islands)
Morgan Stanley Asia (Singapore) Pte (Rep. of Singapore)
Morgan Stanley Asset Management Singapore Company (Rep. of Singapore)
Morgan Stanley Capital Group (Singapore) Pte (Rep. of Singapore)
Morgan Stanley Futures (Singapore) Pte (Rep. of Singapore)
Morgan Stanley Asia Regional (Holdings) IV LLC (Cayman Islands)
Morgan Stanley Japan (Holdings) Ltd. (Cayman Islands)
Morgan Stanley Japan Limited (Hong Kong)
Morgan Stanley Asia Pacific (Holdings) I Limited (Cayman Islands)
Morgan Stanley Asia (Taiwan) Ltd. (Rep. of China)
Morgan Stanley Asset & Investment Trust Management Co., Limited (Japan)
Morgan Stanley Australia Limited (Australia)
Morgan Stanley Australia Securities Limited (Australia)
Morgan Stanley Bank Luxembourg S.A. (Luxembourg)
Morgan Stanley Canada Limited (Canada)
Morgan Stanley Capital SA (France)
Morgan Stanley Capital (Luxembourg) S.A. (Luxembourg)
Morgan Stanley Financial Services Beteiligungs GmbH (Germany)
Morgan Stanley Financial Services GmbH & Co. KG (Germany)
Morgan Stanley Group (Europe) Plc (England)
Morgan Stanley Asset Management Limited (England)
Morgan Stanley Capital Group Limited (England)
Morgan Stanley (Europe) Limited (England)
Morgan Stanley Finance plc (England)
Morgan Stanley Properties Limited (England)
Morgan Stanley Property Management (UK) Limited (England)
Morgan Stanley Services (UK) Limited (England)
Morgan Stanley UK Group (England)
Morgan Stanley & Co. International Limited (England)
Morgan Stanley Funding Limited Jersey, Channel Is.)
Morgan Stanley International Nominees Limited (England)
Morgan Stanley & Co. Limited (England)
Morgan Stanley Securities Limited (England)
Morstan Nominees Limited (England)
MS Leasing UK Limited (England)
Morgan Stanley Holding (Deutschland) GmbH (Germany)
Morgan Stanley Bank AG (Germany)
Morgan Stanley Hong Kong Nominees Limited (Hong Kong)
Morgan Stanley International Insurance Ltd (Bermuda)
Morgan Stanley Latin America Incorporated
Morgan Stanley Administadora de Carteiras Ltda. (Brazil)
Morgan Stanley do Brasil Ltda. (Brazil)
MS Carbocol Advisors Incorporated
Morgan Stanley Latin American Derivatives Ltd. (Cayman Islands)
Morgan Stanley Mauritius Company Limited (Mauritius)
Morgan Stanley Asset Management India Private Limited (India)
Morgan Stanley India Securities Private Limited (India)
Morgan Stanley India Private Limited (India)
Morgan Stanley Middle East Inc.
Morgan Stanley Offshore Investment Company Ltd. (Cayman Islands)
Morgan Stanley S.A. (France)
Morgan Stanley Services (Jersey) Limited (Jersey, Channel Is.)
Morgan Stanley SICAV Management S.A. (Luxembourg)
6
<PAGE>
Morgan Stanley South Africa (Pty) Limited (South Africa)
Morgan Stanley SPVI (Cayman Islands) LLC (Cayman Islands)
Farlington Corporation (Ireland)
ITALSEC S.r.l. (Italy)
Morgan Stanley SPV II (Cayman Islands) LLC (Cayman Islands)
Morgan Stanley (Structured Products) Jersey Limited (Jersey, Channel Is.)
Morgan Stanley (Thailand) Limited (Thailand)
Morgan Stanley Wertpapiere GmbH (Germany)
MS Italy (Holdings) Inc.
Banca Morgan Stanley SpA (Italy)
MS LDC, Ltd.
MSAM/Kokusai (Cayman Islands), Inc. (Cayman Islands)
MSL Incorporated
Morgan Stanley (Jersey) Limited (Jersey, Channel Is.)
Morgan Stanley LEF I, Inc.
Morgan Stanley Leveraged Capital Fund Inc.
Morgan Stanley Leveraged Equity Fund II, Inc.
Morgan Stanley Capital Partners Asia Limited (Hong Kong)
Morgan Stanley Leveraged Equity Holdings Inc.
Morgan Stanley Market Products Inc.
Morgan Stanley Mortgage Capital Inc. (New York)
Morgan Stanley Overseas Finance Ltd. (Cayman Islands)
Morgan Stanley Overseas Services (Jersey) Limited (Jersey, Channel Is.)
Morgan Stanley Real Estate Investment Management Inc.
Morgan Stanley Real Estate Fund, Inc.
MSREF I, L.L.C.
MSREF I-CO, L.L.C.
Morgan Stanley Real Estate Investment Management II, Inc.
MSREF II-CO, L.L.C.
Morgan Stanley Realty Incorporated
Brooks Harvey & Co., Inc.
Morgan Stanley Realty of California Inc. (California)
Morgan Stanley Realty of Illinois Inc.
Brooks Harvey of Florida, Inc. (Florida)
Brooks Harvey & Co. of Hawaii, Inc.
Morgan Stanley Realty Japan Ltd. (Japan)
BH-MS Realty Inc.
BH-MS Leasing Inc.
BH-Sartell Inc.
The Morgan Stanley Scholarship Fund Inc. (Not-For-Profit)
Morgan Stanley Senior Funding, Inc.
Morgan Stanley Services Inc.
Morgan Stanley Technical Services Inc.
Morgan Stanley Technical Services MB/VC Inc.
Morgan Stanley Trust Company (New York)
Morgan Stanley Venture Capital Inc.
Morgan Stanley Venture Capital II, Inc.
Morgan Stanley Venture Capital III, Inc.
Morgan Stanley Ventures Inc.
Morstan Development Company, Inc.
Moranta, Inc. (Georgia)
Porstan Development Company, Inc. (Oregon)
MS 10020, Inc.
MS 10036, Inc.
MS Capital Cayman Ltd. (Cayman Islands)
MS Financing Inc.
1585 Broadway Corporation
7
<PAGE>
Morgan Stanley 750 Building Corp.
MS Tokyo Properties Ltd. (Japan)
MS Holdings Incorporated
MS Real Estate Special Situations Inc.
MS Real Estate Special Situations GP Inc.
MS Technology Holdings, Inc.
MS Venture Capital (Japan) Inc.
MSAM Holdings II, Inc.
VK/AC Holding, Inc.
Van Kampen American Capital, Inc.
ACCESS Investor Services, Inc.
American Capital Contractual Services, Inc. (New York)
Van Kampen American Capital Advisors, Inc.
Van Kampen American Capital Asset Management, Inc.
Van Kampen American Capital Distributors, Inc.
Van Kampen American Capital Exchange Corp. (California)
Van Kampen American Capital Insurance Agency of Illinois, Inc.
(Illinois)
Van Kampen American Capital Insurance Agency of Texas, Inc.
(Texas)
Van Kampen American Capital Investment Advisory Corp.
Van Kampen American Capital Management, Inc.
Van Kampen American Capital Recordkeeping Services, Inc.
Van Kampen American Capital Trust Company (Texas)
Van Kampen Merritt Equity Advisors Corp.
VKAC Cayman Limited (Cayman Islands)
VK/AC System, Inc.
MSBF Inc.
MSCP III Holdings, Inc.
MSIT Holdings, Inc.
MSPL Co. Inc.
MSREF II, Inc.
MSREF II, L.L.C.
MSREF Funding, Inc.
MSUH Holdings I, Inc.
MSUH Holdings II, Inc.
MS SP Urban Horizons, Inc.
MS Urban Horizons, Inc.
PG Holdings, Inc.
PG Investors, Inc.
PG Investors II, Inc.
Pierpont Power, Inc. (New York)
Romley Computer Leasing Inc.
Strategic Investments I, Inc.
THE MORGAN STANLEY LEVERAGED EQUITY FUND II, L.P.
(the general partner of which is Morgan Stanley Leveraged Equity Fund II, Inc.)
American Italian Pasta Company
Amerin Corportion
Amerin Guaranty Corporation
ARM Financial Group, Inc.
CIMIC Holdings Limited
Consolidated Hydro, Inc.
Hamilton Services Limited
PageMart Wireless, Inc.
Jefferson Smurfit Corporation
Risk Management Solutions
Silgran Holding Inc.
8
<PAGE>
Silgan Corporation
American Color Graphics
"DEAN WITTER, DISCOVER COMPANIES"
Dean Witter Alliance Capital Corporation
Dean Witter Asset Corporation
Dean Witter Capital Corporation
Dean Witter Advisers Inc.
Dean Witter Capital Advisers Inc.
DW Administrators Inc.
DW Window Coverings Holding, Inc.
Dean Witter Distributors Inc.
Dean Witter Equipment Corporation
Dean Witter Aviation Capital Inc.
Dean Witter Futures and Currency Management Inc.
Dean Witter InterCapital Inc.
Dean Witter Services Company Inc.
Dean Witter Realty Inc.
Cook Street Credit Company (Colorado)
Cool Springs Inc. (Massachusetts)
Dean Witter Global Realty Inc.
Dean Witter Holding Corporation
Cameron Leasing Corporation
Civic Center Leasing Corporation
Lee Leasing Corporation
Lewiston Leasing Corporation
Sartell Leasing Corporation
Dean Witter Leasing Corporation
Dean Witter Realty Advisors Inc.
Dean Witter Realty Credit Corporation
Dean Witter Realty Fourth Income Properties Inc.
Dean Witter Realty Growth Properties Inc.
Dean Witter Realty Income Associates I Inc.
Dean Witter Realty Income Associates II Inc.
Dean Witter Realty Income Properties I Inc.
Dean Witter Realty Income Properties II Inc.
Dean Witter Realty Income Properties III Inc.
Dean Witter Realty Securitization Inc.
Dean Witter Realty Yield Plus Assignor Inc.
Dean Witter Realty Yield Plus Inc.
Dean Witter Realty Yield Plus II Inc.
DW Arboretum Plaza Inc.
DW Bennington Property Inc.
DW Chesterbrook Investors Inc.
DW Duportail Investors Inc.
DW Greycoat Inc.
DW Morris Drive Incorporated
DW 1200 Incorporated
DW Reston Technology Park Inc.
DW Tech Park II Inc.
GF Braker Inc.
Green Orchard Inc. (Massachusetts)
LLJV Funding Corporation (Massachusetts)
LS Atlanta Associates Inc.
LS Bayport, Inc.
LS Lake, Inc.
9
<PAGE>
LS Richmond Mall Inc.
Realty Management Services Inc.
SBA/DW/CB Temp Inc.
SBA/DWR, Inc.
Dean Witter Reynolds Inc.
Dean Witter Reynolds Insurance Agency (Massachusetts ) Inc. (Massachusetts)
Dean Witter Reynolds Insurance Agency (Ohio) Inc. (Ohio)
Dean Witter Reynolds Insurance Agency (Oklahoma) Inc. (Oklahoma)
Dean Witter Reynolds Insurance Agency (Texas) Inc. (Texas)
Dean Witter Reynolds Insurance Agency (Alabama) Inc. (Alabama)
Dean Witter Reynolds Insurance Services (Arizona) Inc. (Arizona)
Dean Witter Reynolds Insurance Services (Arkansas) Inc. (Arkansas)
Dean Witter Reynolds Insurance Services (Illinois) Inc. (Illinois)
Dean Witter Reynolds Insurance Services Inc.
Dean Witter Reynolds Insurance Agency (Indiana) Inc. (Indiana)
Dean Witter Reynolds Insurance Services, Inc. (Puerto Rico) (Puerto Rico)
Dean Witter Reynolds Insurance Services (Maine) Inc. (Maine)
Dean Witter Reynolds Insurance Services (Montana) Inc. (Montana)
Dean Witter Reynolds Insurance Services (New Hampshire) Inc. (New
Hampshire)
Dean Witter Reynolds Insurance Services (South Dakota) Inc. (South Dakota)
Dean Witter Reynolds Insurance Services (Wyoming) Inc. (Wyoming)
DWR Special Partners Inc.
Dean Witter Reynolds International Incorporated
Dean Witter Reynolds GmbH (Germany)
Dean Witter Reynolds (Hong Kong) Limited (Hong Kong)
Dean Witter Reynolds International, Inc. (Panama)
Dean Witter Reynolds (Geneva) S.A. (Switzerland)
Dean Witter International Ltd. (U.K.)
Dean Witter Capital Markets International Itd. (U.K.) (U.K.)
Dean Witter Futures Limited (U.K.)
Dean Witter Reynolds Limited (U.K.)
Dean Witter Reynolds International, S.A. (France)
Dean Witter Reynolds (Italy) Inc.
Dean Witter Reynolds (Luasanne) S.A. (Switzerland)
Dean Witter Reynolds (Lugano) S.A. (Switzerland)
Dean Witter Reynolds S.p.A. (Italy)
Dean Witter Reynolds Partners Inc.
DWR Special Advisors Inc.
Dean Witter Reynolds Venture Equities Inc.
Dean Witter Venture Management Inc.
Dean Witter Trust FSB (Federal Charter)
Dean Witter Venture Inc.
Demeter Management Corporation
DWD Electronic Financial Services Inc.
Discover Brokerage Direct Inc. (California)
Bay One Technologies Group, Inc. (California)
DWR Partnership Administrators Inc.
DWR Wind Technologies Inc.
NOVUS Credit Services
Bank of New Castle
Discover Card Bank Limited (Gibraltar)
Discover Services Corporation
Greenwood Trust Company
Mountain Receivables Corp.
Mountain West Financial Corporation (Utah)
NOVUS Consumer Discount Company (Pennsylvania)
NOVUS Development Corporation
10
<PAGE>
NOVUS Financial Corporation
NOVUS Financial Corporation of Iowa (Iowa)
NOVUS Financial Corporation of Minnesota (Minnesota)
NOVUS Financial Corporation of Tennessee (Tennessee)
NOVUS Financial Corporation of Washington (Washington)
NOVUS Services (Canada), Inc. (Canada)
NOVUS Services, Inc.
SCFC Receivables Corp.
Discover Receivables Financing Corporation
Discover Receivables Financing Group, Inc.
SCFC Receivables Financing Corporation
SPS Transaction Services, Inc.
Hurley State Bank (South Dakota)
SPS Payment Systems, Inc.
MedCash, Inc.
Med-Link Technologies, Inc.
Quality Asset Management, Inc.
Ruf Corporation (Kansas)
SPS Commercial Services, Inc.
SPS Newco, Inc.
SPS Receivables Financing Corporation
Utah Receivables Financing Corporation
One Water Corporation (Massachusetts)
Reynolds Securities Inc.
Tempo-GP, Inc.
Tempo-LP, Inc.
___________________________
* 95% owned by Morgan Stanley Asset Management Holdings Inc., 3% owned by MSL
Incorporated and 2% owned by MS Holdings Incorporated.
** 25% owned by Morgan Stanley Asia Pacific (Holdings) I Limited.
*** 25% owned by non-Morgan Stanley entities.
ITEM 31. NUMBER OF CONTRACT OWNERS
As of January 31, 1998 there were no contract owners of Separate
Account Ten of Integrity. As of January 31, 1998 there were 3,379 contract
owners of Separate Account II of Integrity.
ITEM 32. INDEMNIFICATION
BY-LAWS OF INTEGRITY. Integrity's By-Laws provide, in Article V, as follows:
Section 5.1 INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND
INCORPORATORS. To the extent permitted by the laws of the State of Ohio,
subject to all applicable requirements thereof:
(a) The Corporation shall indemnify or agree to indemnify any
person who was or is a party or is threatened to be made a party,
to any threatened, pending, or completed action, suit, or
proceeding, whether civil, criminal, administrative, or
investigative, other than an action by or in the right of the
Corporation, by reason of the fact that he is or was a Director,
officer, employee, or agent of the Corporation or is or was serving
at the request of the Corporation as a Director, trustee, officer,
employee, or agent of another corporation, domestic or foreign,
non-profit or for profit, partnership, joint venture, trust, or
other enterprise, against expenses, including attorney's fees,
judgements, fines, and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit, or
proceeding if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the
Corporation, and with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit, or proceeding by judgment, order,
settlement, or conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the
person did not act in good faith
11
<PAGE>
and in a manner he reasonably believed to be in or not opposed to
the best interests of the Corporation and, with respect to any
criminal action or proceeding, he had reasonable cause to believe
that his conduct was unlawful.
(b) The Corporation shall indemnify or agree to indemnify any person
who was or is a party or is threatened to be made a party to any
threatened, pending, or completed action or suit by or in the right of
the Corporation to procure a judgment in its favor by reason of the
fact that he is or was a Director, officer, employee, or agent of the
Corporation, or is or was serving at the request of the Corporation as
a Director, trustee, officer, employee, or agent of another
corporation, domestic or foreign, non-profit or for profit,
partnership, joint venture, trust, or other enterprise, against
expenses, including attorney's fees, actually and reasonably incurred
by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the Corporation,
except that no indemnification shall be made in respect to any of the
following:
(1) Any claim, issue, or matter as to which such person is
adjudged to be liable for negligence or misconduct in the
performance of his duty to the Corporation unless, and only to
the extent the court of common pleas or the court in which such
action or suit was brought determines upon application that,
despite the adjudication of liability, but in view of all
circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses as the court of common
pleas or such other court shall deem proper;
(2) Any action of suit in which the only liability asserted
against a Director is pursuant to Section 1701.95 of the Ohio
Revised Code.
(c) To the extent that a Director, trustee, officer, employee, or
agent has been successful in the merits or otherwise in defense
of any action, suit, or proceeding referred to in division (a)
and (b) of this Article, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses,
including attorney's fees, actually and reasonably incurred by
him in connection with the action, suit, or proceeding.
(d) Any indemnification under divisions (a) and (b) of this Article,
unless ordered by a court, shall be made by the Corporation only
as authorized in the specific case upon the determination that
indemnification of the Director, officer, employee, or agent is
proper in the circumstances because he has met the applicable
standard of conduct set forth in divisions (a) and (b) of this
Article. Such determination shall be made as follows:
(1) By a majority vote of a quorum consisting of Directors of
the Corporation who were not and are not parties to or threatened
with any such action, suit, or proceeding;
(2) If the quorum described in division (d)(1) of this Article
is not obtainable or if a majority vote of a quorum of
disinterested Directors so directs, in a written opinion by
independent legal counsel other than an attorney, or a firm
having associated with it an attorney, who has been retained by
or who has performed services for the Corporation or any person
to be indemnified within the past five years;
(3) By the Shareholders; or
(4) By the court of common pleas or the court in which such
action, suit or proceeding was brought.
Any determination made by the disinterested Directors under Article
(d)(1) or by independent legal counsel under Article (d)(2) shall be
promptly communicated to the person who threatened or brought the
action or suit by in the right of the Corporation under (b) of this
Article, and within ten days after receipt of such notification, such
person shall have the right to petition the court of common pleas or
the court in which such action or suit was brought to review the
reasonableness of such determination.
(e) (1) Expenses, including attorney's fees, incurred by a Director
in defending the action, suit, or proceeding shall be paid by the
Corporation as they are incurred, in advance of the final disposition
of the action, suit, or proceeding upon receipt of an undertaking by
or on behalf of the Director in which he agrees
12
<PAGE>
to do both of the following:
(i) Repay such amount if it is proved by clear and
convincing evidence in a court of competent jurisdiction
that his action or failure to act involved an act or
omission undertaken with deliberate intent to cause injury
to the Corporation or undertaken with reckless disregard for
the best interests of the Corporation;
(ii) Reasonably cooperate with the Corporation concerning
the action, suit or proceeding.
(2) Expenses, including attorney's fees, incurred by a Director,
officer, employee, or agent in defending any action, suit, or
proceeding referred to in divisions (a) and (b) of this Article,
may be paid by the Corporation as they are incurred, in advance
of the final disposition of the action, suit, or proceeding as
authorized by the Directors in the specific case upon receipt of
an undertaking by or on behalf of the Director, officer,
employee, or agent to repay such amount, if it ultimately is
determined that he is not entitled to be indemnified by the
Corporation.
(f) The indemnification authorized by this section shall not be
exclusive of, and shall be in addition to, any other rights granted to
those seeking indemnification under the Articles or the Regulations
for any agreement, vote of Shareholders or disinterested Directors, or
otherwise, both as to action in his official capacity and as to action
in another capacity while holding such office, and shall continue as
to a person who has ceased to be a Director, officer, employee, or
agent and shall inure to the benefit of the heirs, executors, and
administrators of such a person.
(g) The Corporation may purchase and maintain insurance or furnish
similar protection, including but not limited to trust funds, letters
of credit, or self insurance, on behalf of or for any person who is or
was a Director, officer, employee, or agent of the Corporation, or is
or was serving at the request of the Corporation as a Director,
officer, employee, or agent of another corporation, domestic or
foreign, non-profit or for profit, partnership, joint venture, trust,
or other enterprise, against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as
such, whether or not the Corporation would have the power to indemnify
him against such liability under this section. Insurance may be
purchased from or maintained with a person in which the Corporation
has a financial interest.
BY-LAWS OF ARM SECURITIES. ARM Securities' By-Laws provide, in Sections 4.01
and 4.02, as follows:
SECTION 4.01 INDEMNIFICATION. The Corporation shall indemnify its
officers and directors for such expenses and liabilities, in such manner, under
such circumstances, and to such extent, as required or permitted by Minnesota
Statutes, Section 302A.521, as amended from time to time, or as required or
permitted by other provisions of law.
SECTION 4.02 INSURANCE. The Corporation may purchase and maintain
insurance on behalf of any person in such person's official capacity against any
liability asserted against and incurred by such person in or arising from that
capacity, whether or not the Corporation would otherwise be required to
indemnify the person against the liability.
INSURANCE. The directors and officers of Integrity and ARM Securities are
insured under a policy issued by National Union. The total annual limit on such
policy is $10 million, and the policy insures the officers and directors against
certain liabilities arising out of their conduct in such capacities.
AGREEMENTS. Integrity and ARM Securities, including each director, officer and
controlling person of Integrity and ARM Securities, are entitled to
indemnification against certain liabilities as described in Sections 5.2, 5.3
and 5.5 of the Selling/General Agent Agreement and Section 9 of the Form of
Principal Underwriter Agreement incorporated as Exhibit 5 to this Registration
Statement. Those sections are incorporated by reference into this response.
Certain officers and directors of Integrity are officers and directors of ARM
Securities (see Item 29 and Item 34 of this Part C).
UNDERTAKING. Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
13
<PAGE>
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
ITEM 33. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The names and business addresses of the officers and directors of, and their
positions with, Integrity Capital Advisers are as follows:
Name and Principal Business Address Position and Offices with Integrity
Capital Advisors
- ----------------------------------- -----------------------------------
Martin H. Ruby Director, Chairman of the Board and
515 West Market Street Chief Executive Officer
Louisville, Kentucky 40202
Robert H. Scott General Counsel, Chief Compliance
Officer and Secretary
515 West Market Street
Louisville, Kentucky 40202
Michael A. Cochran Tax Officer
515 West Market Street
Louisville, Kentucky 40202
Peter S. Resnik Treasurer
515 West Market Street
Louisville, Kentucky 40202
Barry G. Ward Controller
515 West Market Street
Louisville, Kentucky 40202
Craig A. Hawley Assistant Secretary
515 West Market Street
Louisville, Kentucky 40202
Kevin L. Howard Assistant Secretary
515 West Market Street
Louisville, Kentucky 40202
Patricia L. Tackett Assistant Secretary
515 West Market Street
Louisville, Kentucky 40202
ITEM 34. PRINCIPAL UNDERWRITERS
(a) ARM Securities is the principal underwriter for Separate Account Ten.
ARM Securities also serves as an underwriter for Separate Account I and II of
Integrity, Separate Accounts I, II and Ten of National Integrity Life Insurance
Company, and The Legends Fund, Inc. Integrity is the Depositor of Separate
Accounts I, II, Ten and VUL.
(b) The names and business addresses of the officers and directors of, and
their positions with, ARM Securities are as follows:
Name and Principal Business Address Position and Offices with ARM
Securities
- ----------------------------------- -----------------------------
Edward J. Haines Director and President
515 West Market Street
14
<PAGE>
Louisville, Kentucky 40202
John R. McGeeney Director, Secretary, General
515 West Market Street Counsel and Compliance Officer
Louisville, Kentucky 40202
Michael A. Cochran Tax Officer
515 West Market Street
Louisville, Kentucky 40202
Peter S. Resnik Treasurer
515 West Market Street
Louisville, Kentucky 40202
Dale C. Bauman Vice President
100 North Minnesota Street
New Ulm, Minnesota 56073
Robert Bryant Vice President
1550 East Shaw #120
Fresno, California 93710
Ronald Geiger Vice President
100 North Minnesota Street
New Ulm, Minnesota 56073
Barry G. Ward Controller
515 West Market Street
Louisville, Kentucky 40202
William H. Guth Operations Officer
515 West Market Street
Louisville, Kentucky 40202
David L. Anders Marketing Officer
515 West Market Street
Louisville, Kentucky 40202
Robert L. Maddox Assistant Secretary
515 West Market Street
Louisville, Kentucky 40202
Cara M. Page Assistant Secretary
515 West Market Street
Louisville, Kentucky 40202
(c) Not applicable.
ITEM 35. LOCATION OF ACCOUNTS AND RECORDS
The records required to be maintained by Section 31(a) of the Investment
Company Act of 1940 and Rules 31a-1 to 31a-3 promulgated thereunder, are
maintained by Integrity at 515 West Market Street, Louisville, Kentucky 40202.
15
<PAGE>
ITEM 36. MANAGEMENT SERVICES
The contract under which management-related services are provided to
Integrity is discussed under Part 1 and Part 4 of Part B.
ITEM 37. UNDERTAKINGS
The Registrant hereby undertakes:
(a) to file a post-effective amendment, using financial statements of the
Registrant which need not be certified, within four to six months from
the effective date of the Registrant's registration statement;
(b) to file a post-effective amendment to this registration statement as
frequently as is necessary to ensure that the audited financial
statements in the registration statement are never more than 16 months
old for so long as payments under the variable annuity contracts may
be accepted;
(c) to include either (1) as part of any application to purchase a
contract offered by the prospectus, a space that an applicant can
check to request a Statement of Additional Information, or (2) a
postcard or similar written communication affixed to or included in
the prospectus that the applicant can remove to send for a Statement
of Additional Information; and
(d) to deliver any Statement of Additional Information and any financial
statements required to be made available under this Form promptly upon
written or oral request.
Integrity represents that the aggregate charges under variable annuity
contracts described in this Registration Statement are reasonable in relation to
the services rendered, the expenses expected to be incurred, and the risks
assumed by Integrity.
16
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant and the Depositor have duly caused this Registration
Statement to be signed on their behalf, in the City of Louisville and State of
Kentucky on this 28th day of April, 1998.
SEPARATE ACCOUNT TEN OF
INTEGRITY LIFE INSURANCE COMPANY
(Registrant)
By: Integrity Life Insurance Company
(Depositor)
By: /s/ John R. Lindholm
--------------------------------
John R. Lindholm
President
INTEGRITY LIFE INSURANCE COMPANY
(Depositor)
By: /s/ John R. Lindholm
--------------------------------
John R. Lindholm
President
17
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Depositor has duly caused this Registration Statement to be signed on
its behalf, in the City of Louisville and State of Kentucky on this 28th day of
April, 1998.
INTEGRITY LIFE INSURANCE COMPANY
(Depositor)
By: /s/ John R. Lindholm
--------------------------------
John R. Lindholm
President
As required by the Securities Act of 1933, this amendment to the
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
PRINCIPAL EXECUTIVE OFFICER: /s/ John R. Lindholm
----------------------------------
John R. Lindholm, President
Date: 4/28/98
PRINCIPAL FINANCIAL OFFICER: /s/ Edward L. Zeman
----------------------------------
Edward L. Zeman, Executive Vice President-
Chief Financial Officer
Date: 4/28/98
PRINCIPAL ACCOUNTING OFFICER: /s/ Barry G. Ward
----------------------------------
Barry G. Ward, Controller
Date: 4/28/98
DIRECTORS:
/s/ Mark A. Adkins /s/ Jeffrey A. Trainer
- ---------------------------- -----------------------------------
Mark A. Adkins Jeffrey A. Trainer
Date: 4/28/98 Date: 4/28/98
/s/ John R. Lindholm /s/ Martin H. Ruby
- ---------------------------- -----------------------------------
John R. Lindholm Martin H. Ruby
Date: 4/28/98 Date: 4/28/98
/s/ Gerald J. Rusnak /s/ John R. McGeeney
- ---------------------------- -----------------------------------
Gerald J. Rusnak John R. McGeeney
Date: 4/28/98 Date: 4/28/98
/s/ William H. Guth
- ----------------------------
William H. Guth
Date: 4/28/98
18
<PAGE>
EXHIBIT INDEX
Exhibit No.
3. Form of Custodian Agreement
4.(a) Form of Management Agreement
4.(b) Form of Sub-Advisory Agreement
5. Form of Principal Underwriter Agreement with ARM Securities
Corporation
12. Opinion and Consent of Kevin L. Howard, Esq.
13. Consent of Ernst & Young LLP
19
<PAGE>
INVESTMENT ACCOUNTING AGREEMENT
THIS AGREEMENT is made effective as of the ________ day of ______________,
1998, by and between INVESTORS FIDUCIARY TRUST COMPANY, a trust company
established under the laws of the state of Missouri, having its principal place
of business at 801 Pennsylvania, Kansas City, Missouri 64105 ("IFTC"), and
Separate Account Ten, a separate account of Integrity Life Insurance Company a
corporation organized under the laws of the State of Ohio, having its statutory
home office at 515 West Market Street, Louisville, Kentucky, 40202 ("Insurance
Company"), on its own behalf and on behalf of each Separate Account listed on
Schedule A hereto, as it may be amended from time to time, incorporated herein
by reference (each a "Separate Account").
WITNESSETH:
WHEREAS, Insurance Company desires to appoint IFTC as its agent to perform
certain investment accounting and recordkeeping functions for investment
portfolio assets of the Separate Account; and
WHEREAS, IFTC is willing to accept such appointment on the terms and
conditions hereinafter set forth.
NOW THEREFORE, for and in consideration of the mutual promises contained
herein, the parties hereto, intending to be legally bound, mutually covenant and
agree as follows:
1. APPOINTMENT OF AGENT. Insurance Company hereby constitutes and appoints
IFTC as its agent to perform certain investment accounting and
recordkeeping functions for each Separate Account relating to portfolio
transactions required under Rule 31a of the Investment Company Act of 1940
(the "1940 Act") and to value the Assets.
2. REPRESENTATIONS AND WARRANTIES.
A. Insurance Company hereby represents, warrants and acknowledges to
IFTC:
1. That it is a corporation duly organized and existing and in good
standing under the laws of its state of organization, and that
each Separate Account is registered under the 1940 Act; and
2. That it has the requisite power and authority under applicable
law, its articles of incorporation and its bylaws to enter into
this Agreement; it has taken all requisite action necessary to
appoint IFTC as investment accounting and recordkeeping agent for
the Separate Account; this Agreement has been duly executed and
delivered by Insurance Company; and this Agreement constitutes a
legal, valid and binding obligation of Insurance Company,
enforceable in accordance with its terms.
1
<PAGE>
B. IFTC hereby represents, warrants and acknowledges to Insurance Company:
1. That it is a trust company duly organized and existing and in good
standing under the laws of the State of Missouri; and
2. That it has the requisite power and authority under applicable law,
its charter and its bylaws to enter into and perform this Agreement;
this Agreement has been duly executed and delivered by IFTC; and this
Agreement constitutes a legal, valid and binding obligation of IFTC,
enforceable in accordance with its terms.
3. DUTIES AND RESPONSIBILITIES OF THE PARTIES.
A. DELIVERY OF ACCOUNTS AND RECORDS. Insurance Company will turn over or
cause to be turned over to IFTC all accounts and records needed by
IFTC to perform its duties and responsibilities hereunder fully and
properly. IFTC may rely conclusively on the completeness and
correctness of such accounts and records.
B. ACCOUNTS AND RECORDS. IFTC will prepare and maintain, under the
direction of and as interpreted by Insurance Company, Insurance
Company's accountants and/or other advisors, such accounts and
records: (a) needed to perform the accounting and recordkeeping
functions under Rule 31a of the 1940 Act; (b) required as a basis for
calculation of the valuation of the Assets; and (c) as otherwise
agreed upon by the parties. Insurance Company will advise IFTC in
writing of all applicable record retention requirements. IFTC will
preserve such accounts and records in the manner and for the periods
agreed upon by the parties. Insurance Company will furnish, in writing
or its electronic or digital equivalent, accurate and timely
information needed by IFTC to complete such accounts and records when
such information is not readily available from generally accepted
securities industry services or publications.
C. ACCOUNTS AND RECORDS PROPERTY OF INSURANCE COMPANY. IFTC acknowledges
that all of the accounts and records maintained by IFTC pursuant
hereto are the property of Insurance Company and will be made
available to Insurance Company for inspection or reproduction within a
reasonable period of time, upon demand. IFTC will assist Insurance
Company's independent auditors, or upon the prior written approval of
Insurance Company, or upon demand, any regulatory body, in any
requested review of Insurance Company's accounts and records,
provided, that Insurance Company will reimburse IFTC for all expenses
and employee time invested in any such review outside of routine and
normal periodic reviews. Upon receipt from Insurance Company of the
necessary information or instructions, IFTC will supply information
from the books and records it maintains for the Separate Account that
Insurance Company may reasonably request for tax returns,
questionnaires, periodic reports to regulators and such other reports
and information requests as Insurance Company and IFTC may agree upon
from time to time.
2
<PAGE>
D. ADOPTION OF PROCEDURES. IFTC and Insurance Company may from time to
time adopt such procedures as they agree upon, and IFTC may
conclusively assume that no procedure approved or directed by
Insurance Company, Insurance Company's accountants or other advisors
conflicts with or violates any requirements of any Separate Account's
prospectus the articles of incorporation, bylaws, any applicable law,
rule or regulation, or any order, decree or agreement by which
Insurance Company may be bound. Insurance Company will be responsible
for notifying IFTC of any statutes, regulations, rules, requirements
or policies or any changes thereto which may impact IFTC's
responsibilities or procedures under this Agreement.
E. VALUATION OF ASSETS. IFTC will value the Assets in accordance with
Insurance Company's Instructions (as defined below) utilizing the
pricing sources designated by the Insurance Company ("Pricing
Sources").
4. INSTRUCTIONS.
A. The term "Instructions," as used herein, means written (including
telecopied, telexed, or electronically transmitted) or oral
instructions which IFTC reasonably believes were given by a designated
representative of Insurance Company. Insurance Company will deliver
to IFTC, prior to delivery of any Assets to IFTC and thereafter from
time to time as changes therein are necessary, written Instructions
naming one or more designated representatives to give Instructions in
the name and on behalf of Insurance Company, which Instructions may be
received and accepted by IFTC as conclusive evidence of the authority
of any designated representative to act for Insurance Company and may
be considered to be in full force and effect until receipt by IFTC of
notice to the contrary. Unless such written Instructions delegating
authority to any person to give Instructions specifically limit such
authority to specific matters or require that the approval of anyone
else will first have been obtained, IFTC will be under no obligation
to inquire into the right of such person, acting alone, to give any
Instructions whatsoever. If Insurance Company fails to provide IFTC
any such Instructions naming designated representatives, any
Instructions received by IFTC from a person reasonably believed to be
an appropriate representative of Insurance Company will constitute
valid and proper Instructions hereunder. The term "designated
representative" may include Insurance Company's employees and agents,
including investment managers and their employees.
B. No later than the next business day immediately following each oral
Instruction, Insurance Company will send IFTC written confirmation of
such oral Instruction. At IFTC's sole discretion, IFTC may record on
tape, or otherwise, any oral Instruction whether given in person or
via telephone, each such recording identifying the date and the time
of the beginning and ending of such oral Instruction.
C. Insurance Company will provide upon IFTC's request a certificate
signed by an officer or designated representative of Insurance
Company, as conclusive proof of any fact or matter required to be
ascertained from Insurance Company hereunder. Insurance
3
<PAGE>
Company will also provide IFTC Instructions with respect to any matter
concerning this Agreement requested by IFTC. If IFTC reasonably
believes that it could not prudently act according to the
Instructions, or the instruction or advice of Insurance Company's
accountants or counsel, it may in its discretion, with notice to
Insurance Company, not act according to such Instructions.
5. LIMITATION OF LIABILITY OF IFTC. IFTC is not responsible or liable for,
and Insurance Company will indemnify and hold IFTC harmless from and
against, any and all costs, expenses, losses, damages, charges, counsel
fees (including, without limitation, disbursements and the allocable cost
of in-house counsel), payments and liabilities which may be asserted
against or incurred by IFTC or for which IFTC may be held to be liable,
arising out of or attributable to:
A. IFTC's action or failure to act pursuant hereto; provided that IFTC
has acted in good faith and with reasonable care; and provided
further, that in no event shall IFTC be liable for consequential,
special, or punitive damages;
B. IFTC's payment of money as requested by Insurance Company, or the
taking of any action which might make it or its nominee liable for
payment of monies or in any other way; provided, however, that nothing
herein obligates IFTC to take any such action or expend its own monies
except in its sole discretion;
C. IFTC's action or failure to act hereunder upon any Instruction,
advice, notice, request, consent, certificate or other instrument or
paper appearing to it to be genuine and to have been properly
executed, including any Instruction, communications, data or other
information received by IFTC by means of the Systems, as hereinafter
defined, or any electronic system of communication;
D. IFTC's action or failure to act in good faith reliance on the advice
or opinion of counsel for Insurance Company or of its own counsel with
respect to questions or matters of law, which advice or opinion may be
obtained by IFTC at the expense of Insurance Company, or on the
Instruction, advice or statements of any officer or employee of
Insurance Company or Insurance Company's accountants or other
authorized individuals, and other persons believed by it in good faith
to be expert in matters upon which they are consulted;
E. Any error, omission, inaccuracy or other deficiency in any accounts
and records or other information provided by or on behalf of the
Insurance Company with respect to the Separate Account to IFTC,
including the accuracy of the prices quoted by the Pricing Sources or
for the information supplied by Insurance Company to value the Assets
(except to the extent such inaccuracy results from IFTC's lack of
reasonable care in performing the agreed-upon tolerance checks as to
the data furnished), or the failure of Insurance Company to provide,
or provide in a timely manner, any accounts, records, or information
needed by IFTC to perform its duties hereunder;
F. Insurance Company's refusal or failure to comply with the terms hereof
(including
4
<PAGE>
without limitation Insurance Company's failure to pay or reimburse
IFTC under Section 5 hereof), Insurance Company's negligence or
willful misconduct, or the failure of any representation or warranty
of Insurance Company hereunder to be and remain true and correct in
all respects at all times;
G. The use or misuse, whether authorized or unauthorized, of the Systems
or any electronic system of communication used hereunder, by Insurance
Company or by any person who acquires access to the Systems or such
other systems through the terminal device, passwords, access
instructions or other means of access to such Systems or such other
system which are utilized by, assigned to or otherwise made available
to Insurance Company, except to the extent attributable to any
negligence or willful misconduct by IFTC;
H. Loss occasioned by the acts, omissions, defaults or insolvency of any
broker, bank, trust company, securities system or any other person
with whom IFTC may deal; and
I. The failure or delay in performance of its obligations hereunder, or
those of any entity for which it is responsible hereunder, arising out
of or caused, directly or indirectly, by circumstances beyond the
affected entity's reasonable control, including, without limitation:
any interruption, loss or malfunction of any utility, transportation,
computer (hardware or software) or communication service; inability to
obtain labor, material, equipment or transportation, or a delay in
mails; governmental or exchange action, statute, ordinance, rulings,
regulations or direction; war, strike, riot, emergency, civil
disturbance, terrorism, vandalism, explosions, labor disputes,
freezes, floods, fires, tornadoes, acts of God or public enemy,
revolutions, or insurrection.
6. COMPENSATION. In consideration for its services hereunder, Insurance
Company will pay to IFTC the compensation set forth in a separate fee
schedule to be agreed to by Insurance Company and IFTC from time to time,
and, upon demand, reimbursement for IFTC's cash disbursements and
reasonable out-of-pocket costs and expenses, including attorney's fees and
disbursements, incurred by IFTC in connection with the performance of
services hereunder.
7. TERM AND TERMINATION. The initial term of this Agreement is for a period
of one (1) year. Thereafter, either Insurance Company or IFTC may
terminate this Agreement by notice in writing, delivered or mailed, postage
prepaid, to the other party and received not less than ninety (90) days
prior to the date upon which such termination will take effect. Upon
termination hereof:
A. Insurance Company will pay IFTC its fees and compensation due
hereunder and its reimbursable disbursements, costs and expenses paid
or incurred to such date and Insurance Company will designate a
successor investment accounting agent (which may be Insurance Company)
by Instruction to IFTC; and
B. IFTC will, upon payment of all sums due to IFTC from Insurance Company
5
<PAGE>
hereunder, deliver all accounts and records and other properties of
Insurance Company to the successor, or, if none, to Insurance Company,
at IFTC's office.
In the event that accounts, records or other properties remain in the
possession of IFTC after the date of termination hereof for any reason
other than IFTC's failure to deliver the same, IFTC is entitled to
compensation as provided in the then-current fee schedule for its services
during such period, and the provisions hereof relating to the duties and
obligations of IFTC will remain in full force and effect.
8. NOTICES. Notices, requests, instructions and other writings addressed to
Insurance Company at the address set forth above, Attention: _____________,
or at such other address as Insurance Company may have designated to IFTC
in writing, will be deemed to have been properly given to Insurance Company
hereunder. Notices, requests, Instructions and other writings addressed to
IFTC at the address set forth above, Attention: Vice President, Investment
Accounting, or to such other address as it may have designated to Insurance
Company in writing, will be deemed to have been properly given to IFTC
hereunder.
9. THE SYSTEMS; CONFIDENTIALITY.
A. If IFTC provides Insurance Company direct access to the computerized
investment portfolio recordkeeping and accounting systems used by IFTC
("Systems") or if IFTC and Insurance Company agree to utilize any
electronic system of communication, Insurance Company agrees to
implement and enforce appropriate security policies and procedures to
prevent unauthorized or improper access to or use of the Systems or
such other system.
B. Insurance Company will preserve the confidentiality of the Systems and
the tapes, books, reference manuals, instructions, records, programs,
documentation and information of, and other materials relevant to, the
Systems and the business of IFTC ("Confidential Information").
Insurance Company agrees that it will not voluntarily disclose any
such Confidential Information to any other person other than its own
employees who reasonably have a need to know such information pursuant
hereto. Insurance Company will return all such Confidential
Information to IFTC upon termination or expiration hereof.
C. Insurance Company has been informed that the Systems are licensed for
use by IFTC and its affiliates from one or more third parties
("Licensors"), and Insurance Company acknowledges that IFTC and
Licensors have proprietary rights in and to the Systems and all other
IFTC or Licensor programs, code, techniques, know-how, data bases,
supporting documentation, data formats, and procedures, including
without limitation any changes or modifications made at the request or
expense or both of Insurance Company (collectively, the "Protected
Information"). Insurance Company acknowledges that the Protected
Information constitutes confidential material and trade secrets of
IFTC and Licensors. Insurance Company will preserve the
6
<PAGE>
confidentiality of the Protected Information, and Insurance Company
hereby acknowledges that any unauthorized use, misuse, disclosure or
taking of Protected Information, residing or existing internal or
external to a computer, computer system, or computer network, or the
knowing and unauthorized accessing or causing to be accessed of any
computer, computer system, or computer network, may be subject to
civil liabilities and criminal penalties under applicable law.
Insurance Company will so inform employees and agents who have access
to the Protected Information or to any computer equipment capable of
accessing the same. Licensors are intended to be and are third party
beneficiaries of Insurance Company's obligations and undertakings
contained in this Section.
D. Insurance Company hereby represents and warrants to IFTC that it has
determined to its satisfaction that the Systems are appropriate and
suitable for its use. THE SYSTEMS ARE PROVIDED ON AN AS IS, AS
AVAILABLE BASIS. IFTC EXPRESSLY DISCLAIMS ALL WARRANTIES INCLUDING,
BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE, EXCEPT THOSE WARRANTIES EXPRESSLY
STATED HEREIN.
10. MULTIPLE SEPARATE ACCOUNTS. If Schedule A lists more than one Separate
Account:
A. Each Separate Account will be regarded for all purposes hereunder as a
separate party apart from each other Separate Account. Unless the
context otherwise requires, with respect to every transaction covered
hereby, every reference herein to Insurance Company is deemed to
relate solely to the particular Separate Account to which such
transaction relates. Under no circumstances will the rights,
obligations or remedies with respect to a particular Separate Account
constitute a right, obligation or remedy applicable to any other
Separate Account. The use of this single document to memorialize the
separate agreement of each Separate Account is understood to be for
clerical convenience only and will not constitute any basis for
joining the Separate Accounts for any reason.
B. Insurance Company may appoint IFTC as its investment accounting and
recordkeeping agent for additional Separate Accounts from time to time
by written notice, provided that IFTC consents to such addition.
Rates or charges for each additional Separate Account will be as
agreed upon by IFTC and Insurance Company in writing.
11. MISCELLANEOUS.
A. This Agreement will be construed according to, and the rights and
liabilities of the parties hereto will be governed by, the laws of the
State of Missouri without reference to the choice of law principles
thereof.
7
<PAGE>
B. All terms and provisions hereof will be binding upon, inure to the
benefit of and be enforceable by the parties hereto and their
respective successors and permitted assigns.
C. The representations and warranties, the indemnifications extended
hereunder, and the provisions of Section 9 hereof are intended to and
will continue after and survive the expiration, termination or
cancellation hereof.
D. No provisions hereof may be amended or modified in any manner except
by a written agreement properly authorized and executed by each party
hereto.
E. The failure of either party to insist upon the performance of any
terms or conditions hereof or to enforce any rights resulting from any
breach of any of the terms or conditions hereof, including the payment
of damages, will not be construed as a continuing or permanent waiver
of any such terms, conditions, rights or privileges, but the same will
continue and remain in full force and effect as if no such forbearance
or waiver had occurred. No waiver, release or discharge of any
party's rights hereunder will be effective unless contained in a
written instrument signed by the party sought to be charged.
F. The captions herein are included for convenience of reference only,
and in no way define or limit any of the provisions hereof or
otherwise affect their construction or effect.
G. This Agreement may be executed in two or more counterparts, each of
which is deemed an original but all of which together constitute one
and the same instrument.
H. If any provision hereof is determined to be invalid, illegal, in
conflict with any law or otherwise unenforceable, the remaining
provisions hereof will be considered severable and will not be
affected thereby, and every remaining provision hereof will remain in
full force and effect and will remain enforceable to the fullest
extent permitted by applicable law.
I. The benefits of this Agreement may not be assigned by either party nor
may either party delegate all or a portion of its duties hereunder
without the prior written consent of the other party. Notwithstanding
the foregoing, Insurance Company agrees that IFTC may delegate all or
a portion of its duties to an affiliate of IFTC provided that such
delegation shall not reduce the obligations of IFTC under this
Agreement.
J. Neither the execution nor performance hereof will be deemed to create
a partnership or joint venture by and between IFTC and Insurance
Company or any Separate Account.
K. Except as specifically provided herein, this Agreement does not in any
way affect any other agreements entered into among the parties hereto
and any actions taken or
8
<PAGE>
omitted by either party hereunder will not affect any rights or
obligations of the other party hereunder.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their respective duly authorized officers.
[SEPARATE ACCOUNT TEN] INVESTORS FIDUCIARY TRUST COMPANY
By: By:
-------------------------------- --------------------------------
Name: Name:
Title: Title:
9
<PAGE>
SCHEDULE A--LIST OF SEPARATE ACCOUNT DIVISIONS
10
<PAGE>
SEPARATE ACCOUNT TEN
of
INTEGRITY LIFE INSURANCE COMPANY
MANAGEMENT AGREEMENT
Agreement, made this ___ day of _________, 1998 between Separate Account
Ten (the SEPARATE ACCOUNT) of Integrity Life Insurance Company, an Ohio
corporation, and Integrity Capital Advisors, Inc., a Delaware corporation (the
ADVISER).
W I T N E S S E T H
WHEREAS, the Separate Account is a managed separate account registered
under the Investment Company Act of 1940, as amended (the 1940 ACT); and
WHEREAS, the units of beneficial interest of the Separate Account are
divided into separate divisions or portfolios (each, a DIVISION), each of which
is established pursuant to a resolution of the Board of Managers of the Separate
Account, and the Board of Managers may from time to time terminate such
Divisions or establish and terminate additional Divisions; and
WHEREAS, the Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended (the ADVISERS ACT); and
WHEREAS, the Separate Account desires to retain the Adviser to render or
contract to obtain as hereinafter provided investment advisory and supervisory
services to the Separate Account and the Separate Account also desires to avail
itself of the facilities available from the Adviser with respect to the
administration of the Separate Account's day to day business affairs, and the
Adviser is willing to render or contract for such investment advisory,
supervisory and administrative services;
NOW, THEREFORE, the parties agree as follows:
1. APPOINTMENT OF ADVISER. The Separate Account hereby appoints the Adviser to
act as manager of the Separate Account and administrator of its business
affairs for the period and on the terms set forth in this Agreement. The
Adviser accepts such appointment and agrees to render the services herein
described, for the compensation herein provided. The Adviser is authorized
to enter into one or more sub-advisory agreements (each, a SUB-ADVISORY
AGREEMENT) with a registered investment adviser (each, a SUB-ADVISER)
pursuant to which the Adviser delegates to the Sub-Adviser its obligations
for providing investment advisory and certain other services in connection
with one or more of the Divisions; provided, that the Adviser, and not the
Separate Account, shall be responsible for any compensation payable under
any Sub-Advisory Agreement. Any such Sub-Advisory Agreement may be entered
into by the Adviser on such terms and in such manner as may be permitted by
the 1940 Act and the rules thereunder. For each Division for which the
Adviser has entered into a Sub-Advisory
<PAGE>
Agreement, the Sub-Adviser shall have the primary responsibility for
providing investment advisory services as set forth in Section 2 and shall
be responsible for broker-dealer selection as set forth in Section 3 and
maintaining books and records as set forth in Section 4, and the Adviser
will have supervisory responsibility for investment advisory services
furnished by the Sub-Adviser pursuant to the Sub-Advisory Agreement. The
Adviser will review the performance of the Sub-Adviser and make
recommendations to the Board of Managers of the Separate Account with
respect to the retention and renewal of the Sub-Advisory Agreement.
2. INVESTMENT ADVISORY SERVICES. Subject to the supervision of the Separate
Account's Board of Managers, and in compliance with each Division's
investment objectives and policies, the Adviser will provide an investment
program for each Division and determine the composition of the assets of
each Division, including determination of the purchase, retention or sale
of the securities, cash, and other investments contained in such Division's
holdings. The Adviser is hereby authorized to execute and perform such
services, or to arrange for execution and performance of such services, on
behalf of each Division. To the extent, if any, permitted by the investment
policies of a Division, the Adviser shall make determinations as to and
execute and perform futures contracts and options on behalf of such
Division. The Adviser will provide the services under this Agreement in
accordance with each Division's investment objective or objectives,
policies, procedures and restrictions as stated in the Separate Account's
Registration Statement, as amended from time to time (the REGISTRATION
STATEMENT), filed with the Securities and Exchange Commission (the SEC) and
any other documents that set forth investment policies, procedures or
restrictions governing the Division.
The Adviser further agrees as follows:
(a) The Adviser will manage each Division so as to ensure compliance
by such Division with the diversification requirements of Section
817(h) of the Internal Revenue Code of 1986 and regulations
issued thereunder. In managing the Division in accordance with
these requirements, the Adviser shall be entitled to receive and
act upon advice of counsel.
(b) In undertaking its duties under this Agreement, the Adviser will
comply with the 1940 Act and all rules and regulations
thereunder, all other applicable federal and state laws and
regulations, with any applicable procedures adopted by the
Separate Account's Board of Managers of which it has notice and
the provisions of the Registration Statement.
(c) On occasions when the Adviser deems the purchase or sale of a
security to be in the best interest of a Division as well as of
the Adviser's or the Adviser's affiliates' other investment
advisory clients, the Adviser may, to the extent permitted by
applicable laws and regulations, but shall not be obligated to,
aggregate the securities to be so sold or purchased with those of
its other
2
<PAGE>
clients where such aggregation is not inconsistent with the
policies set forth in the Registration Statement. In such event,
the Adviser will allocate the securities so purchased or sold, as
well as the expenses incurred in the transaction, in a manner
that is fair and equitable in the Adviser's judgment in the
exercise of the Adviser's fiduciary obligations to the Separate
Account and to such other clients.
(d) In connection with the purchase and sale of securities for each
Division, the Adviser will arrange for the transmission to the
custodian, transfer agent, dividend disbursing agent and
recordkeeping agent for the Separate Account (such custodian and
agent or agents hereinafter collectively referred to as the
AGENT), on a daily basis, such confirmations, trade tickets
(which shall state industry classifications unless the Adviser
has previously furnished a list of classifications for portfolio
securities), and other documents and information, including, but
not limited to, Cusip or other numbers that identify securities
to be purchased or sold on behalf of each Division as may be
reasonably necessary to enable the Agent to perform their
administrative and recordkeeping responsibilities with respect to
such Division. With respect to portfolio securities to be
purchased or sold through the Depository Trust Company, the
Adviser will arrange for the automatic transmission of the
confirmation of such trades to the Separate Account's Agent.
(e) The Adviser will monitor on a daily basis, by review of daily
pricing reports provided by the Agent to the Adviser, the
determination by the Agent for the Separate Account of the
valuation of portfolio securities and other investments of each
Division. The Adviser shall not be obligated to independently
verify the Agent's pricing determinations, and the Agent's
responsibility for accurate pricing determinations of the value
of the Division's securities shall not be reduced by the
Adviser's duty to monitor such determinations. The Adviser will
assist the Agent in determining or confirming, consistent with
the procedures and policies stated in the Registration Statement,
the value of any portfolio securities or other assets of each
Division for which the Agent seeks assistance from or identifies
for review by the Adviser.
(f) The Adviser will make available to the Separate Account, promptly
upon request, all of each Division's investment records and
ledgers maintained by the Adviser as are necessary to assist the
Separate Account to comply with requirements of the 1940 Act and
the Advisers Act, as well as other applicable laws. The Adviser
will furnish to regulatory authorities having the requisite
authority any information or reports in connection with its
services which may be requested in order to ascertain whether the
operations of the Separate
3
<PAGE>
Account are being conducted in a manner consistent with
applicable laws and regulations.
(g) The Adviser will provide reports, which may be prepared by the
Agent, to the Separate Account's Board of Managers for
consideration at meetings of the Board on the investment program
for each Division and the issuers and securities represented in
each Division's securities holdings, including a schedule of the
investments and other assets held in such Division and a
statement of all purchases and sales for each Division since the
last such statement, and will furnish the Separate Account's
Board of Managers with periodic and special reports with respect
to each Division as the Managers may reasonably request,
including statistical information with respect to the Division's
securities.
3. BROKER-DEALER SELECTION. The Adviser is responsible for decisions to buy or
sell securities and other investments for each Division, broker-dealer and
futures commission merchants' selection, and negotiation of brokerage
commission and futures commission merchants' rates. As a general matter, in
executing portfolio transactions, the Adviser may employ or deal with such
broker-dealers or futures commission merchants as may, in the Adviser's
best judgment, provide prompt and reliable execution of the transactions at
favorable prices and reasonable commission rates. In selecting such
broker-dealers or futures commission merchants, the Adviser shall consider
all relevant factors, including price (including the applicable brokerage
commission, dealer spread or futures commission merchant rate), the size of
the order, the nature of the market for the security or other investment,
the timing of the transaction, the reputation, experience and financial
stability of the broker-dealer or futures commission merchant involved, the
quality of the service, the difficulty of execution, and the execution
capabilities and operational facilities of the firm involved, and, in the
case of securities, the firm's risk in positioning a block of securities.
Subject to such policies as the Board of Managers may determine and
consistent with Section 28(e) of the Securities Exchange Act of 1934, as
amended (the 1934 ACT), the Adviser shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or
otherwise solely by reason of the Adviser's having caused a Division to pay
a member of an exchange, broker or dealer an amount of commission for
effecting a securities transaction in excess of the amount of commission
another member of an exchange, broker or dealer would have charged for
effecting that transaction, if the Adviser determines in good faith that
such amount of commission was reasonable in relation to the value of the
brokerage and research services provided by such member of an exchange,
broker or dealer viewed in terms of either that particular transaction or
the Adviser's overall responsibilities with respect to such Division and to
the other clients as to which the Adviser exercises investment discretion.
In accordance with Section 11(a) of the 1934 Act and Rule lla2-2('I')
thereunder, and subject to any other applicable laws and regulations
including Section 17(e) of the 1940 Act and Rule 17e-1 thereunder, the
Adviser may engage its affiliates, or any Sub-Adviser to the Separate
Account
4
<PAGE>
and its respective affiliates, as broker-dealers or futures commission
merchants to effect portfolio transactions in securities and other
investments for a Division.
4. BOOKS AND RECORDS. The Adviser shall keep the Separate Account's books and
records required to be maintained by it pursuant to this Agreement, the
1940 Act or otherwise. The Adviser agrees that all records which it
maintains for the Separate Account are the property of the Separate Account
and it will surrender promptly to the Separate Account any such records
upon the Separate Account's request, provided however that the Adviser may
retain a copy of such records. The Adviser further agrees to preserve for
the periods prescribed by Rule 31a-2 under the 1940 Act any such records as
are required to be maintained by the Adviser hereunder.
5. ADMINISTRATIVE AND SUPERVISORY SERVICES.
(a) The Adviser will coordinate all matters relating to the functions of
the Divisions' Sub-Adviser, if any, Agent, accountants, attorneys, and
other parties performing services or operational functions for the
Divisions.
(b) The Adviser will furnish without cost to the Separate Account, or pay
the cost of, such office space, office equipment and office facilities
as are adequate for the Separate Account's needs.
(c) The Adviser will provide, without remuneration from or other cost to
the Separate Account, the services of a sufficient number of
individuals competent to perform all of the Separate Account's
executive, administrative and clerical functions as are necessary to
ensure compliance with federal securities laws as well as other
applicable laws and to provide effective supervision and
administration of the Divisions and which are not performed by
employees or other agents engaged by the Separate Account or by the
Adviser acting in some other capacity pursuant to a separate agreement
or arrangement with the Separate Account. The Adviser shall authorize
and permit any of its directors, officers and employees who may be
elected as a member of the Board of Managers or officers of the
Separate Account to serve in the capacities in which they are elected
without any remuneration from the Separate Account.
(d) The Adviser will assist in the preparation of all periodic reports to
the unitholders of the Separate Account and all reports and filings
required to maintain the registration and qualification of the
Separate Account's units, or to meet other regulatory or tax
requirements applicable to the Separate Account, under federal and
state securities and tax laws.
5
<PAGE>
(e) The Adviser shall assist in the preparation of and, after approval by
the Separate Account, file and arrange for the distribution of proxy
materials to Separate Account unitholders as required by applicable
law.
(f) The Adviser shall prepare, or cause the preparation of, and, after
approval by the Separate Account, arrange for the filing of such
registration statements and other documents with the SEC and other
federal and state regulatory authorities as may be required by
applicable law.
(g) The Adviser shall take such other action with respect to the
Divisions, after approval by the Separate Account, as may be required
by applicable law, including without limitation the rules and
regulations of the SEC and of state securities or insurance
commissions and other regulatory agencies.
(h) The Adviser shall make its officers and employees available to the
Board of Managers and officers of the Separate Account and Sub-Adviser
for consultation and discussions regarding the supervision and
administration of the Divisions.
6. EXPENSES.
(a) During the term of this Agreement, the Adviser shall pay, or cause a
Sub-Adviser to pay, the following expenses:
(i) The salaries and expenses of all personnel of the Separate
Account and the Adviser except the fees and expenses of members
of the Board of Managers who are not "interested persons"
(within the meaning of the 1940 Act) of the Separate Account,
the Adviser, National Integrity Life Insurance Company
("National Integrity"), or any Sub-Adviser;
(ii) All expenses reasonably incurred by the Adviser in connection
with providing the services described above, including the
provision of office space, office equipment, office facilities,
and executive, administrative and clerical personnel in
accordance with paragraph 2(i) hereof, but excluding the
expenses described below to be assumed by the Separate Account;
(iii) The fees of any Sub-Adviser pursuant to a Sub-Advisory
Agreement; and
(iv) The costs and expenses payable by any Sub-Adviser pursuant to a
Sub-Advisory Agreement.
(b) Each Division is responsible for and bears all expenses incurred in
its operation that are not specifically assumed by the Adviser or ARM
Securities Corp., the Separate Account's distributor, pursuant to the
Distribution Agreement with the Separate
6
<PAGE>
Account. General expenses of the Separate Account not readily
identifiable as belonging to one of the Divisions will be allocated
among the Divisions by or under the direction of the Separate
Account's Board of Managers in such manner as the Board shall
determine to be fair and equitable. Expenses borne by each Division
include, but are not limited to, the following (or the Division's
allocated share of the following):
(i) The cost (including brokerage commissions, if any) of
securities purchased or sold by the Division and any losses
incurred in connection therewith;
(ii) Investment management fees due hereunder (but not sub-advisory
fees, which are payable by the Adviser);
(iii) Organizational expenses;
(iv) Filing fees and expenses relating to the registration and
qualification of the Separate Account or the units of a
Division under federal or state securities laws and maintenance
of such registrations and qualifications;
(v) Fees and expenses payable to the members of the Board of
Managers who are not "interested persons" of the Separate
Account or the Adviser, National Integrity or any Sub-Adviser;
(vi) Taxes (including any income or franchise taxes) and
governmental fees;
(vii) Costs of any liability, directors' and officers', uncollectible
items of deposit and other insurance and fidelity bonds;
(viii) Legal, accounting and auditing expense;
(ix) Charges of custodians, transfer agents and other agents;
(x) Expenses of setting in type and providing a camera-ready copy
of prospectuses and supplements thereto, expenses of setting in
type and printing or otherwise reproducing statements of
additional information and supplements thereto and reports and
proxy materials for existing unitholders;
(xi) Any extraordinary expenses (including fees and disbursements of
counsel) incurred by the Separate Account or Division;
(xii) Fees, voluntary assessments and other expenses incurred in
connection with membership in investment company organizations;
and
7
<PAGE>
(xiii) Costs of meetings of unitholders.
7. COMPENSATION. For the services provided and the expenses assumed pursuant
to this Agreement, each Division will pay to the Adviser as full
compensation therefor a fee at an annual rate of .50% of the average daily
net assets of each Division. This fee will be deducted from the assets of
each respective Division and paid to the Adviser monthly, but will be
accrued daily for purposes of determining the value of each Division on
each day the New York Stock Exchange is open for trading.
8. LIABILITY. Except as may otherwise be required by the 1940 Act and the
rules and regulations thereunder, the Adviser, any of its affiliated
persons and each person, if any, who, within the meaning of Section 15 of
the Securities Act of 1933, as amended, controls the Adviser, shall not be
liable for, or subject to any damages, expenses, or losses in connection
with, any act or omission connected with or arising out of any services
rendered under this Agreement, except by reason of willful misfeasance, bad
faith or gross negligence on the part of the Adviser in the performance of
its duties or from reckless disregard of its duties and obligations under
this Agreement.
9. TERM. Unless sooner terminated, this Agreement shall continue in effect for
two years and thereafter for successive one year periods, provided that
such continuance is specifically approved at least annually in conformity
with the requirements of the 1940 Act; provided, however, that this
Agreement may be terminated by the Separate Account or any Division thereof
(with respect to such Division) at any time, without the payment of any
penalty, by the Board of Managers of the Separate Account or by vote of a
majority of the outstanding voting securities (as defined in the 1940 Act)
of a Division, or by the Adviser at any time, without the payment of any
penalty, upon not less than 60 days' prior written notice to the other
party. This Agreement shall terminate automatically in the event of its
assignment (as defined in the 1940 Act).
10. NON-EXCLUSIVITY. Nothing in this Agreement shall limit or restrict the
right of any director, officer or employee of the Adviser who may also be a
member of the Board of Managers, officer or employee of the Separate
Account to engage in any other business or to devote his or her time and
attention in part to the management or other aspects of any business,
whether of a similar or dissimilar nature, nor limit or restrict the right
of the Adviser to engage in any other business or to render services of any
kind to any other corporation, firm, individual or association.
11. AMENDMENTS. This Agreement may be amended by mutual consent in writing, but
the consent of the Separate Account must be obtained in conformity with the
requirements of the 1940 Act.
12. NOTICES. Any notice or other communication required to be given pursuant to
this Agreement shall be deemed duly given if delivered or mailed by
registered mail, postage prepaid, (1) to
8
<PAGE>
the Adviser at 515 West Market Street, 8th Floor, Louisville, Kentucky
40202, Attention: President; or (2) to the Separate Account at 515 West
Market Street, 8th Floor, Louisville, Kentucky 40202, Attention: President.
13. CHOICE OF LAW. Except insofar as the 1940 Act or other federal laws and
regulations may be controlling, this Agreement shall be governed by, and
construed and enforced in accordance with, the internal laws of the State
of Ohio.
14. SEPARATE ACCOUNT. The Separate Account was established under Section
1701.54 of the Ohio General Corporation Law as of February 4, 1998. The
Separate Account may establish separate Divisions, and all debts,
liabilities, obligations and expenses of a particular Division shall be
enforceable only against the assets of that Division and not against the
assets of any other Division or of the Separate Account as a whole.
15. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between
the parties hereto and supersedes any prior agreement with respect to the
subject matter hereof whether oral or written.
16. COUNTERPARTS. This Agreement may be executed in counterparts, and each
counterpart shall for all purposes be deemed an original, and all such
counterparts shall together constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
SEPARATE ACCOUNT TEN OF
INTEGRITY LIFE INSURANCE
COMPANY
By
-------------------------------------
INTEGRITY CAPITAL ADVISORS, INC.
By
-------------------------------------
9
<PAGE>
SUB-ADVISORY AGREEMENT
AGREEMENT, made this ___ day of __________, 1998, between Integrity Capital
Advisors, Inc. (MANAGER), a Delaware corporation, and National Asset Management
Corporation, a Kentucky corporation (SUB-ADVISER).
WHEREAS, Manager, a wholly-owned subsidiary of ARM Financial Group, Inc., is an
investment adviser registered under the Investment Advisers Act of 1940, as
amended (the ADVISERS ACT);
WHEREAS, the Sub-Adviser is an investment adviser registered under the Advisers
Act;
WHEREAS, pursuant to a Management Agreement dated __________, 1998 (the
MANAGEMENT AGREEMENT), Manager acts as Investment Manager to Separate Account
Ten of Integrity Life Insurance Company (the SEPARATE ACCOUNT), which is a
managed separate account registered under the Investment Company Act of 1940, as
amended (the 1940 ACT);
WHEREAS, the Separate Account is authorized to subdivide into portfolios, each
such portfolio representing a separate division (collectively, the DIVISIONS) of
securities and investments; and
WHEREAS, Manager desires to retain the Sub-Adviser to furnish investment
advisory services to the Separate Account, and the Sub-Adviser is willing to
accept such appointment on the terms and conditions set forth herein.
NOW, THEREFORE, based on the premises and the consideration set forth herein,
Manager and the Sub-Adviser agree as follows:
SECTION 1. INVESTMENT ADVISORY SERVICES.
Subject to the supervision of the Separate Account's Board of Managers and the
Manager, and in compliance with each Division's investment objectives and
policies, the Sub-Adviser will provide an investment program for the Divisions
and determine the composition of the assets of the Divisions, including
determination of the purchase, retention or sale of the securities, cash, and
other investments contained in the Divisions's holdings. The Sub-Adviser is
hereby authorized to execute and perform such services on behalf of the
Divisions. To the extent, if any, permitted by the investment policies of the
Divisions, the Sub-Adviser shall make determinations as to and execute and
perform futures contracts and options on behalf of the Divisions. The
Sub-Adviser will provide the services under this Agreement in accordance with
each Division's investment objective or objectives, policies, and restrictions
as stated in the Separate Account's Registration Statement filed with the
Securities and Exchange Commission (SEC). Manager agrees to supply the
Sub-Adviser with a copy of the Registration Statement and each amendment thereto
(the Registration Statement as amended from time to time hereinafter referred to
as the REGISTRATION STATEMENT) and any other documents that set forth investment
policies, procedures or restrictions governing the Divisions and to notify the
Sub-Adviser in writing of any changes in the investment objectives, policies,
procedures and restrictions governing the Divisions.
The Sub-Adviser further agrees as follows:
(a) The Sub-Adviser will manage the Divisions so as to ensure compliance by the
Divisions with the diversification requirements of Section 817(h) of the
Internal Revenue Code of 1986, as amended (the CODE) and regulations issued
thereunder. In managing the Divisions in accordance with these requirements,
the Sub-Adviser shall be entitled to receive and act upon advice of counsel to
the Separate Account, counsel to Manager or counsel to the Sub-Adviser, provided
the Sub-Adviser's counsel is acceptable to Manager.
(b) In undertaking its duties under this Agreement, the Sub-Adviser will comply
with the 1940 Act and all rules
<PAGE>
and regulations thereunder, all other applicable federal and state laws and
regulations, with any applicable procedures adopted by the Separate Account's
Board of Managers of which it has notice and the provisions of the Registration
Statement.
(c) On occasions when the Sub-Adviser is required pursuant to the Divisions'
investment objectives to enter into the purchase or sale of a security and such
purchase or sale is also in the best interest of the Sub-Adviser's or the
Sub-Adviser's affiliates' other investment advisory clients, the Sub-Adviser
may, to the extent permitted by applicable laws and regulations, but shall not
be obligated to, aggregate the securities to be so sold or purchased with those
of its other clients where such aggregation is not inconsistent with the
policies set forth in the Registration Statement. In such event, the Sub-Adviser
will allocate the securities so purchased or sold, as well as the expenses
incurred in the transaction, in a manner that is fair and equitable in the
Sub-Adviser's judgment in the exercise of the Sub-Adviser's fiduciary
obligations to the Separate Account and to such other clients.
(d) In connection with the purchase and sale of securities for the Divisions,
the Sub-Adviser, together with Manager, will arrange for the transmission to the
custodian, transfer agent, dividend disbursing agent and recordkeeping agent for
the Separate Account (such custodian and agent or agents hereinafter referred to
as the AGENT), on a daily basis, such confirmation, trade tickets (which shall
state industry classifications unless the Sub-Adviser has previously furnished a
list of classifications for portfolio securities), and other documents and
information, including (but not limited to) Cusip or other numbers that identify
securities to be purchased or sold on behalf of the Divisions as may be
reasonably necessary to enable the Agent to perform its administrative and
recordkeeping responsibilities with respect to the Divisions. With respect to
portfolio securities to be purchased or sold through the Depository Trust
Company, the Sub-Adviser will arrange for the automatic transmission of the
confirmation of such trades to the Separate Account's Agent, and if requested,
Manager.
(e) The Sub-Adviser will monitor on a daily basis, by review of daily pricing
reports provided by the Agent to the Sub-Adviser, the determination by the Agent
for the Separate Account of the valuation of portfolio securities and other
investments of the Divisions. The Sub-Adviser shall not be obligated to
independently verify the Agent's pricing determinations, and the Agent's
responsibility for accurate pricing determinations of the value of the
Divisions' securities shall not be reduced by the Sub-Adviser's duty to monitor
such determinations. The Sub-Adviser will assist the Agent in determining or
confirming, consistent with the procedures and policies stated in the
Registration Statement, the value of any portfolio securities or other assets of
the Divisions for which the Agent seeks assistance from or identifies for review
by the Sub-Adviser.
(f) The Sub-Adviser will make available to the Separate Account and Manager,
promptly upon request, all of the Divisions' investment records and ledgers
maintained by the Sub-Adviser as are necessary to assist the Separate Account
and Manager to comply with requirements of the 1940 Act and the Advisers Act, as
well as other applicable laws. The Sub-Adviser will furnish to regulatory
authorities having the requisite authority any information or reports in
connection with its services which may be requested in order to ascertain
whether the operations of the Separate Account are being conducted in a manner
consistent with applicable laws and regulations.
(g) The Sub-Adviser will provide reports, which may be prepared by the Agent, to
the Separate Account's Board of Managers for consideration at meetings of the
Board on the investment program for the Divisions and the issuers and securities
represented in the Divisions' securities holdings, including a schedule of the
investments and other assets held in the Divisions and a statement of all
purchases and sales for the Divisions since the last such statement, and will
furnish the Separate Account's Board of Managers with periodic and special
reports with respect to the Divisions as the Board of Managers and Manager may
reasonably request, including statistical information with respect to the
Divisions' securities. In addition, the Sub-Adviser will make available
2
<PAGE>
at each meeting of the Board of Managers, either in person or by telephone
conference call as instructed by Manager on behalf of the Board of Managers of
the Separate Account, an appropriate person to discuss the investment
performance of the Divisions.
(h) The Sub-Adviser will provide information and reports to Manager as Manager
shall reasonably request to enable it to review the performance of the
Sub-Adviser under this Agreement.
SECTION 2. BROKER-DEALER SELECTION.
The Sub-Adviser is responsible for decisions to buy and sell securities and
other investments for the Divisions, broker-dealer and futures commission
merchant selection, and negotiation of brokerage commission and futures
commission merchants' rates. As a general matter, in executing portfolio
transactions the Sub-Adviser may employ or deal with such broker-dealers or
futures commission merchants as may, in the Sub-Adviser's best judgment, provide
prompt and reliable execution of the transactions at favorable prices and
reasonable commission rates. In selecting such broker-dealers or futures
commission merchants, the Sub-Adviser shall consider all relevant factors,
including price (including the applicable brokerage commission, dealer spread or
futures commission merchant rate), the size of the order, the nature of the
market for the security or other investment, the timing of the transaction, the
reputation, experience and financial stability of the broker-dealer or futures
commission merchant involved, the quality of the service, the difficulty of
execution, and the execution capabilities and operational facilities of the firm
involved, and, in the case of securities, the firm's risk in positioning a block
of securities. Subject to such policies as the Board of Managers may determine
and consistent with Section 28(e) of the Securities Exchange Act of 1934, as
amended (the 1934 ACT), the Sub-Adviser shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or otherwise
solely by reason of the Sub-Adviser's having caused the Divisions to pay a
member of an exchange, broker or dealer an amount of commission for effecting a
securities transaction in excess of the amount of commission another member of
an exchange, broker or dealer would have charged for effecting that transaction,
if the Sub-Adviser determines in good faith that such amount of commission was
reasonable in relation to the value of the brokerage and research services
provided by such member of an exchange, broker or dealer, viewed in terms of
either that particular transaction or the Sub-Adviser's overall responsibilities
with respect to the Divisions and to the Sub-Adviser's other clients as to which
the Sub-Adviser exercises investment discretion. In accordance with Section
11(a) of the 1934 Act and Rule 11a2-2(T) thereunder, and subject to any other
applicable laws and regulations including Section 17(e) of the 1940 Act and Rule
17e-1 thereunder, the Sub-Adviser may engage its affiliates, Manager and its
affiliates or any other sub-adviser to the Separate Account and its respective
affiliates as broker-dealers or futures commission merchants to effect portfolio
transactions in securities and other investments for the Divisions.
SECTION 3. RECORDS, REPORTS, ETC.
In compliance with the requirements of Rule 31a-3 under the 1940 Act, the
Sub-Adviser hereby agrees that all records which the Sub-Adviser maintains for
the Divisions are the property of the Separate Account and further agrees to
surrender promptly to the Separate Account any of such records upon the Separate
Account's or Manager's request or upon termination of this Agreement, although
the Sub-Adviser may, at the Sub-Adviser's own expense, make and retain a copy of
such records. The Sub-Adviser further agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act the records required to be
maintained by Rule 31a-1 under the 1940 Act and to preserve the records required
by the Rule 204-2 under the Advisers Act for the period specified in the Rule.
SECTION 4. PAYMENT OF EXPENSES.
3
<PAGE>
The Sub-Adviser shall assume and pay all of the costs and expenses of performing
its obligations under this Agreement.
SECTION 5. COMPENSATION FOR SERVICES.
Manager will pay to the Sub-Adviser a monthly sub-advisory fee (adjusted pro
rata for any shorter applicable period) at an annual rate of .10% of the first
$100 million of average daily net assets of the Divisions from the management
fee actually received by Manager from the Separate Account and its affiliated
separate account offered by National Integrity Life Insurance Company; and at an
annual rate of .05% of average daily net assets above $100 million of the
Divisions from the management fee actually received by Manager from the Separate
Account and its affiliated separate account offered by National Integrity Life
Insurance Company; provided, however, the Sub-Adviser is guaranteed a minimum
sub-advisory fee of $25,000 during its first year of operations; and provided
further, that the sub-advisory fee shall be reduced proportionately if the
management fee actually paid to Manager by the Divisions shall have been reduced
as a result of applicable state expense limitations or fee waivers agreed to in
writing by the Sub-Adviser. The sub-advisory fee shall be computed, accrue and
be payable in the same manner as the management fee which is payable by the
Separate Account to Manager pursuant to the Management Agreement and as
specified in the Separate Account's Registration Statement.
SECTION 6. LIABILITY FOR SERVICES.
Except as may otherwise be required by the 1940 Act or the rules thereunder or
other applicable law, and except as set forth in the next paragraph, the
Separate Account and Manager agree that the Sub-Adviser, any of its affiliated
persons, and each person, if any, who, within the meaning of Section 15 of the
Securities Act of 1933, as amended, controls the Sub-Adviser, shall not be
liable for, or subject to any damages, expenses, or losses in connection with,
any act or omission connected with or arising out of any services rendered under
this Agreement, except by reason of willful misfeasance, bad faith, or gross
negligence in the performance of the Sub-Adviser's duties, or by reason of
reckless disregard of the Sub-Adviser's obligations and duties under this
Agreement.
SECTION 7. INDEMNIFICATION BY SUB-ADVISER.
The Sub-Adviser agrees to indemnify and hold harmless Manager against any
losses, expenses, claims, damages or liabilities (or actions or proceedings in
respect thereof), to which Manager may become subject arising out of or based on
the breach or alleged breach by the Sub-Adviser of any provisions of this
Agreement; provided, however, that the Sub-Adviser shall not be liable under
this paragraph in respect of any loss, expense, claim, damage or liability to
the extent that a court having jurisdiction shall have determined by a final
judgment, or independent counsel agreed upon by Manager and the Sub-Adviser
shall have concluded in a written opinion, that such loss, expense, claim,
damage or liability resulted primarily from Manager's willful misfeasance, bad
faith or gross negligence or by reason of the reckless disregard by Manager of
its duties. The foregoing indemnification shall be in addition to any rights
that Manager may have at common law or otherwise. The Sub-Adviser's agreements
in this paragraph shall, upon the same terms and conditions, extend to and inure
to the benefit of each person who may be deemed to control Manager, be
controlled by Manager or be under common control with Manager and its
affiliates, directors, officers, employees and agents. The Sub-Adviser's
agreements in this paragraph shall also extend to any of Manager's successors or
the successors of the aforementioned affiliates, directors, officers, employees
or agents.
SECTION 8. INDEMNIFICATION BY MANAGER.
4
<PAGE>
Manager agrees to indemnify and hold harmless the Sub-Adviser against any
losses, expenses, claims, damages or liabilities (or actions or proceedings in
respect thereof), to which the Sub-Adviser may become subject arising out of or
based on the breach or alleged breach by Manager of any provisions of this
Agreement or the Management Agreement, or any wrongful action or alleged
wrongful action by Manager or its affiliates in the distribution of the Separate
Account's units, or any wrongful action or alleged wrongful action by the
Separate Account other than wrongful action or alleged wrongful action that was
caused by the breach by the Sub-Adviser of the provisions of this Agreement;
provided, however, that Manager shall not be liable under this paragraph in
respect of any loss, expense, claim, damage or liability to the extent that a
court having jurisdiction shall have determined by a final judgment, or
independent counsel agreed upon by Manager and the Sub-Adviser shall have
concluded in a written opinion, that such loss, expense, claim, damage or
liability resulted primarily from the Sub-Adviser's willful misfeasance, bad
faith or gross negligence or by reason of the reckless disregard by the
Sub-Adviser of its duties. The foregoing indemnification shall be in addition to
any rights that the Sub-Adviser may have at common law or otherwise. Manager's
agreements in this paragraph shall, upon the same terms and conditions, extend
to and inure to the benefit of each person who may be deemed to control the
Sub-Adviser, be controlled by the Sub-Adviser or be under common control with
the Sub-Adviser and to each of the Sub-Adviser's and each such person's
respective affiliates, directors, officers, employees and agents. Manager's
agreements in this paragraph shall also extend to any of the Sub-Adviser's
successors or the successors of the aforementioned affiliates, directors,
officers, employees or agents.
SECTION 9. NOTICE AND DEFENSE OR PROCEEDINGS, ETC.
Promptly after receipt by a party indemnified under paragraph 7 or 8 above of
notice of the commencement of any action, proceeding or investigation for which
indemnification will be sought, such indemnified party shall promptly notify the
indemnifying party in writing; but the omission so to notify the indemnifying
party shall not relieve it from any liability which it may otherwise have to any
indemnified party unless such omission results in actual material prejudice to
the indemnifying party. In case any action or proceeding shall be brought
against any indemnified party, and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate in
and, individually or jointly with any other indemnifying party, to assume the
defense thereof with counsel reasonably satisfactory to the indemnified party.
After notice from the indemnifying party to the indemnified party of its
election to assume the defense of any action or proceeding, the indemnifying
party shall not be liable to the indemnified party for any legal or other
expenses subsequently incurred by the indemnified party in connection with the
defense thereof other than reasonable costs of investigation. If the
indemnifying party does not elect to assume the defense of any action or
proceeding, the indemnifying party on a monthly basis shall reimburse the
indemnified party for the legal fees and expenses incurred by the indemnified
party for continuing its defense thereof. Regardless of whether or not the
indemnifying party shall have assumed the defense of any action or proceeding,
the indemnified party shall not settle or compromise the action or proceeding
without the prior written consent of the indemnifying party.
SECTION 10. REPRESENTATIONS AND WARRANTIES; COVENANTS.
(a) The Sub-Adviser hereby represents and warrants as follows:
(i) The Sub-Adviser is registered with the SEC as an investment adviser under
the Advisers Act, and such registration is current, complete and in full
compliance with all material applicable provisions of the Advisers Act and the
rules and regulations thereunder;
(ii) The Sub-Adviser has all requisite authority to enter into, execute, deliver
and perform the Sub-Adviser's obligations under this Agreement;
5
<PAGE>
(iii) The Sub-Adviser's performance of its obligations under this Agreement does
not conflict with any law, regulation or order to which the Sub-Adviser is
subject; and
(iv) The Sub-Adviser has reviewed the Registration Statement for the Separate
Account filed with the SEC, and with respect to the disclosure about the
Sub-Adviser and the Divisions or information relating, directly or indirectly,
to the Sub-Adviser or the Divisions which was made in reliance upon and in
conformity with written information provided by the Sub-Adviser to the Separate
Account specifically for use therein or, if written information was not
provided, which the Sub-Adviser had the opportunity to review prior to filing
with the SEC, such Registration Statement contains, as of its date, no untrue
statement of any material fact and does not omit any statement of a material
fact which was required to be stated therein or necessary to make the statements
contained therein not misleading.
(b) The Sub-Adviser hereby covenants and agrees that, so long as this Agreement
shall remain in effect:
(i) The Sub-Adviser shall maintain the Sub-Adviser's registration as an
investment adviser under the Advisers Act, and such registration shall at all
times remain current, complete and in full compliance with all material
applicable provisions of the Advisers Act and the rules and regulations
thereunder;
(ii) The Sub-Adviser's performance of its obligations under this Agreement shall
not conflict with any law, regulation or order to which the Sub-Adviser is then
subject;
(iii) The Sub-Adviser shall at all times fully comply with the Advisers Act, the
1940 Act, all applicable rules and regulations under such Acts and all other
applicable law;
(iv) The Sub-Adviser shall promptly notify Manager and the Separate Account upon
the occurrence of any event that might disqualify or prevent the Sub-Adviser
from performing its duties under this Agreement. The Sub-Adviser further agrees
to notify Manager and the Separate Account promptly with respect to written
material that has been provided to the Separate Account or Manager by the
Sub-Adviser for inclusion in the Registration Statement or prospectus for the
Separate Account or any supplement or amendment thereto, or, if written material
has not been provided, with respect to the information in the Registration
Statement or Prospectus, or any amendment or supplement thereto, reviewed by the
Sub-Adviser, in either case of any untrue statement of a material fact or of any
omission of any statement of a material fact which is required to be stated
therein or is necessary to make the statements contained therein not misleading;
and
SECTION 11. EXCLUSIVITY OF USE OF NAMES.
The Sub-Adviser acknowledges and agrees that the name PINNACLE and SELECT TEN
PLUS, and abbreviations or logos associated with those names, are the valuable
property of Manager and its affiliates; that the Separate Account, Manager and
its affiliates have the sole right to use such names, abbreviations and logos;
and that the Sub-Adviser shall use the names PINNACLE and SELECT TEN PLUS, and
associated abbreviations and logos, only in connection with the Sub-Adviser's
performance of its duties hereunder.
Manager acknowledges that "National Asset Management Corporation" (the
SUB-ADVISER'S NAME) is distinctive in connection with investment advisory and
related services provided by the Sub-Adviser, the Sub-Adviser's name is a
property right of the Sub-Adviser, and the Sub-Adviser's name in connection with
the Divisions is understood to be used by the Separate Account with the
Sub-Adviser's consent. The Sub-Adviser hereby grants to the Separate Account a
non-exclusive license to use the Sub-Adviser's name in the name of the Divisions
upon the conditions hereinafter set forth; provided that the Separate Account
may use such name only so long as the
6
<PAGE>
Sub-Adviser shall be retained as the investment sub-adviser of the Divisions
pursuant to the terms of this Agreement. Any such use by the Separate Account
shall in no way prevent the Sub-Adviser or any of its successors or assigns from
using or permitting the use of the Sub-Adviser's name along with any other word
or words, for, by or in connection with any other entity or business, other than
the Separate Account or its business, whether or not the same directly competes
or conflicts with the Separate Account or its business in any manner.
Manager acknowledges that the Separate Account shall use the Sub-Adviser's name
in connection with the Divisions for the period set forth herein in a manner not
inconsistent with the interests of the Sub-Adviser and that the Separate
Account's rights in the Sub-Adviser's name are limited to its use as a component
of the Divisions's name and in connection with accurately describing the
activities of the Divisions. In the event that the Sub-Adviser shall cease to be
the investment sub-adviser of the Divisions, then the Separate Account at their
own expense, upon the Sub-Adviser's written request:
(i) shall cease to use the Sub-Adviser's name, or any combination thereof for
any other commercial purpose (other than the right to refer to the Divisions'
former Sub-Adviser's name in the Separate Account's Registration Statement,
proxy materials and other Separate Account documents to the extent required
under the 1940 Act);
(ii) shall use its best efforts to cause the Separate Account's officers and
Board of Managers to take any all actions which may be necessary or desirable to
effect the foregoing and to reconvey to the Sub-Adviser all rights which the
Separate Account may have to such name. Manager agrees to take any all actions
as may be necessary or desirable to effect the foregoing.
The Sub-Adviser hereby agrees and consents to the use of the Sub-Adviser's name
upon the foregoing terms and conditions.
SECTION 12. ENTIRE AGREEMENT; AMENDMENT, WAIVER.
This Agreement supersedes all prior agreements between the parties and
constitutes the entire agreement by the parties. No provision of this Agreement
may be changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought, and no amendment of this
Agreement shall be effective with respect to the Divisions until approved as
required by the 1940 Act.
SECTION 13. EFFECTIVENESS AND DURATION OF AGREEMENT.
Unless sooner terminated, this Agreement shall continue in effect for two years
and thereafter for successive one year periods, provided that continuation of
this Agreement and the terms thereof are specifically approved annually in
accordance with the requirements of the 1940 Act by a majority of the Managers
of the Separate Account, including a majority of the Managers who are not
interested persons of the Sub-Adviser, Manager or the Separate Account, cast in
person at a meeting called for the purpose of voting on such approval.
SECTION 14. TERMINATION OF AGREEMENT, ASSIGNMENT.
This Agreement may be terminated at any time, without the payment of any
penalty, by the Sub-Adviser or by Manager, upon sixty (60) days' written notice
from the terminating party to the other party and to the Separate Account, or by
the Separate Account, upon sixty (60) days written notice to the Sub-Adviser and
Manager, acting pursuant to a resolution adopted by a majority of the members of
the Board of Managers who are not interested persons or by a vote of the holders
of the lesser of (1) 67% of the Divisions' voting shares present if
7
<PAGE>
the holders of more than 50% of the outstanding shares are present in person or
by proxy, or (2) more than 50% of the outstanding shares of the Divisions.
This Agreement shall automatically terminate in the event of its assignment
or the termination of the Management Agreement pertaining to the Divisions.
Termination of this Agreement shall not affect rights of the parties which
have accrued prior thereto.
The provisions of paragraphs 6, 7, 8, 9 and 11 shall survive the termination of
this Agreement, except that if Manager or the Separate Account terminates the
Agreement, the first paragraph of Section 11 shall not survive termination.
SECTION 15. DEFINITIONS.
The terms ASSIGNMENT and INTERESTED PERSON when used in this Agreement shall
have the meanings given such terms in the 1940 Act and the rules and regulations
thereunder.
SECTION 16. CONCERNING APPLICABLE PROVISIONS OF LAW.
This Agreement shall be subject to all applicable provisions of law, including,
without limitation, the applicable provisions of the 1940 Act, and to the extent
that any provisions herein contained conflict with any such applicable
provisions of law, the latter shall control. This Agreement shall be governed
by the laws of the State of Kentucky, without reference to principles of
conflicts of law.
SECTION 17. COUNTERPARTS.
This Agreement may be executed in counterparts, and each counterpart shall for
all purposes be deemed an original and all such counterparts shall together
constitute one and the same instrument.
IN WITNESS WHEREOF, authorized officers of Manager and the Sub-Adviser have
executed this Agreement as of the day and year first written above.
ARM CAPITAL ADVISORS, INC.
By:
--------------------------------
Attest:
----------------------------
NATIONAL ASSET MANAGEMENT CORPORATION
8
<PAGE>
By:
--------------------------------
Attest:
----------------------------
9
<PAGE>
DISTRIBUTION AGREEMENT
THIS AGREEMENT made as of the day of , 1998, by and
between Integrity Life Insurance Company, an Ohio stock life insurance company
("Integrity"), on its own and on behalf of its separate account, Separate
Account Ten (the "Separate Account"), and ARM Securities Corp., a Minnesota
corporation and a registered broker-dealer (the "Distributor").
WITNESSETH:
WHEREAS, the Distributor is registered as a broker-dealer with the
Securities and Exchange Commission (the "SEC") under the Securities Exchange Act
of 1934 (the "1934 Act") and is a member of the National Association of
Securities Dealers, Inc. (the "NASD");
WHEREAS, the Separate Account and its divisions (the "Divisions") listed on
Exhibit A as may be amended from time to time, as established pursuant to
Section 3907.15 of the Ohio Insurance Law and a registered investment company
under the Investment Company Act of 1940 (the "1940 Act") of the type referred
to as a managed separate account, propose to offer for sale certain contracts
(the "Contracts") which may be deemed to be securities under the Securities Act
of 1933 (the "1933 Act");
WHEREAS, the parties desire to have the Distributor act as principal
underwriter for each Division and assume such supervisory responsibility as is
required by federal and state securities law and applicable requirements of the
NASD for the securities activities of any "person associated" (as that term is
defined in Section 3(a)(18) of the 1934 Act) with the Distributor, including
personnel engaged directly or indirectly in the Separate Account's insurance
operations (the "Associated Persons");
WHEREAS, the parties desire to have the Separate Account perform certain
services in connection with the sale of the Contracts;
NOW, THEREFORE, in consideration of the covenants and mutual promises
herein contained, the Distributor and the Separate Account agree as follows:
1. The Distributor will act as the principal underwriter of the Contracts
in each state or other jurisdiction where the Contracts may legally be sold.
The Distributor will from time to time enter into separate written agreements
("Selling Agreements") on such terms and conditions as the parties may determine
not inconsistent with this Agreement, with one or more individuals or
organizations which agree to participate in the distribution of the Contracts.
Such individuals or organizations ("Dealers") shall be registered as
broker-dealers under the 1934 Act and members of the NASD. Each such Dealer and
its representatives soliciting applications for Contracts shall be duly and
appropriately licensed for the sale of the Contracts under the insurance law and
any applicable securities law of each state or other jurisdiction in which the
Dealer or representative is required to be so licensed. The Selling Agreements
shall be in such form as approved by the Separate Account.
<PAGE>
2. The Distributor will assume such supervisory responsibility for the
securities activities of, and for securities law compliance by, its Associated
Persons, as is required by applicable federal and state law and NASD
requirements, including the NASD Rules of Fair Practice. The Distributor will
have such responsibility as is contemplated by Section 15(b)(4)(E) of the 1934
Act in connection with the training, supervision and control of its Associated
Persons. The parties understand that certain sales literature and materials
intended for use in connection with the sale of Contracts may require filings
with and/or approvals from the SEC, NASD and other regulatory authorities. In
advance of using any such literature or materials, the Distributor will obtain
the approval of the Separate Account and will make any such required regulatory
filing or seek any such required approval. The Distributor will provide
appropriate training materials for its Associated Persons, use its best efforts
to prepare them to complete satisfactorily any and all applicable NASD and state
qualification exams, register the Associated Persons as its registered
representatives before they engage in securities activities, and supervise them
in the performance of such activities. It is understood and agreed that the
office of the Distributor at 515 West Market Street, 8th Floor, Louisville,
Kentucky 40202 will be designated the Office of Supervisory Jurisdiction of the
Distributor and will perform such functions as are agreed to by the Separate
Account and the Distributor.
3. Distributor shall ensure that each Dealer supervises its registered
representatives. Dealers shall assume any legal responsibilities of Separate
Account for the acts, omissions or defalcations of its registered
representatives insofar as they relate to the sale of the Contracts.
Applications for Contracts solicited by such Dealers through its registered
representatives shall be transmitted directly to the Separate Account, and if
received by Distributor, shall be forwarded to Separate Account. All payments
under the Contracts received by the Distributor shall be remitted promptly to
Separate Account.
4. The Separate Account will bear the cost of all services and expenses,
including legal services and expenses and registration, filing and other fees,
in connection with (a) registering and qualifying the Divisions, the Contracts,
and (b) printing and distributing all of the Separate Account's registration
statements, prospectuses and statements of additional information for the
Contracts (including amendments) to Owners of Contracts, Contracts, notices and
periodic reports, and proxy solicitation material.
5. The Distributor will, in connection with the sale of the Contracts,
pay all amounts (including sales commissions) due to Dealers who sell Contracts
under Selling Agreements, in amounts specified in the Selling Agreements and
agreed to by the Distributor.
6. The Distributor will be responsible for compliance with respect to the
maintenance and preservation in accordance with all applicable federal and state
securities laws and regulations, including Rules 17a-3 and 17a-4 under the 1934
Act, of all books and records required to be maintained in connection with the
offer and sale of the Contracts being distributed pursuant to this Agreement.
The Separate Account shall maintain and preserve such books and
-2-
<PAGE>
records on behalf of and as the agent for the Distributor in conformity with the
requirements of Rules 17a-3 and 17a-4 under the 1934 Act. Such books and
records shall be the property of the Distributor and shall at all times be
subject to inspection by the NASD and the SEC in accordance with Section 17(a)
of the 1934 Act. Integrity, acting as agent for the Distributor upon or prior
to completion of each transaction for which a confirmation is legally required,
will send a written confirmation for each such transaction reflecting the facts
of the transaction.
7. The Distributor will execute such papers and do such acts and things
as shall from time to time be reasonably requested by the Separate Account for
the purpose of (a) maintaining the registration statements relating to the
Contracts under the 1933 Act and the 1940 Act, and (b) qualifying and
maintaining qualification of the Contracts for sale under the applicable laws of
any state. It will, however, remain the responsibility of the Separate Account
to obtain and maintain all necessary approvals and registration of the Contracts
with all relevant regulatory authorities.
8. The Distributor is not authorized to give any information, or to make
any representations concerning the Contracts, Accounts or the Separate Account
other than those contained in the current registration statements, prospectuses
or statements of additional information (as amended from time to time) for the
Contracts filed with the SEC or such sales literature and materials as may be
authorized by the Separate Account.
9. Each party hereto shall advise the other promptly of (a) any action of
the SEC or any authorities of any state or territory, of which it has knowledge,
affecting registration or qualifications of the Accounts or the Contracts, or
the right to offer the Contracts for sale, and (b) the happening of any event
which makes untrue any statement, or which requires the making of any change in
the registration statements or prospectuses or statements of additional
information in order to make the statements therein not misleading.
10. There shall be net no compensation for either the services provided by
the Distributor or the services provided by Integrity in connection with this
Agreement.
11. The obligations of the Distributor under this Agreement relate solely
to its status as the principal underwriter of the Contracts.
12. The services of the Distributor and the Separate Account under this
Agreement are not deemed to be exclusive and the Distributor and the Separate
Account shall be free to render similar services to others, including, without
implied limitation, such other separate investment accounts as are now or
hereafter established by the Separate Account, the Distributor or any affiliate
of the Distributor.
13. Unless sooner terminated, this Agreement shall continue in full force
and effect for two years and thereafter for successive one year periods,
provided that such continuance is specifically approved at least annually by (i)
the Board of Managers of the Separate Account, or by the vote of a majority of
the outstanding shares of the Separate Account, and (ii) a vote of a
-3-
<PAGE>
majority of those members of the Board of Managers of the Separate Account who
are not parties to this Agreement nor interested persons of any such parties,
cast in person at a meeting called for the purpose of voting on such approval.
This Agreement may be terminated at any time without the payment of any penalty
upon not less than 60 days written notice to the other party. This Agreement
shall terminate automatically in the event of its assignment (as defined in the
1940 Act).
14. This Agreement shall be governed by and construed in accordance with
the laws of the State of Ohio.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
SEPARATE ACCOUNT TEN of
INTEGRITY LIFE INSURANCE COMPANY
By:
------------------------------------------
Title:
---------------------------------------
INTEGRITY LIFE INSURANCE COMPANY
By:
------------------------------------------
Title:
---------------------------------------
ARM SECURITIES CORP.
By:
------------------------------------------
Title:
---------------------------------------
-4-
<PAGE>
EXHIBIT A
SEPARATE ACCOUNT TEN of
INTEGRITY LIFE INSURANCE COMPANY
Divisions
- ---------
March
June
September
December
<PAGE>
Exhibit 12
[ARM Financial Group, Inc. Letterhead]
April 30, 1998
Integrity Life Insurance Company
515 West Market Street
Louisville, KY 40202
Re: Separate Account Ten of Integrity Life Insurance Company (the "Separate
Account")
Dear Sirs:
This opinion is furnished in connection with the Registration Statement on Form
N-3 for the Separate Account and Integrity Life Insurance Company ("Integrity"),
filed under the Securities Act of 1933 (File No. 333-46389) and the Investment
Company Act of 1940 (File No. 811-08645).
The Registration Statement covers an indefinite number of units of interest in
the Separate Account. Contributions to be received under individual variable
annuity contracts ("Contracts") and group variable annuity certificates
("Certificates") offered by Integrity may be allocated to the Separate Account
to support reserves for such Contracts and Certificates.
I have examined all such corporate records of Integrity and such other documents
and such laws as I consider appropriate as a basis for the opinion hereinafter
expressed. On the basis of such examination, it is my opinion that:
1. Integrity is a corporation duly organized and validly existing under the
laws of the State of Ohio.
2. The Separate Account was established and is maintained pursuant to the laws
of the State of Ohio, under which income, gains and losses, whether or not
realized, from assets allocated to such Separate Account are, in accordance
with the contracts and certificates, credited to or charged against the
Separate Account without regard to other income, gains or losses of
Integrity. Although contractual obligations with respect to the funds of
the Separate Account constitute corporate obligations of Integrity, the
specific amounts payable from accumulations in the Separate Account in
accordance with the Contracts and Certificates depend upon the investment
experience of the Separate Account.
<PAGE>
3. Assets allocated to the Separate Account will be owned by Integrity;
Integrity will not be a trustee with respect thereto. The Contracts and
Certificates provide that the portion of the assets of the Separate Account
equal to the reserves and other Contract and Certificate liabilities with
respect to the Separate Account will not be chargeable with liabilities
arising out of any other business Integrity may conduct, and that Integrity
reserves the right to transfer assets of the Separate Account in excess of
such reserves and other Contract and Certificate liabilities to the General
Account of Integrity.
4. When issued and sold as described above, the Contracts and Certificates
will be duly authorized and will constitute validly issued and binding
obligations of Integrity in accordance with their terms. Purchasers of the
Contracts and Certificates will be subject only to the deductions, charges
and fees set forth in the Prospectus.
I hereby consent to the use of this opinion as an exhibit to the Registration
Statement.
Sincerely,
/s/ Kevin L. Howard
Kevin L. Howard
Assistant General Counsel
<PAGE>
EXHIBIT 13
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Financial Statements"
in Pre-Effective Amendment No. 1 to the Registration Statement (Form N-3 No.
333-46389) and Amendment No. 1 to the Registration Statement (Form N-3 No.
811-08645) and related Prospectus of Integrity Life Insurance Company's Separate
Account Ten and to the use of our report dated February 10, 1998, with respect
to the statutory basis financial statements of Integrity Life Insurance Company
included in the Registration Statement (Form N-3) for 1997 filed with the
Securities and Exchange Commission.
Louisville, Kentucky
April 23, 1998
\s\ Ernst & Young LLP
