<PAGE>
As filed with the Securities and Exchange Commission
on March 10, 1998
Registration No. __________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. ___ [ ]
Post-Effective Amendment No. ___ [ ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. ___ [ ]
(Check appropriate box or boxes)
Select Ten Plus Division of
Separate Account II of National Integrity Life Insurance Company
(Exact Name of Registrant)
National 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
National 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
<PAGE>
/ / 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.
Title of Securities Being Registered...........................................
The registrant has registered an indefinite amount of securities under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940.
<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
<TABLE>
<CAPTION>
PART A: INFORMATION REQUIRED IN PROSPECTUS - PINNACLE (VERSION III)
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 - National Integrity and Separate
Insurance Company Account II; Part I, Section 3 - Your Investment Options;
Part II, Section 1 - The Select Ten Plus Division of
Separate Account II
6. Management Part II, Section 2 - Management of the Select Ten Plus
Division of Separate Account II
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>
<CAPTION>
PART B: INFORMATION REQUIRED IN STATEMENT OF ADDITIONAL INFORMATION - PINNACLE (VERSION III)
Form N-3 Item No. Location in Statement of Additional Information
<S> <C>
16. Cover Page Cover Page
17. Table of Contents Cover Page
18. General Information and History Part 1 - National Integrity and Custodian
19. Investment Objectives and Policies Part 3 - Investment Restrictions and Policies of the
Select Ten Plus Division of Separate Account II
20. Management Part 4 - Management of the Select Ten Plus Division
of Separate Account II
21. Investment Advisory and Other Services Part 4 - Management of the Select Ten Plus Division
of Separate Account II
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
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<PAGE>
PROSPECTUS PINNACLE (VERSION III)
FLEXIBLE PREMIUM VARIABLE ANNUITY
issued by NATIONAL INTEGRITY LIFE INSURANCE COMPANY
This prospectus describes a flexible premium variable annuity offered by
National 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 Separate Account II. Contributions under
the contracts may be allocated to the various available investment divisions of
Separate Account II (VARIABLE ACCOUNT OPTIONS, or individually, OPTION) or to
fixed rate Guaranteed Rate Options (GROs), or both.
Contributions to the Variable Account Options of Separate Account II, except
those to the Select Ten Plus Division of Separate Account II (DIVISION), 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-Registered Trademark- group of companies (collectively, FIDELITY'S
VIP FUNDS); The Legends Fund, Inc. (LEGENDS FUND); Janus Aspen Series (JANUS
TRUST); JPM Series Trust II (JPM 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 JPM 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, other than the Division, 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 TRUST
-----------
Janus Capital Appreciation Portfolio
Janus Balanced Portfolio
Janus Worldwide Growth Portfolio
Janus Money Market Portfolio
JPM SERIES
----------
JPM International Equity Portfolio
JPM 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
<PAGE>
Morgan Stanley U.S. Real Estate Portfolio
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.
The Division invests directly in securities. Part I of this prospectus describes
the contract and provides background information regarding Separate Account II.
Part II of this prospectus (beginning on page ___) provides information
regarding the investment activities of the Division, including its investment
policies.
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), less previous withdrawals and any applicable contingent withdrawal
charges.
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 National Integrity Life Insurance Company, 200 Park Avenue, 20th
Floor, New York, New York 10166. You may also call the following toll-free
number: 1-800-433-1778.
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.
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 - NATIONAL INTEGRITY AND SEPARATE ACCOUNT II
National Integrity Life Insurance Company. . . . . . . . . . . . . . . . . . 9
Separate Account II and the Variable Account Options . . . . . . . . . . . . 9
Assets of Separate Account II. . . . . . . . . . . . . . . . . . . . . . . . 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
The Janus Trust's Investment Adviser . . . . . . . . . . . . . . . . . . .16
Investment Objectives of the Portfolios. . . . . . . . . . . . . . . . . .16
JPM Series Trust II. . . . . . . . . . . . . . . . . . . . . . . . . . . .. 17
The JPM 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 Division of Separate Account II. . . . . . . . . . . . .20
Guaranteed Rate Options. . . . . . . . . . . . . . . . . . . . . . . . . . .20
Renewals of GRO Accounts . . . . . . . . . . . . . . . . . . . . . . . . .21
Market Value Adjustments . . . . . . . . . . . . . . . . . . . . . . . . .21
SECTION 4 - DEDUCTIONS AND CHARGES
Separate Account Charges . . . . . . . . . . . . . . . . . . . . . . . . . .22
Annual Administrative Charge . . . . . . . . . . . . . . . . . . . . . . . .22
<PAGE>
PAGE
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 VARIABLE ANNUITY
Contributions Under Your Contract. . . . . . . . . . . . . . . . . . . . . .24
Your Account Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Your Purchase of Units in Separate Account II. . . . . . . . . . . . . . . .24
How We Determine Unit Value. . . . . . . . . . . . . . . . . . . . . . . . .25
Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Withdrawals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Assignments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Death Benefits and Similar Benefit Distributions . . . . . . . . . . . . . .27
Annuity Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
Annuities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
Annuity Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
Timing of Payment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
How You Make Requests and Give Instructions. . . . . . . . . . . . . . . . .29
SECTION 6 - VOTING RIGHTS
Fund Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
How We Determine Your Voting Shares. . . . . . . . . . . . . . . . . . . . .29
How Fund Shares Are Voted. . . . . . . . . . . . . . . . . . . . . . . . . .29
How Select Ten Plus Division Interests Are Voted . . . . . . . . . . . . . .30
Separate Account Voting Rights . . . . . . . . . . . . . . . . . . . . . . .30
SECTION 7 - TAX ASPECTS OF THE CONTRACTS
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
Tax Status of National 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 National Integrity. . . . . . . . . . . . . . . . . . . .34
Transfers Among Investment Options . . . . . . . . . . . . . . . . . . . .34
<PAGE>
PAGE
SECTION 8 - ADDITIONAL INFORMATION
Systematic Withdrawals . . . . . . . . . . . . . . . . . . . . . . . . . . .34
Dollar Cost Averaging. . . . . . . . . . . . . . . . . . . . . . . . . . . .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 DIVISION OF SEPARATE ACCOUNT II
The Division . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
Investment Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
Investment Objective and Policies. . . . . . . . . . . . . . . . . . . . . .38
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
Investment Restrictions. . . . . . . . . . . . . . . . . . . . . . . . . . .39
SECTION 2 - MANAGEMENT OF THE SELECT TEN PLUS DIVISION OF SEPARATE ACCOUNT II
Board of Managers of the Division. . . . . . . . . . . . . . . . . . . . . .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.
<PAGE>
SAI TABLE OF CONTENTS
Part 1 - National Integrity and Custodian
Part 2 - Distribution of the Contracts
Part 3 - Investment Restrictions and Policies of the Select Ten Plus Division
of Separate Account II
Part 4 - Management of the Select Ten Plus Division of Separate Account II
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
National Integrity Life Insurance Company
200 Park Avenue, 20th Floor
New York, New York 10166
ATTN: Request for SAI of Separate Account II (Pinnacle)
Name:
---------------------------------------------------------------------
Address:
------------------------------------------------------------------
City: State: Zip:
-------------------------------- --------- ----------------
<PAGE>
PART I
SECTION 1 -- SUMMARY
YOUR VARIABLE ANNUITY CONTRACT
In this prospectus, WE, OUR and US mean National Integrity Life Insurance
Company (NATIONAL INTEGRITY), a subsidiary of Integrity Life Insurance Company
(INTEGRITY) and 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.
Your retirement or endowment date (RETIREMENT DATE) will be no later than your
90th 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. 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 GROs,
or both. The Variable Account Options and the GROs 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. To select Investment Options most suitable for you, see Part I,
Section 3, "Your Investment Options."
VARIABLE ACCOUNT OPTIONS
The Variable Account Options, except the Division, 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
1
<PAGE>
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 Division
invests directly in securities. For a full description of the Division, see
Part II.
ACCOUNT VALUE, ADJUSTED ACCOUNT VALUE AND CASH VALUE
The sum of your values under the GROs 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 under special
services we offer to dollar cost average or rebalance your investment in the
Variable Account Options. See "Dollar Cost Averaging" and "Customized Asset
Rebalancing" 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 Division, Integrity Capital Advisors, Inc. (INTEGRITY CAPITAL
ADVISORS), the investment adviser of the Legends Fund and the Division, receives
fees ranging from an annual rate of .40% to 1.05% of the average net assets of
the Portfolios and the Division.
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 1996 was .61% 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 1996 was .79% of
average net assets. Please see Table of Annual Fees and Expenses for rates
associated with specific Portfolios.
2
<PAGE>
For providing investment management services to the JPM 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 JPM Bond Portfolio and .60% from the JPM
International Equity 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 Division, Integrity Capital
Advisors will receive a monthly fee based on an annual rate of .50% of the
Division's average daily net assets up to $100 million and .40% of the
Division's average daily net assets in excess of $100 million. Integrity
Capital Advisors will pay a portion of those fees to Bankers Trust Global Asset
Management Services for its services under the sub-advisory agreement at an
annual rate of .25% of the Division's average daily net assets up to $100
million and .15% of the Division's average daily net assets in excess of $100
million.
A Fund's and the Division's advisory fees 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. A sales charge of up to
7% 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.
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.
3
<PAGE>
TABLE OF ANNUAL FEES AND EXPENSES
CONTRACT OWNER TRANSACTION EXPENSES
Sales Load on Purchases. . . . . . . . . . . . . . . . . . . . . . . . . .$0
Deferred Sales Load (1). . . . . . . . . . . . . . . . . . . . . .7% Maximum
Exchange Fee (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$0
Annual Administrative Charge (3) . . . . . . . . . . . . . . . . . . . . $30
Separate Account Annual Expenses
(AS A PERCENTAGE OF AVERAGE ACCOUNT VALUE) (4)
Mortality and Expense Risk Fees. . . . . . . . . . . . . . . . . . . . 1.20%
Administrative Expenses. . . . . . . . . . . . . . . . . . . . . . . . .15%
----
Total Separate Account Annual Expenses . . . . . . . . . . . . . . . . 1.35%
----
----
Fund 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. . . . . . . . . . . . . . . . . . . . . . . . 0.51%(6) 0.07% 0.58%(6)
VIP II Contrafund. . . . . . . . . . . . . . . . . . . . . . . . 0.61%(6) 0.13% 0.74%(8)
VIP III Growth & Income. . . . . . . . . . . . . . . . . . . . . 0.50%(6) 0.20%(6) 0.70%(6)(8)
VIP III Growth Opportunities . . . . . . . . . . . . . . . . . . 0.61% 0.16% 0.77%(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 Capital Appreciation . . . . . . . . . . . . . . . . . . . 0.75%(10) 0.30%(10) 1.05%(10)
Janus Balanced . . . . . . . . . . . . . . . . . . . . . . . . . 0.79%(11) 0.15%(11) 0.94%(11)
Janus Worldwide Growth . . . . . . . . . . . . . . . . . . . . . 0.66%(11) 0.14%(11) 0.80%(11)
Janus Money Market . . . . . . . . . . . . . . . . . . . . . . . 0.00%(11) 0.50%(11) 0.50%(11)
JPM International Equity . . . . . . . . . . . . . . . . . . . . 0.60% 0.60% 1.20%(12)
JPM Bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.30% 0.45% 0.75%(12)
Morgan Stanley Asian Equity. . . . . . . . . . . . . . . . . . . 0.80%(13) 0.40%(13) 1.20%(13)
Morgan Stanley Emerging Markets Debt . . . . . . . . . . . . . . 0.80%(13) 0.50%(13) 1.30%(13)
Morgan Stanley High Yield. . . . . . . . . . . . . . . . . . . . 0.50%(13) 0.30%(13) 0.80%(13)
Morgan Stanley U.S. Real Estate. . . . . . . . . . . . . . . . . 0.80%(13) 0.30%(13) 1.10%(13)
</TABLE>
The Select Ten Plus Division Annual Expenses After Reimbursement
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
Management and
Assets Advisory Fees Other Expenses Total Annual Expenses(14)
- ------------------------- -------------- -------------- -------------------------
<S> <C> <C> <C>
$0 to $100 million .50% .10% .60%
in excess of $100 million .40% .10% .50%
</TABLE>
4
<PAGE>
- -------------------------
(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.
(2) After the first twelve transfers during a contract year, National
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 or
customized asset rebalancing. 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, 1996. 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 and transfer agent
whereby interest earned on uninvested cash balances was used to reduce
custodian and transfer agent expenses. Including these reductions, the total
operating expenses presented in the table would have been 0.56% for VIP
Equity-Income Portfolio, 0.71% for VIP II Contrafund Portfolio, and 0.76% 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 for the Janus Capital Appreciation Portfolio are
based on the estimated gross expenses before estimated expense offset
arrangements that the Institutional Shares of the Portfolio expect to incur
in their initial fiscal year, net of fee waivers or reductions or waivers
from Janus. Fee reductions 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 are estimated to be 1.00%, .30% and 1.30%, respectively.
Janus may modify or terminate the waivers or reductions at any time upon at
least 90 days' notice to the Trustees.
5
<PAGE>
(11) The fees and expenses in the table above are based on gross expenses
before expense offset arrangements for the fiscal year ended December 31,
1996. Fee reductions for the Janus Balanced and Janus 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 .77%, .14%, and .91% for Worldwide Growth Portfolio, .92%,
.15% and 1.07% for Balanced Portfolio, and .25%, .53% and .78% 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.
(12) The information in the foregoing table has been restated to reflect an
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 JPM
International Equity Portfolio and JPM Bond Portfolio, respectively.
(13) 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 Portfolios to exceed the
respective percentage of average daily net assets set forth in the schedule
table for the Morgan Stanley Universal Funds in Part I, Section 3 - Your
Investment Options.
(14) Integrity Capital Advisors has agreed to reimburse the Division for
operating expenses (excluding management fees) above an annual rate of .10%
of average net assets for the Division. 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.
6
<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. . . . . . . . . . . $ 90.99 $114.75 $140.98 $238.35
Equity 500 Index . . . . . . . . . . . . . . . . . . . . . . $ 87.41 $103.87 $122.66 $200.80
Small Cap Index. . . . . . . . . . . . . . . . . . . . . . . $ 88.94 $108.54 $130.54 $217.06
VIP Equity-Income. . . . . . . . . . . . . . . . . . . . . . $ 90.28 $112.58 $137.34 $230.95
VIP II Contrafund . . . . . . . . . . . . . . . . . . . . . $ 91.92 $117.53 $145.65 $247.79
VIP III Growth & Income . . . . . . . . . . . . . . . . . . $ 91.51 $116.30 $143.57 $243.61
VIP III Growth Opportunities. . . . . . . . . . . . . . . . $ 92.22 $118.46 $147.20 $250.92
Harris Bretall Sullivan & Smith Equity Growth. . . . . . . . $ 95.09 $127.08 $161.59 $279.66
Scudder Kemper Value . . . . . . . . . . . . . . . . . . . . $ 96.12 $130.15 $166.68 $289.73
Zweig Asset Allocation . . . . . . . . . . . . . . . . . . . $ 97.24 $133.52 $172.26 $300.69
Zweig Equity (Small Cap) . . . . . . . . . . . . . . . . . . $100.22 $142.36 $186.85 $328.99
Janus Capital Appreciation . . . . . . . . . . . . . . . . . $ 95.09 $127.08 $161.59 $279.66
Janus Balanced . . . . . . . . . . . . . . . . . . . . . . . $ 93.97 $123.70 $155.95 $268.47
Janus Worldwide Growth . . . . . . . . . . . . . . . . . . . $ 92.53 $119.39 $148.75 $254.04
Janus Money Market . . . . . . . . . . . . . . . . . . . . . $ 89.46 $110.10 $133.16 $222.42
JPM International Equity . . . . . . . . . . . . . . . . . . $ 96.63 $131.68 $169.22 $294.73
JPM Bond . . . . . . . . . . . . . . . . . . . . . . . . . . $ 92.02 $117.84 $146.16 $248.84
Morgan Stanley Asian Equity. . . . . . . . . . . . . . . . . $ 96.63 $131.68 $169.22 $294.73
Morgan Stanley Emerging Markets Debt . . . . . . . . . . . . $ 97.65 $134.74 $174.29 $304.64
Morgan Stanley High Yield. . . . . . . . . . . . . . . . . . $ 92.53 $119.39 $148.75 $254.04
Morgan Stanley U.S. Real Estate. . . . . . . . . . . . . . . $ 95.61 $128.62 $164.14 $284.71
Select Ten Plus Division . . . . . . . . . . . . . . . . . .
</TABLE>
7
<PAGE>
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):
<TABLE>
<CAPTION>
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 . . . . . . . . . . . . . . . . . . . . . $21.92 $67.53 $115.65 $247.79
VIP III Growth & Income . . . . . . . . . . . . . . . . . . $21.51 $66.30 $113.57 $243.61
VIP III Growth Opportunities. . . . . . . . . . . . . . . . $22.22 $68.46 $117.20 $250.92
Harris Bretall Sullivan & Smith Equity Growth. . . . . . . . $25.09 $77.08 $131.59 $279.66
Scudder Kemper Value . . . . . . . . . . . . . . . . . . . . $26.12 $80.15 $136.68 $289.73
Zweig Asset Allocation . . . . . . . . . . . . . . . . . . . $27.24 $83.52 $142.26 $300.69
Zweig Equity (Small Cap) . . . . . . . . . . . . . . . . . . $30.22 $92.36 $156.85 $328.99
Janus Capital Appreciation . . . . . . . . . . . . . . . . . $25.09 $77.08 $131.59 $279.66
Janus Balanced . . . . . . . . . . . . . . . . . . . . . . . $23.97 $73.70 $125.95 $268.47
Janus Worldwide Growth . . . . . . . . . . . . . . . . . . . $22.53 $69.39 $118.75 $254.04
Janus Money Market . . . . . . . . . . . . . . . . . . . . . $19.46 $60.10 $103.16 $222.42
JPM International Equity . . . . . . . . . . . . . . . . . . $26.63 $81.68 $139.22 $294.73
JPM 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 . . . . . . . . . . . . . . . . . .
</TABLE>
These examples assume the current level of fixed charges that are borne by the
Separate Account and the investment management fees and other expenses of the
Portfolios and the Division 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 Separate Account II as well as those of the
Portfolios and the Division. Premium taxes upon annuitization also may be
applicable.
8
<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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994 1993 1992 INCEPTION*
---- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
SCUDDER KEMPER VALUE DIVISION
Unit value at beginning of period . . . . . . . . . $14.85 $10.34 $10.56 $10.07 - $10.00
Unit value at end of period . . . . . . . . . . . . $18.24 $14.85 $10.34 $10.56 $10.07
Number of units outstanding at end of period . . . 1,119,634 806,752 733,336 547,498 3,540
HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH
DIVISION
Unit value at beginning of period . . . . . . . . . $13.21 $10.17 $9.91 $10.05 - $10.00
Unit value at end of period . . . . . . . . . . . . $14.85 $13.21 $10.17 $9.91 $10.05
Number of units outstanding at end of period . . . 1,184,119 1,342,971 1,014,016 830,307 18,906
ZWEIG ASSET ALLOCATION DIVISION
Unit value at beginning of period . . . . . . . . . $13.44 $11.23 $11.33 $9.99 - $10.00
Unit value at end of period . . . . . . . . . . . . $15.23 $13.44 $11.23 $11.33 $9.99
Number of units outstanding at end of period . . . 2,434,199 2,541,023 2,558,692 1,518,392 11,385
ZWEIG EQUITY (SMALL CAP) DIVISION
Unit value at beginning of period . . . . . . . . . $12.58 $10.53 $10.74 - - $10.00
Unit value at end of period . . . . . . . . . . . . $14.71 $12.58 $10.53 $10.74 -
Number of units outstanding at end of period . . . 592,469 587,830 567,827 425,500 -
</TABLE>
- --------------------------------------------------------------------------------
*Inception Dates for the Variable Account Options were December 14, 1992 for the
Zweig Asset Allocation, Scudder Kemper Value and Zweig Equity Options; and
December 8, 1992 for the Harris Bretall Sullivan & Smith Equity Growth Option.
The Inception Date for each of the following: 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 Capital
Appreciation, Janus Balanced, Janus Worldwide Growth, Janus 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 Options is October 1, 1997. The unit value for each Variable Account
Option at inception is $10.00.
9
<PAGE>
SECTION 2 - NATIONAL INTEGRITY AND SEPARATE ACCOUNT II
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
National Integrity is a stock life insurance company organized under the laws of
New York. Our home office is in New York, New York. We are authorized to sell
life insurance and annuities in eight states plus the District of Columbia. In
addition to the contracts, we sell flexible premium annuity contracts with
underlying investment options other than the Funds, and fixed single premium
annuity contracts. We are currently licensed to sell variable contracts in five
states. 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.
National 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 June 30, 1997, ARM had $5.6 billion
of assets under management.
SEPARATE ACCOUNT II AND THE VARIABLE ACCOUNT OPTIONS
Separate Account II is established and maintained under the insurance laws of
the State of New York. Separate Account II contains unit investment trust
divisions 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, except the Division, 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.
The Division 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 the Division. The Division invests directly in securities in accordance
with its investment objective and policies.
ASSETS OF SEPARATE ACCOUNT II
Under New York law, we own the assets of Separate Account II 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 Account II in proportion to the amounts relating to their
contracts. Separate Account II's 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
Separate Account II are credited to or charged against Separate Account II
without regard to our other income, gains or losses. We may permit charges owed
to us to stay in Separate Account II, and thus may participate proportionately
in Separate Account II. Amounts in Separate Account II in excess of reserves and
other liabilities belong to us, and we may transfer them to our general account
(GENERAL ACCOUNT).
CHANGES IN HOW WE OPERATE
We may modify how we or Separate Account II 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:
10
<PAGE>
- add Options to, or remove Options from, Separate Account II, combine two or
more Options within Separate Account II, or withdraw assets relating to
your contract from one Option and put them into another;
- register or end the registration of Separate Account II under the 1940 Act;
- operate Separate Account II 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 National Integrity under the
1940 Act);
- restrict or eliminate any voting rights of Owners or others who have voting
rights that affect Separate Account II;
- cause one or more Options to invest in a mutual fund other than or in
addition to the Funds;
- operate Separate Account II 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 National Integrity and Integrity, the parent of National 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 National 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
11
<PAGE>
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. 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.
12
<PAGE>
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
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.
13
<PAGE>
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.
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
14
<PAGE>
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
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
15
<PAGE>
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 1996 management fee rate, comprised of the individual and group rates,
as a percentage of average net assets:
<TABLE>
<CAPTION>
1996
Portfolio Individual Rate Management Fee
--------- --------------- --------------
<S> <C> <C>
VIP Equity-Income 0.20% 0.51%
VIP II Contrafund 0.30% 0.61%
VIP III Growth & Income 0.20% 0.50%
VIP III Growth Opportunities 0.30% 0.61%
</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 common or preferred stock and the remainder in debt securities.
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 long-term growth of capital with some
current income. 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.
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. It has the flexibility to adjust its investment mix between growth,
cyclical and value stocks as market conditions change. The Portfolio seeks
growth through either appreciation of the security itself or an increase in the
company's earnings or gross sales.
JANUS ASPEN SERIES
Each of the Portfolios of the Janus Trust currently offers two classes of
shares. The Institutional Shares are sold under the name "Janus Aspen Series."
The Janus Trust is registered with the SEC as an open-end management
16
<PAGE>
investment company. The Janus Trust sells and redeems its Shares at net asset
value without any sales charges, commissions or redemption fees.
THE JANUS TRUST'S 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.
The Portfolios of the Janus Trust 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 Capital Appreciation First $300 Million 0.75* 1.25%
Janus Balanced Next $200 Million 0.70 N/A
Janus Worldwide Growth Over $500 Million 0.65 N/A
Janus 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 .75%, .78% and .66%, respectively, for the
quarter ended March 31, 1997. 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, 1998.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Set forth below is a summary of the
investment objectives of the Portfolios of the Janus Trust. There can be no
assurance that these objectives will be achieved. YOU SHOULD READ THE JANUS
TRUST'S PROSPECTUSES CAREFULLY BEFORE INVESTING.
JANUS CAPITAL APPRECIATION PORTFOLIO
Janus 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 BALANCED PORTFOLIO
Janus 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
17
<PAGE>
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 WORLDWIDE GROWTH PORTFOLIO
Janus 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
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 MONEY MARKET PORTFOLIO
Janus 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.
JPM SERIES TRUST II
The JPM 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 JPM Series are bought and sold by
Separate Account II at their respective net asset values.
THE JPM SERIES' INVESTMENT ADVISER. JPMIM, 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 JPM 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>
JPM Bond Portfolio 0.30%
JPM International Equity 0.60%
Portfolio
</TABLE>
18
<PAGE>
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Set forth below is a summary of the
investment objectives of the Portfolios of the JPM Series. There can be no
assurance that these objectives will be achieved. YOU SHOULD READ THE JPM
SERIES' PROSPECTUS CAREFULLY BEFORE INVESTING.
JPM BOND 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.
JPM INTERNATIONAL EQUITY 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 U.S. The Portfolio
seeks to achieve its investment objective through country allocation and stock
valuation and selection.
MORGAN STANLEY UNIVERSAL FUNDS, INC.
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),
which is a publicly owned financial services corporation listed on the New York
and Pacific stock exchanges. 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 August 31,
1997, MSAM and its investment advisory affiliates (exclusive of MAS, Van Kampen
American Capital, and Dean Witter Intercapital) managed assets of approximately
$80.9 billion, and MAS managed assets of approximately $57.6 billion.
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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>
ASSETS OF PORTFOLIO MORGAN STANLEY MORGAN STANLEY MORGAN STANLEY MORGAN STANLEY
HIGH YIELD U.S. REAL ASIAN EQUITY EMERGING MARKETS
ESTATE 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 0.80% 1.10% 1.20% 1.30%
Annual 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
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.
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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 DIVISION OF SEPARATE ACCOUNT II
The Division is a non-diversified investment company that invests directly in
securities. There can be no assurance that the Division will meet its
investment objective. Integrity Capital Advisors serves as investment adviser of
the Division and Bankers Trust Global Asset Management Services, a unit of
Bankers Trust, serves as the sub-adviser of the Division. For its investment
management services to the Division, Integrity Capital Advisors will receive a
monthly fee based on an annual rate of .50% of the Division's average daily net
assets up to $100 million and .40% of the Division's average daily net assets in
excess of $100 million. Integrity Capital Advisors will pay a portion of those
fees to Bankers Trust Global Asset Management Services for its services under
the sub-advisory agreement at an annual rate of .25% of the Division's average
daily net assets up to $100 million and .15% of the Division's average daily net
assets in excess of $100 million.
Integrity Capital Advisors has agreed to reimburse the Division for operating
expenses (excluding management fees) above an annual rate of .10% of average net
assets for the Division. 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.
FOR COMPLETE INFORMATION ABOUT THE SELECT TEN PLUS DIVISION, INCLUDING THE RISKS
ASSOCIATED WITH ITS INVESTMENTS, SEE "INVESTMENT STRATEGY," "INVESTMENT
OBJECTIVE AND POLICIES," AND "RISK FACTORS" IN PART II, SECTION 1.
GUARANTEED RATE OPTIONS
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.
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 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
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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.
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.
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
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.
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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.
SECTION 4 -- DEDUCTIONS AND CHARGES
SEPARATE ACCOUNT CHARGES
National 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 National
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 National 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 National Integrity takes that
annuitants, as a class of persons, will live longer than estimated and therefore
require National 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.
National Integrity may realize a gain from these daily charges to the extent
they are not needed to meet the actual expenses incurred.
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, National 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 GROs 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.
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 Division invests directly in securities and certain
investment management fees and other expenses are deducted directly from the
Division. See Part I, Section 3, "Your Investment Options."
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STATE PREMIUM TAX DEDUCTION
National 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, National 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 7%. As
shown below, the percentage charge varies, depending upon the "age" of the
contributions included in the withdrawal--that is, the contract 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 sixth prior contract 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 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.
<TABLE>
<CAPTION>
Contract 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 . . . . . . . . . . . . . . . . 1
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 National 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, National 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.
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 for each additional transfer during that contract year. (However, no
transfer charge will apply to transfers under our dollar cost averaging and
customized asset
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rebalancing programs, 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.
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 National
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.
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. 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 any day other than a weekend or
a national bank holiday.
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.
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,
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if applicable, are made as of the effective date of the transaction. Charges
against Separate Account II 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 GROs is guaranteed, subject to any applicable Market Value
Adjustments. See "Guaranteed Rate Options" in Part I, Section 3.
YOUR PURCHASE OF UNITS IN SEPARATE ACCOUNT II
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 the Variable Account
Options, other than the Division, 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 the Division varies with
the performance of the securities held by the Division. The unit values also
change because of deductions and charges we make to Separate Account II. 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.
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.
- 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 the Division as follows:
- First, we take the value of the assets in the Division at the end of
the preceding period.
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- 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 Account 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 Division, 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 National Integrity's then current transfer restrictions.
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
National 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.
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 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. A transfer request does not change the allocation of
current or future contributions among the Investment Options. Telephone
transfers may be requested from 8:30 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. Accordingly, transfer
requests received after 4:00 p.m. Eastern Time 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.
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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. A withdrawal charge of
up to 7% 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." National 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.
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 82 years
old. It is National Integrity's intention, subject to obtaining all necessary
regulatory approvals, to make this new death benefit retroactive to all
contracts issued on or after January 1, 1997.
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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 90th 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 90th 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.
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
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tax-favored retirement programs). If National 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 National
Integrity to defer action in order to protect persons with interests in Separate
Account II. National Integrity can defer payment of your GRO Values 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
National 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
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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 National Integrity from its
Owners.
Owners with accumulation value in the Division have certain voting rights. Each
such owner will be given one vote for every $1.00 of accumulation value in the
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 SELECT TEN PLUS DIVISION INTERESTS ARE VOTED
The Division's rules do not require the Division to hold annual meetings of
owners of interests in the Division, although special meetings may be called 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
the Division means the lesser of:
(1) The holders of more than 50% of all votes entitled to be cast with
respect to the Division; or,
(2) The holders of at least 67% of the votes which are present at a
meeting of such persons are the holders of more than 50% of all votes
entitled to be cast with respect to the Division are present or
represented by proxy.
We will determine the number of votes you can instruct us to vote 60 days or
less before the Division's meeting.
SEPARATE ACCOUNT VOTING RIGHTS
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
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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 National 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 understanding of the present federal income tax
laws as currently interpreted by the Internal Revenue Service (IRS). 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 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. NATIONAL 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 NATIONAL INTEGRITY
National 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
Separate Account II is not a separate entity from National Integrity and their
operations form a part of National 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 Separate Account II are
reinvested and taken into account in determining the accumulation value. Under
existing federal income tax law, Separate Account II's investment income,
including realized net capital gains, is not taxed to National Integrity.
National 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.
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.
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
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"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 National 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) attributable to the taxpayer becoming disabled within the
meaning of Code Section 72(m)(7); (4) from certain qualified plans (note,
however, other penalties may apply); (5) under a qualified funding asset (as
defined in Section 130(d) of the Code); (6) purchased by an employer on
termination of certain types of qualified plans and held by the employer until
the employee separates from service; or (7) under an immediate annuity as
defined in Code Section 72(u)(4).
All annuity contracts issued by National 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.
If the Owner is not an individual, the "primary annuitant," as defined in the
Code, is considered the Owner. The primary annuitant is the individual who is of
primary importance in affecting the timing of the amount of payout under a
contract. In addition, when the Owner is not an individual, a change in the
primary annuitant is treated as the death of the Owner. Finally, in the case of
joint owners, the distribution-at-death rules will be applied at the death of
the first Owner.
DIVERSIFICATION STANDARDS
Each Portfolio of the Funds and the 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 manager for the Fund and the Division monitors 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.
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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 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.
National 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 National Integrity may issue a contract.
INDIVIDUAL RETIREMENT ANNUITIES
Code Section 408 permits eligible individuals to contribute to an individual
retirement program known as an IRA. An individual who receives compensation and
who has not reached age 70-1/2 by the end of the tax year may establish an IRA
and make contributions up to the deadline for filing his or her federal income
tax return for that year (without extensions). 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 IRA or another tax-favored retirement program
to an IRA contract. Your IRA contract will be issued with a rider outlining the
special terms of your contract which apply to IRAs.
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.
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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. National 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. National 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
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.
Distributions from a tax-favored plan (not including an IRA subject to Code
Section 408) 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 an IRA; or (2) the payment
is a minimum
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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.
FEDERAL AND STATE INCOME TAX WITHHOLDING
National 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 National Integrity at or before the time of the
distribution of an election not to have any amounts withheld. In certain
circumstances, National 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%. As discussed above,
the withholding rate applicable to eligible rollover distributions is 20%.
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 NATIONAL INTEGRITY
The contracts provide that National Integrity may charge Separate Account II for
taxes. National 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. 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.
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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 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."
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. 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.
CUSTOMIZED ASSET REBALANCING
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.
GROs 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
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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. 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 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.
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.
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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 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.
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PART II
SECTION 1 -- THE SELECT TEN PLUS DIVISION OF SEPARATE ACCOUNT II
THE DIVISION
The Division is a non-diversified investment company which invests directly in
securities. There can be no assurance that the Division will meet its
investment objective. Integrity Capital Advisors serves as the investment
adviser to the Division and Bankers Trust Global Asset Management Services, a
unit of Bankers Trust, serves as the sub-adviser to the Division.
INVESTMENT STRATEGY
The Division seeks total return by acquiring the ten highest yielding stocks in
the Dow Jones Industrial Average-SM- (DJIA) in equal weights as of December 31,
and holding them until the next year end. At that point, the portfolio is
restructured to again hold the ten highest yielding stocks in the DJIA in equal
weights. For example, if an investor invested $100 in the Division on December
31, the Division would buy $10 of each of the ten stocks; subsequent purchases
would be made at the same ratio of shares as existed on December 31. Through
the year, any contributions or disbursements will be made on a pro rata basis,
and the weights of the individual positions will not be rebalanced. Should a
portfolio stock be deleted from the DJIA, we would dispose of that position and
reinvest the proceeds in the next highest yielding nonheld security in the new
DJIA.
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 the 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. The 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.
The Division follows 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 Division
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
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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-SM-" and "DJIA-SM-" are the property of Dow Jones & Company, Inc. (DOW
JONES). Dow Jones is not affiliated with National Integrity, has not
participated in any way in the creation of the Division or in the selection of
stocks included in the Division and has not reviewed or approved any information
included in this prospectus. The Division is not sponsored, endorsed, sold or
promoted by Dow Jones, and Dow Jones has no relationship whatsoever to the
Division. The Dow Jones Industrial Average-SM- is determined, composed and
calculated by Dow Jones without regard to the Division. Dow Jones is not
responsible for and does not participate in the determination of the timing of,
prices at, or quantities of the Division's shares to be issued or in the
determination or calculation of the equation by which the Division's shares are
to be redeemed. Dow Jones has no obligation or liability whatsoever in
connection with the administration or marketing of the Division.
INVESTMENT OBJECTIVE AND POLICIES
The Division seeks total return by acquiring the ten highest dividend yielding
common stocks in the DJIA. 'Highest dividend yield' is calculated for each stock
by annualizing the last quarterly or semi-annual ordinary dividend distributed
on the stock and dividing the result by its closing sales price. This yield is
historical and there is no assurance that any dividends will be declared or paid
in the future on the stocks. No leverage or borrowing is used (except that the
Division may borrow up to 5% of its total assets for temporary or emergency
purposes) nor does the 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 the 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 the
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.
RISK FACTORS
An investment in the 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.
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The 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 the Division may be subject to greater fluctuations in
value than an investment in a diversified investment company. In addition, the
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 the Division's portfolio. Set forth below is a brief description
of certain risks associated with stocks which may be held by the Division.
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 Division is 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.
SECTION 2 -- MANAGEMENT OF THE SELECT TEN PLUS DIVISION OF SEPARATE ACCOUNT II
BOARD OF MANAGERS OF THE DIVISION
The business and affairs of the Division 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
the Division 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 National Integrity's
responsibility.
THE INVESTMENT ADVISER
Integrity Capital Advisors serves as the investment adviser to the Division
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
Division and for monitoring and evaluating the management of the assets of the
Division 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 Division.
As investment adviser, Integrity Capital Advisors provides the overall business
management and administrative services necessary for the Division's operation.
Integrity Capital Advisors furnishes or procures on behalf of the Division the
services and information necessary to the proper conduct of the Division's
business. Integrity Capital Advisors also acts as liaison among the various
service providers to the Division, including the custodian,
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portfolio accounting personnel, sub-adviser, counsel and auditors. Integrity
Capital Advisors is also responsible for ensuring that the Division operates 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 Division.
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 Division in the event
that at any time a sub-adviser is not engaged to manage the assets of the
Division. 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
Bankers Trust Global Asset Management Services, a unit of Bankers Trust, serves
as the sub-adviser to the Division and in that capacity provides investment
advisory services for the Division including security selection. Pursuant to
the sub-advisory agreement, Bankers Trust Global Asset Management Services has
full investment discretion and makes all determinations with respect to the
investment of the Division's assets and the purchase and sale of securities and
other investments.
Bankers Trust, a New York banking corporation with 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.
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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
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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
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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.
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STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1998
FOR
PINNACLE (VERSION III)
FLEXIBLE PREMIUM VARIABLE ANNUITY
ISSUED BY
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
AND
FUNDED THROUGH ITS SEPARATE ACCOUNT II
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TABLE OF CONTENTS
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Part 1 - National Integrity and Custodian. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Part 2 - Distribution of the Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Part 3 - Investment Restrictions and Policies of the Select Ten Plus Division of Separate Account II . . . . . . . . . . . . . 3
Part 4 - Management of the Select Ten Plus Division of Separate Account II . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Part 5 - Portfolio Transactions and Brokerage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Part 6 - Performance Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Part 7 - Determination of Accumulation Unit Values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Part 8 - Determination of Annuity Unit Values. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Part 9 - Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
</TABLE>
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 National Integrity Life Insurance Company
("National Integrity"), 200 Park Avenue, 20th Floor, New York, New York 10166,
or by calling 1-800-325-8583.
<PAGE>
PART 1 - NATIONAL INTEGRITY AND CUSTODIAN
National Integrity is a New York stock life insurance company that sells life
insurance and annuities. Its offices are located at 200 Park Avenue, 20th
Floor, New York, New York 10166. National Integrity, the depositor of Separate
Account II, is a wholly owned subsidiary of Integrity Life Insurance Company.
Integrity Life Insurance Company is a wholly owned subsidiary of Integrity
Holdings, Inc., a Delaware corporation which is a holding company engaged in no
active business. 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.
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 National
Integrity for management services in 1995 and 1996, including services
applicable to Separate Account II, were $5,640,827 and $6,007,766, respectively.
National 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 the Select Ten Plus Division of Separate Account II.
The shares are held in book-entry form.
Reports and marketing materials, from time to time, may include information
concerning the rating of National Integrity, as determined by A.M. Best Company,
Moody's Investor Services, Inc., Standard & Poor's Corporation, Duff & Phelps
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Corporation, or other recognized rating services. National 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, National Integrity does not guarantee the
investment performance of the portfolios, and these ratings do not reflect
protection against investment risk.
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 6.5% of initial
contributions. The amount of distribution allowances paid was $51,204, $123,719
and $684,838 for the years ended December 31, 1996, 1995, and 1994,
respectively. No distribution allowances were retained by ARM Securities during
these years. National 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 DIVISION OF
SEPARATE ACCOUNT II
INVESTMENT RESTRICTIONS
The investment objective of the Division is to seek total return. The Division's
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 Division's fundamental investment
limitations which cannot be changed without shareholder approval.
The Division :
1. May not borrow money, except that the 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 Division 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 the 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 Division from purchasing or selling securities or other instruments
backed by real estate or of issuers engaged in real estate activities).
The following are the Division's non-fundamental operating policies which may be
changed by the Board of Managers of the Division without shareholder approval.
The Division may not:
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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 the 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
Division's 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 Division's 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 Division's assets (i.e.,
due to cash inflows or redemptions) or in market value of the investment or the
Division's assets will not constitute a violation of that restriction.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Division's
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."
LENDING OF PORTFOLIO SECURITIES. The 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 Division's 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 the
Division is authorized to lend, the Division does 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
Division will retain authority to terminate any loans at any time. The Division
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
Division 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 Division 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 Division's interest.
REPURCHASE AGREEMENTS. The Division may enter into repurchase agreements with
certain banks or non-bank dealers. In a repurchase agreement, the 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 Division's 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 the Division enters into repurchase
agreements to evaluate those risks. The Division may, under certain
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circumstances, deem repurchase agreements collateralized by U.S. government
securities to be investments in U.S. government securities.
PART 4 - MANAGEMENT OF THE SELECT TEN PLUS DIVISION OF SEPARATE ACCOUNT II
BOARD OF MANAGERS OF THE SELECT TEN PLUS DIVISION
The business and affairs of the Division 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 the Select Ten Plus Division of Separate Account II." The Board
of Managers has responsibility for the investment management related operations
of the Division 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 National Integrity's
responsibility. The day-to-day operations of the Division are the
responsibility of its officers. The names, addresses, and ages of the Managers
and the officers of the Division, together with information as to their
principal business occupations during the past five years, are set forth below.
<TABLE>
<CAPTION>
NAME, AGE AND ADDRESS OTHER BUSINESS ACTIVITIES IN PAST 5 YEARS
--------------------- -----------------------------------------
<S> <C>
John R. Lindholm (49)* President of Integrity and Vice President-Chief Marketing Officer of National Integrity,
515 West Market Street since November 26, 1993; Executive Vice President- Chief Marketing Officer of ARM
Louisville, KY 40202 Financial Group, Inc., since July 27, 1993; Chief Marketing Officer of Analytical Risk
Management, L.P., since March 1992; Chief Marketing Officer and a Managing Director of
the ICH Capital Management Group, ICH Corporation, Louisville, Kentucky, June 1990 to
February 1992; prior thereto, Chief Marketing Officer and Managing Director of Capital
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.
John Katz (59) Investment banker, since January 1991; Chairman and Chief Executive Officer, Sam's
10 Hemlock Road Restaurant Group, Inc. (a restaurant holding company), June 1991 to August 1992;
Hartsdale, NY 10530 Executive Vice President, Equitable Investment Corporation (an indirect wholly-owned
subsidiary of The Equitable Life Assurance Society of the United States, through which it
owns and manages 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, Capital Holding Corporation,
2304 Speed Avenue December 1991 to April 1992; prior thereto, Executive Vice President and Chief Financial
Louisville, KY 40205 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 (70) President, William Faulkner and Associates, business and institutional adviser, since
240 East Plato Blvd. 1 9 8 6 ; Consultant to American Hoist & Derrick Company, construction equipment
St. Paul, Minnesota 55107 manufacturer, 1986 to 1989; prior thereto, 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.
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NAME, AGE AND ADDRESS OTHER BUSINESS ACTIVITIES IN PAST 5 YEARS
--------------------- -----------------------------------------
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Chris LaVictoire Mahai (42) Senior Vice President, Markets and Products Unit, Star Tribune/Cowles Media Company,
425 Portland Avenue since August 1995; Vice President, Marketing Director, Star Tribune, since September
Minneapolis, MN 55488 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.
</TABLE>
* 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 the Division
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 the Division 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 the Division, (ii) providing the Division,
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 the
Division, (iii) making its officers and employees available to the Board of
Managers and officers of the Division for consultation and discussions regarding
the supervision and administration of the Division, (iv) maintaining or
supervising the maintenance by the sub-adviser or third parties approved by the
Division 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 the Division of all federal, state and local tax returns and reports
of the Division 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 applicable law, (viii) taking
such other action with respect to the Division as may be required by applicable
law, including without limitation, the rules and regulations of the SEC and
other regulatory agencies, and (ix) providing the Division, 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 Division in the event
that at any time a sub-adviser is not engaged to manage the assets of the
Division. 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 Division pays Integrity
Capital Advisors a monthly fee based on an annual rate of .50% of the Division's
average daily net assets up to $100 million and .40% of the Division's average
daily net assets in excess of $100 million. Integrity Capital Advisors will pay
a portion of those fees to Bankers Trust Global Asset Management Services for
its services under the sub-advisory agreement at an annual rate of .25% of the
Division's average daily net assets up to $100 million and .15% of the
Division's average daily net assets in excess of $100 million.
Integrity Capital Advisors has agreed to reimburse the Division for operating
expenses (excluding management fees) above an annual rate of .10% of average net
assets for the Division. 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
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Bankers Trust Global Asset Management Services (BANKERS TRUST GLOBAL), a unit of
Bankers Trust, serves as the sub-adviser to the Division and in that capacity
provides investment advisory services for the Division including security
selection. Subject to the supervision of the Board of Managers and Integrity
Capital Advisors, Bankers Trust Global will provide a continuous investment
program for the Division 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.
Bankers Trust Global will also provide investment research and conduct a
continuous program of evaluation, investment, sales and reinvestment of the
Division's assets. Bankers Trust Global will receive a monthly fee for its
services based on an annual rate of .25% of the Division's average daily net
assets up to $100 million and .15% of the Division's average daily net assets in
excess of $100 million.
PART 5 - PORTFOLIO TRANSACTIONS AND BROKERAGE
Investment decisions for the Division are made by Bankers Trust Global, subject
to the supervision of the Board of Managers of the Division and Integrity
Capital Advisors. Bankers Trust Global has investment advisory clients other
than the Division. A particular security may be bought or sold by Bankers Trust
Global 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 Bankers Trust Global. Although there is no
specified formula for allocating such transactions, the various allocation
methods used by Bankers Trust Global, and the results of such allocations, are
subject to the periodic review by Integrity Capital Advisors and the Board of
Managers of the Division.
Bankers Trust Global places all orders for the purchase and sale of securities,
options, and futures contracts for the Division through a substantial number of
brokers and dealers. In executing transactions, Bankers Trust Global will
attempt to obtain the best execution for the Division 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 Division, Bankers Trust Global may pay higher commission rates than the
lowest available when Bankers Trust Global 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 Bankers
Trust Global 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,
Bankers Trust Global may receive research services for the Division from many
broker-dealers with which Bankers Trust Global 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 Bankers Trust Global and its affiliates in advising its various clients
(including the Division), although not all of these services are necessarily
useful and of value in managing the Division. The sub-advisory fee paid by
Integrity Capital Advisors to Bankers Trust Global is not reduced because
Bankers Trust Global and its affiliates receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, Bankers
Trust Global may cause the Division to pay a broker-dealer a disclosed
commission for effecting a securities transaction for the Division 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
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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).
Bankers Trust Global may place orders for the purchase and sale of
exchange-listed portfolio securities with a broker-dealer that is an affiliate
of Bankers Trust Global where, in the judgment of Bankers Trust Global, 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 Bankers Trust
Global may retain compensation on transactions effected for the Division 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 Bankers Trust Global 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
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 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.
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
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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>
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
PINNACLE
VARIABLE ANNUITY
For the period ending: 12/31/97 All figures are
unaudited.
NON-STANDARD AVERAGE ANNUAL TOTAL RETURN - Reflects all historical investment results, less all charges.
The calculation assumes the policy is still in force and therefore does not take withdrawal charges into consideration.
RETURNS WITHOUT SURRENDER CHARGES
CUMULATIVE TOTAL RETURN
YEAR-TO- ------------------------------------------
INCEPTION CURRENT DATE LIFE OF
VARIABLE OPTIONS DATE (1) UNIT VALUE RETURN 3 YEAR 5 YEAR 10 YEAR FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BT Insurance Funds Trust - EAFE Equity Index 6/21/96 $ 9.884336 0.40% n/a n/a n/a 1.35%
BT Insurance Funds Trust - Equity 500 Index 12/31/92 10.324079 26.77 101.62 104.30 n/a 104.30
BT Insurance Funds Trust - Small Cap Index 8/13/96 9.848390 23.98 n/a n/a n/a 37.32
Fidelity's VIP Equity-Income 10/9/86 10.422097 26.38 90.98 134.04 309.79 299.24
Fidelity's VIP II Contrafund 1/3/95 9.905060 22.47 n/a n/a n/a 101.88
Fidelity's VIP III Growth & Income 12/31/96 10.307084 28.34 n/a n/a n/a 28.34
Fidelity's VIP III Growth Opportunities 1/3/95 10.650617 28.20 n/a n/a n/a 95.57
Harris Bretall Sullivan & Smith Equity Growth 1/12/93 19.546358 32.92 94.14 n/a n/a 95.46
Janus Aspen Series Balanced 9/13/93 10.008238 20.45 69.95 n/a n/a 80.52
Janus Aspen Series Capital Appreciation* 5/1/97 10.027685 25.46 n/a n/a n/a 25.46
Janus Aspen Series Worldwide Growth 9/13/93 9.928728 20.51 92.75 n/a n/a 129.02
JPM Bond 1/3/95 10.156801 7.47 n/a n/a n/a 22.49
JPM International Equity 1/3/95 10.193212 4.01 n/a n/a n/a 24.40
Morgan Stanley Asian Equity 12/31/91 9.225954 -43.38 -39.31 1.85 n/a 26.79
Morgan Stanley Emerging Markets Debt 2/1/94 10.883157 15.75 116.34 n/a n/a 64.70
Morgan Stanley High Yield 8/31/92 10.190225 11.22 52.57 70.10 n/a 70.87
Morgan Stanley U.S. Real Estate 1/31/95 10.378178 22.88 n/a n/a n/a 102.08
Scudder Kemper Value 1/12/93 23.667902 28.71 126.99 n/a n/a 136.68
Zweig Asset Allocation 3/26/93 17.384880 20.30 63.24 n/a n/a 73.85
Zweig Equity (Small Cap) 1/14/93 18.135989 23.42 72.44 n/a n/a 81.36
AVERAGE ANNUAL RETURN
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LIFE OF
VARIABLE OPTIONS 1 YEAR 3 YEAR 5 YEAR 10 YEAR FUND
- ---------------------------------------------------------------------------------------------------------------------------
BT Insurance Funds Trust - EAFE Equity Index 0.40% n/a n/a n/a 0.88%
BT Insurance Funds Trust - Equity 500 Index 26.77 26.33 15.36 n/a 15.36
BT Insurance Funds Trust - Small Cap Index 23.98 n/a n/a n/a 25.78
Fidelity's VIP Equity-Income 26.38 24.07 18.54 15.15 13.12
Fidelity's VIP II Contrafund 22.47 n/a n/a n/a 26.46
Fidelity's VIP III Growth & Income 28.34 n/a n/a n/a 28.36
Fidelity's VIP III Growth Opportunities 28.20 n/a n/a n/a 25.12
Harris Bretall Sullivan & Smith Equity Growth 32.92 24.75 n/a n/a 14.45
Janus Aspen Series Balanced 20.45 19.34 n/a n/a 14.73
Janus Aspen Series Capital Appreciation* n/a n/a n/a n/a 40.43
Janus Aspen Series Worldwide Growth 20.51 24.45 n/a n/a 21.26
JPM Bond 7.47 n/a n/a n/a 7.01
JPM International Equity 4.01 n/a n/a n/a 7.57
Morgan Stanley Asian Equity -43.38 -15.33 .37 n/a 4.03
Morgan Stanley Emerging Markets Debt 15.75 29.33 n/a n/a 13.60
Morgan Stanley High Yield 11.22 15.12 11.21 n/a 10.57
Morgan Stanley U.S. Real Estate 22.88 n/a n/a n/a 27.29
Scudder Kemper Value 28.71 31.42 n/a n/a 18.94
Zweig Asset Allocation 20.30 17.75 n/a n/a 12.30
Zweig Equity (Small Cap) 23.42 19.92 n/a n/a 12.75
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
For the period ending: 12/31/97 x All figures are
unaudited.
STANDARD AVERAGE ANNUAL TOTAL RETURN - Reflects all historical investment results, less all charges and deductions applied against
the subaccount.
Includes any withdrawal charges that would apply if an owner terminated the policy at the end of the period, but excludes deductions
for applicable premium tax charges.
Surrender charges are 7% in year one, declining 1% annually in years one through seven, 0% thereafter.
RETURNS WITH SURRENDER CHARGES CUMULATIVE TOTAL RETURN
INCEPTION LIFE OF
VARIABLE OPTIONS DATE (1) 3 YEAR 5 YEAR 10 YEAR FUND
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BT Insurance Funds Trust - EAFE Equity Index 6/21/96 n/a n/a n/a -4.65%
BT Insurance Funds Trust - Equity 500 Index 12/31/92 96.62 101.30 n/a 102.30
BT Insurance Funds Trust - Small Cap Index 8/13/96 n/a n/a n/a 31.32
Fidelity's VIP Equity-Income 10/9/86 85.98 131.04 309.79 299.24
Fidelity's VIP II Contrafund 1/3/95 n/a n/a n/a 96.88
Fidelity's VIP III Growth & Income 12/31/96 n/a n/a n/a 22.34
Fidelity's VIP III Growth Opportunities 1/3/95 n/a n/a n/a 90.57
Harris Bretall Sullivan & Smith Equity Growth 1/12/93 89.14 n/a n/a 92.46
Janus Aspen Series Balanced 9/13/93 64.95 n/a n/a 77.52
Janus Aspen Series Capital Appreciation* 5/1/97 n/a n/a n/a 18.46
Janus Aspen Series Worldwide Growth 9/13/93 87.75 n/a n/a 126.02
JPM Bond 1/3/95 n/a n/a n/a 17.49
JPM International Equity 1/3/95 n/a n/a n/a 19.40
Morgan Stanley Asian Equity 12/31/91 -44.31 -1.15 n/a 25.79
Morgan Stanley Emerging Markets Debt 2/1/94 111.34 n/a n/a 60.70
Morgan Stanley High Yield 8/31/92 47.57 67.10 n/a 68.87
Morgan Stanley U.S. Real Estate 1/31/95 n/a n/a n/a 97.08
Scudder Kemper Value 1/12/93 121.99 n/a n/a 133.68
Zweig Asset Allocation 3/26/93 58.24 n/a n/a 70.85
Zweig Equity (Small Cap) 1/14/93 67.44 n/a n/a 78.36
SEC STANDARDIZED
AVERAGE ANNUAL RETURN
RETURNS WITH SURRENDER CHARGES LIFE OF
VARIABLE OPTIONS 1 YEAR 3 YEAR 5 YEAR 10 YEAR FUND
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BT Insurance Funds Trust - EAFE Equity Index -6.60% n/a n/a n/a -3.07%
BT Insurance Funds Trust - Equity 500 Index 19.77 25.28 15.36 n/a 15.14
BT Insurance Funds Trust - Small Cap Index 16.98 n/a n/a n/a 21.78
Fidelity's VIP Equity-Income 19.38 22.98 18.54 15.15 13.12
Fidelity's VIP II Contrafund 15.47 n/a n/a n/a 25.41
Fidelity's VIP III Growth & Income 21.34 n/a n/a n/a 22.36
Fidelity's VIP III Growth Opportunities 21.20 n/a n/a n/a 24.05
Harris Bretall Sullivan & Smith Equity Growth 25.92 23.67 n/a n/a 14.09
Janus Aspen Series Balanced 13.45 18.15 n/a n/a 14.28
Janus Aspen Series Capital Appreciation* n/a n/a n/a n/a 28.86
Janus Aspen Series Worldwide Growth 13.51 23.36 n/a n/a 20.89
JPM Bond .47 n/a n/a n/a 5.53
JPM International Equity -2.99 n/a n/a n/a 6.10
Morgan Stanley Asian Equity -50.38 -17.72 .37 n/a 3.90
Morgan Stanley Emerging Markets Debt 8.75 28.33 n/a n/a 12.89
Morgan Stanley High Yield 4.22 13.85 11.21 n/a 10.32
Morgan Stanley U.S. Real Estate 15.88 n/a n/a n/a 26.20
Scudder Kemper Value 21.71 30.45 n/a n/a 18.64
Zweig Asset Allocation 13.30 16.53 n/a n/a 11.89
Zweig Equity (Small Cap) 16.42 18.75 n/a n/a 12.37
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
PINNACLE
VARIABLE ANNUITY
All figures
are unaudited.
For the period ending: 12/31/97
CALENDAR YEAR RETURNS
WITHOUT SURRENDER CHARGES
INCEPTION
VARIABLE OPTIONS DATE (1) 1993 1994 1995 1996 1997
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BT Insurance Funds Trust - EAFE Equity Index 6/21/96 n/a n/a n/a 0.94% * 0.40%
BT Insurance Funds Trust - Equity 500 Index 12/31/92 4.55 -3.08 32.15 20.35 26.77
BT Insurance Funds Trust - Small Cap Index 8/13/96 n/a n/a n/a 10.76 * 23.98
Fidelity's VIP Equity-Income 10/9/86 16.70 5.01 34.05 12.73 26.38
Fidelity's VIP II Contrafund 1/3/95 n/a n/a 37.86 * 19.57 22.47
Fidelity's VIP III Growth & Income 12/31/96 n/a n/a n/a n/a 28.34
Fidelity's VIP III Growth Opportunities 1/3/95 n/a n/a 30.76 * 16.67 28.20
Harris Bretall Sullivan & Smith Equity Growth 1/12/93 -1.91 * 2.64 29.93 12.42 32.92
Janus Aspen Series Balanced 9/13/93 6.77 * -.51 23.11 14.60 20.45
Janus Aspen Series Capital Appreciation* 5/1/97 n/a n/a n/a n/a 25.46 *
Janus Aspen Series Worldwide Growth 9/13/93 18.62 * .17 25.66 27.28 20.51
JPM Bond 1/3/95 n/a n/a 13.36 * .54 7.47
JPM International Equity 1/3/95 n/a n/a 7.16 * 11.62 4.01
Morgan Stanley Asian Equity 12/31/91 102.53 -17.14 5.21 1.88 -43.38
Morgan Stanley Emerging Markets Debt 2/1/94 n/a -23.87 * 25.75 48.64 15.75
Morgan Stanley High Yield 8/31/92 18.31 -5.76 21.29 13.10 11.22
Morgan Stanley U.S. Real Estate 1/31/95 n/a n/a 19.58 * 37.53 22.88
Scudder Kemper Value 1/12/93 6.47 * -2.07 43.65 22.78 28.71
Zweig Asset Allocation 3/26/93 7.49 * -.92 19.75 13.32 20.30
Zweig Equity (Small Cap) 1/14/93 7.29 * -1.97 19.54 16.87 23.42
SEC STANDARDIZED
AVERAGE ANNUAL RETURN
LIFE OF
VARIABLE OPTIONS 1 YEAR 3 YEAR 5 YEAR 10 YEAR FUND
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BT Insurance Funds Trust - EAFE Equity Index 0.40% n/a n/a n/a 0.88%
BT Insurance Funds Trust - Equity 500 Index 26.77 26.33 15.36 n/a 15.36
BT Insurance Funds Trust - Small Cap Index 23.98 n/a n/a n/a 25.78
Fidelity's VIP Equity-Income 26.38 24.07 18.54 15.15 13.12
Fidelity's VIP II Contrafund 22.47 n/a n/a n/a 26.46
Fidelity's VIP III Growth & Income 28.34 n/a n/a n/a 28.36
Fidelity's VIP III Growth Opportunities 28.20 n/a n/a n/a 25.12
Harris Bretall Sullivan & Smith Equity Growth 32.92 24.75 n/a n/a 14.45
Janus Aspen Series Balanced 20.45 19.34 n/a n/a 14.73
Janus Aspen Series Capital Appreciation* n/a n/a n/a n/a 40.43
Janus Aspen Series Worldwide Growth 20.51 24.45 n/a n/a 21.26
JPM Bond 7.47 n/a n/a n/a 7.01
JPM International Equity 4.01 n/a n/a n/a 7.57
Morgan Stanley Asian Equity -43.38 -15.33 .37 n/a 4.03
Morgan Stanley Emerging Markets Debt 15.75 29.33 n/a n/a 13.60
Morgan Stanley High Yield 11.22 15.12 11.21 n/a 10.57
Morgan Stanley U.S. Real Estate 22.88 n/a n/a n/a 27.29
Scudder Kemper Value 28.71 31.42 n/a n/a 18.94
Zweig Asset Allocation 20.30 17.75 n/a n/a 12.30
Zweig Equity (Small Cap) 23.42 19.92 n/a n/a 12.75
</TABLE>
Notes:
n/a Not applicable.
* Partial-year returns (italicized) are calculated from the inception date
through year-end.
(1) 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.
12
<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.
13
<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.
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
14
<PAGE>
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 National 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 Separate Account II for one of the quoted periods, the standardized
average annual total return and nonstandardized total return quotations will
show the investment performance such Options would have achieved (reduced by the
applicable charges) had they been investment divisions within Separate Account
II for the period quoted.
INDIVIDUALIZED COMPUTER GENERATED ILLUSTRATIONS
15
<PAGE>
National 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:
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 National
Integrity's current annuity rates are used, contributions in the current and
five prior participation years will qualify for National Integrity's current
individual annuity rates applicable to funds derived from sources outside
National Integrity. The balance of the proceeds will qualify for National
Integrity's current individual annuity rates for payment of proceeds.
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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 National
Integrity receives a written request for lump sum payment of remaining values.
Assets held in Separate Account II 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 Separate
Account II. 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 Separate Account II as of December 31, 1997, and for
the periods indicated in the financial statements and the statutory-basis
financial statements of National 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 the Division are
included because as of the date of this SAI, the Division had not yet commenced
operations.
The financial statements of National Integrity should be distinguished from the
financial statements of Separate Account II and should be considered only as
they relate to the ability of National Integrity to meet its obligations under
the contracts. They should not be considered as relating to the investment
performance of the assets held in Separate Account II.
17
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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:
SEPARATE ACCOUNT II:
Report of Independent Auditors*
Statement of Assets and Liabilities as of December 31, 1997*
Statement of Operations for the Year Ended December 31, 1997*
Statement of Changes in Net Assets for the Years Ended December 31, 1997
and 1996*
Notes to Financial Statements*
* To be filed by pre-effective amendment
NATIONAL INTEGRITY LIFE INSURANCE COMPANY:
Report of Independent Auditors*
Balance Sheets (Statutory Basis) as of December 31, 1997 and 1996*
Statements of Operations (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*
* To be filed by pre-effective amendment
(b) EXHIBITS:
The following exhibits are filed herewith unless indicated otherwise:
1. Resolutions of the Board of Directors of National Integrity Life
Insurance Company (NATIONAL INTEGRITY) and Certification of
Chief Executive Officer authorizing the establishment of Separate
Account II, the Registrant. Incorporated by reference from
registration statement filed on Form N-4 (File No. 33-51126) on
August 20, 1992.
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. *
<PAGE>
6.(a) 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.(b) Form of variable annuity certificate. Incorporated by
reference to Form N-4 registration statement (File No.
33-56658).
6.(c) Form of riders to certificate for qualified plans.
Incorporated by reference from pre-effective amendment no. 1
to Form N-4 registration statement filed on October 23,
1992.
7. Form of application. Incorporated by reference to
post-effective amendment no.1 to Form S-1 registration
statement (File No. 33-51122).
8.(a) Certificate of Incorporation of National Integrity.
Incorporated by reference to Form N-4 registration statement
(File No. 33-33119).
8.(b) By-Laws of National Integrity. Incorporated by reference to
Form N-4 registration statement (File No. 33-33119).
9.(a) Reinsurance Agreement between National Integrity and
Connecticut General Life Insurance Company (CIGNA).
Incorporated by reference to Form N-4 registration statement
(File No. 33-51126), filed on April 28, 1995.
9.(b) Reinsurance Agreement between National Integrity and
Connecticut General Life Insurance Company (CIGNA) effective
January 1, 1995. Incorporated by reference to Form N-4
registration statement (File No. 33-51126) filed on May 1,
1996.
10. Not applicable.
11. Not applicable.
12. Opinion and Consent of Jorden Burt Berenson & Johnson.*
13. Consent of Ernst & Young LLP.*
14. Not applicable.
15. Not applicable.
16. Schedule for computation of performance quotations.*
17. Financial Data Schedule.*
* To be filed by pre-effective amendment
ITEM 29. DIRECTORS AND OFFICERS OF THE INSURANCE COMPANY.
Set forth below is information regarding the directors and principal
officers of National Integrity.
DIRECTORS:
<TABLE>
<CAPTION>
Name and Principal Business Address Position and Offices with National Integrity
- ----------------------------------- --------------------------------------------
<S> <C>
Kenneth F. Clifford Director
Morgan Stanley & Co. Incorporated
1221 Avenue of the Americas
New York, New York 10020
2
<PAGE>
James S. Cole Director
Morgan Stanley & Co. Incorporated
1221 Avenue of the Americas
New York, New York 10020
Warren S. Foss Director
Bear Stearns Co.
245 Park Avenue, 3rd Floor
New York, New York 10167
John R. McGeeney Director
ARM Financial Group, Inc.
515 West Market Street
Louisville, Kentucky 40202
Dudley J. Godfrey, Jr. Director
Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, Wisconsin 53202-3590
Donald B. Henderson, Jr. Director
LeBoeuf, Lamb, Greene & MacRae
125 West 55th Street
New York, New York 10019-4513
John R. Lindholm Director and President
ARM Financial Group, Inc.
515 West Market Street
Louisville, Kentucky 40202
Edward D. Powers Director
6064 Shipyard Lane
Easton, Maryland 21601
Colin F. Raymond Director
Morgan Stanley & Co. Incorporated
1221 Avenue of the Americas
New York, New York 10020
Martin H. Ruby Director, Co-Chairman of the Board
ARM Financial Group Inc. and Co-Chief Executive Officer
515 West Market Street
Louisville, Kentucky 40202
Irwin T. Vanderhoof Director
18 Two Bridges Road
Towaco, New Jersey
Peter R. Vogelsang Director
Morgan Stanley & Co. Incorporated
1221 Avenue of the Americas
New York, New York 10020
Edward L. Zeman Director, Executive Vice President
ARM Financial Group Inc. and Chief Financial Officer
515 West Market Street
Louisville, Kentucky 40202
</TABLE>
3
<PAGE>
SELECTED OFFICERS: (The business address for each of the principal officers
listed below is 515 West Market Street, Louisville,
Kentucky 40202.)
<TABLE>
<CAPTION>
Name and Principal Business Address Position and Offices with National Integrity
- ----------------------------------- --------------------------------------------
<S> <C>
Dennis L. Carr Executive Vice President and Chief Actuary
David E. Ferguson Executive Vice President and Chief Technology Officer
Daniel R. Gattis Executive Vice President-Institutional Business Group
John R. McGeeney Executive Vice President-Retail Business Division
Robert H. Scott Executive Vice President, General Counsel and Secretary
Patricia L. Winter Senior Vice President - Mergers/Acquisitions and Investment Assurance
Peter S. Resnik Treasurer
Barry G. Ward Controller
</TABLE>
ITEM 30. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH NATIONAL INTEGRITY
OR REGISTRANT
National Integrity, the depositor of Separate Account II, is a wholly owned
subsidiary of Integrity Life Insurance Company, an Ohio stock life insurance
corporation. Integrity Life Insurance Company is a wholly owned subsidiary of
Integrity Holdings, Inc., a Delaware corporation which is a holding company
engaged in no active business. 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 disbursing agency.
In June 1997, ARM Financial 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 Financial and 3.45 million shares were sold by the Morgan Stanley
Stockholders (as defined below). Concurrent with the closing of the Offering,
ARM Financial amended and restated its Certificate of Incorporation to
effectuate a recapitalization such that (i) the common equity of ARM Financial
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 Financial 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
4
<PAGE>
Morgan Stanley Stockholder or an affiliate of a Morgan Stanley Stockholder. The
Morgan Stanley Stockholders owned approximately 91% of the outstanding shares of
ARM Financial'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 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 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 and its predecessor.
The following list shows the subsidiaries of Morgan Stanley. 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.
5
<PAGE>
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)
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)
6
<PAGE>
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)
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.
7
<PAGE>
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
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
ARM Financial Group, Inc.
CIMIC Holdings Limited
Hamilton Services Limited
PageMart Wireless, Inc.
8
<PAGE>
Jefferson Smurfit Corporation
Risk Management Solutions
Silgan Holding Inc.
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)
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LS Atlanta Associates Inc.
LS Bayport, Inc.
LS Lake, Inc.
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.
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Mountain West Financial Corporation (Utah)
NOVUS Consumer Discount Company (Pennsylvania)
NOVUS Development Corporation
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 MSLIncorporated and 2% owned by MS Holdings Incorporated.
** 25% owned by Morgan Stanley Asia Pacific (Holdings) I Limited.
*** 25% owned by non-Morgan Stanley entities.
[THERE ARE NO SUBSIDIARIES OF NATIONAL INTEGRITY. THE FINANCIAL
STATEMENTS FOR NATIONAL INTEGRITY ARE NOT CONSOLIDATED WITH ANY AFFILIATE.]
ITEM 31. NUMBER OF CONTRACT OWNERS
As of January 31, 1998 there were no contract owners of the Select Ten
Plus Division of Separate Account II of National Integrity. As of January 31,
1998 there were 1,029 contract owners of Separate Account II of National
Integrity.
ITEM 32. INDEMNIFICATION
BY-LAWS OF NATIONAL INTEGRITY. National Integrity's By-Laws provide, in Article
VII, as follows:
7.1 INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND INCORPORATORS.
To the extent permitted by the law of the State of New York and subject to all
applicable requirements thereof:
(a) any person made or threatened to be made a party to any action or
proceeding, whether civil or criminal, by reason of the fact that he, his
testator or intestate, is or was a director, officer, employee or
incorporator of the Company shall be indemnified by the Company;
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(b) any person made or threatened to be made a party to any action or
proceeding, whether civil or criminal, by reason of the fact that he, his
testator or intestate serves or served any other organization in any
capacity at the request of the Company may be indemnified by the Company;
and
(c) the related expenses of any such person in any other of said
categories may be advanced by the Company.
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.
AGREEMENTS. National Integrity and ARM Securities, including each director,
officer, and controlling person of National 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 Agreement and Section 9 of the Form of Principal
Underwriter Agreement filed as Exhibit 5 to this Registration Statement. Those
sections are incorporated by reference into this response. Certain officers and
directors of National Integrity are officers and directors of ARM Securities
(see Item 29 and Item 34 of this Part C).
INSURANCE. The directors and officers of National 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.
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
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 Advisors, are as follows:
<TABLE>
<CAPTION>
Name and Principal Business Address Position and Offices with Integrity Capital Advisors
- ----------------------------------- ----------------------------------------------------
<S> <C>
John Franco Director, Co-Chairman of the Board and Co-Chief
515 West Market Street Executive Officer
Louisville, Kentucky 40202
Martin H. Ruby Director, Co-Chairman of the Board and Co-Chief
515 West Market Street Executive Officer
Louisville, Kentucky 40202
Robert H. Scott General Counsel, Chief Compliance Officer and Secretary
515 West Market Street
Louisville, Kentucky 40202
Peter S. Resnik Treasurer
515 West Market Street
Louisville, Kentucky 40202
12
<PAGE>
Michael A. Cochran Tax Officer
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
</TABLE>
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
National Integrity, Separate Accounts I, II and Ten of Integrity, and The
Legends Fund, Inc. National 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:
<TABLE>
<CAPTION>
Name and Principal Business Address Position and Offices with ARM Securities
- ----------------------------------- ----------------------------------------
<S> <C>
Edward J. Haines Director and President
515 West Market Street
Louisville, Kentucky 40202
John R. McGeeney Director, Secretary, General Counsel & Compliance
515 West Market Street Officer
Louisville, Kentucky 40202
Peter S. Resnik Treasurer
515 West Market Street
Louisville, Kentucky 40202
Michael A. Cochran Tax Officer
515 West Market Street
Louisville, Kentucky 40202
Dale C. Bauman Vice President
100 North Minnesota Street
New Ulm, Minnesota 46073
Robert Bryant Vice President
1550 East Shaw #120
Fresno, California 93710
13
<PAGE>
Ronald Geiger Vice President
100 North Minnesota Street
New Ulm, Minnesota 46073
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
</TABLE>
(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 National Integrity at 515 West Market Street, Louisville, Kentucky
40202.
ITEM 36. MANAGEMENT SERVICES
The contract under which management-related services are provided to
National 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.
14
<PAGE>
National 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 National Integrity.
15
<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 10th day of February, 1998.
SELECT TEN PLUS DIVISION OF
SEPARATE ACCOUNT II OF
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
(Registrant)
By: National Integrity Life Insurance Company
(Depositor)
By: /s/ John R. Lindholm
--------------------------------
John R. Lindholm
Director and President
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
(Depositor)
By: /s/ John R. Lindholm
--------------------------------
John R. Lindholm
Director and President
16
<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 10th day of
February, 1998.
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
(Depositor)
By: /s/ John R. Lindholm
--------------------------------
John R. Lindholm
Director and President
As required by the Securities Act of 1933, this 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, Director and President
Date: 2/10/98
PRINCIPAL FINANCIAL OFFICER: /s/ Edward L. Zeman
------------------------------------------
Edward L. Zeman, Executive Vice President-
Chief Financial Officer
Date: 2/10/98
PRINCIPAL ACCOUNTING OFFICER: /S/ Barry G. Ward
------------------------------------------
Barry G. Ward, Controller
Date: 2/10/98
DIRECTORS:
/s/ John R. Lindholm
- -------------------------------- --------------------------------
John R. Lindholm Warren S. Foss
Date: 2/10/98 Date:
/s/ Kenneth F. Clifford /s/ Colin F. Raymond
- -------------------------------- --------------------------------
Kenneth F. Clifford Colin F. Raymond
Date: 2/10/98 Date: 2/10/98
/s/ Martin H. Ruby
- -------------------------------- --------------------------------
James S. Cole Martin H. Ruby
Date: Date: 2/10/98
- -------------------------------- --------------------------------
John Franco Irwin T. Vanderhoof
Date: Date:
/s/ Peter R. Vogelsang
- -------------------------------- --------------------------------
Dudley J. Godfrey, Jr. Peter R. Vogelsang
Date: Date: 2/10/98
/s/ Donald B. Henderson, Jr. /s/ Edward L. Zeman
- -------------------------------- --------------------------------
Donald B. Henderson, Jr. Edward L. Zeman
Date: 2/10/98 Date: 2/10/98
- --------------------------------
Edward D. Powers
Date:
17
