<PAGE> 1
1933 Act File No. 33-85204
1940 Act File No. 811-3875
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. _____ [ ]
Post-Effective Amendment No. 4 [ x ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 22 [ x ]
SENTRY VARIABLE ACCOUNT II
________________________________________________________________________________
(Exact Name of Registrant)
SENTRY LIFE INSURANCE COMPANY
________________________________________________________________________________
(Name of Depositor)
1800 North Point Drive
Stevens Point, Wisconsin 54481
________________________________________________________________________________
(Address of Depositor's Executive Offices and Zip Code)
Telephone (715) 346-6000
________________________________________________________________________________
(Depositor's Telephone Number, Including Area Code)
William M. O'Reilly
Sentry Life Insurance Company
1800 North Point Drive
Stevens Point, WI 54481
________________________________________________________________________________
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[x] on January 7, 2000, pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on __________________, pursuant to paragraph (a)(1) 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: Individual Variable Annuity Contracts
<PAGE> 2
CROSS REFERENCE SHEET
(Required by Rule 495)
<TABLE>
<CAPTION>
Item No. Location
PART A
<S> <C> <C>
1 Cover Page .............................. Cover Page
2 Definitions ............................. Definitions
3 Synopsis ................................. Summary
4 Condensed Financial Information ......... Condensed Financial
Information
5 General Description of Registrant,
Depositor, and Portfolio Companies ....... The Company; The Variable
Account; T. Rowe Price Fixed
Income Series, Inc., T. Rowe
Price Equity Series, Inc., and
Janus Aspen Series
6 Deductions and Expenses ................. Charges and Deductions
7 General Description of Variable
Annuity Contracts ....................... The Contracts
8 Annuity Period .......................... Annuity Provisions
9 Death Benefit ........................... The Contracts; Annuity
Provisions
10 Purchases and Contract Value ............. Purchases and Contract Value
11 Redemptions ............................. Purchases and Contract Value
12 Taxes ................................... Federal Tax Status
13 Legal Proceedings ....................... Legal Proceedings
14 Table of Contents of the Statement
of Additional Information ................ Table of Contents of the
Statement of Additional
Information
PART B
15 Cover Page .............................. Cover Page
16 Table of Contents ....................... Table of Contents
17 General Information and History .......... The Company
18 Services ................................ Not Applicable
19 Purchase of Securities Being Offered ..... Not Applicable
20 Underwriters ............................ Distribution of Contracts
21 Calculation of Performance Data .......... Yield Calculation for T. Rowe
Price Prime Reserve Subaccount
22 Annuity Payments ........................ Amount of Annuity Payments
23 Financial Statements ..................... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C to this Registration Statement
<PAGE> 3
PART A
<PAGE> 4
SENTRY LIFE INSURANCE COMPANY
HOME OFFICE: ANNUITY SERVICE OFFICE:
1800 North Point Drive P.O. Box 867
Stevens Point, WI 54481 Stevens Point, WI 54481
Telephone: (800)533-7827
INDIVIDUAL FLEXIBLE PURCHASE PAYMENT DEFERRED
VARIABLE ANNUITY CONTRACTS
ISSUED BY
SENTRY VARIABLE ACCOUNT II
AND
SENTRY LIFE INSURANCE COMPANY
The individual flexible purchase payment deferred variable annuity contract (the
"Contract") described in this Prospectus provides for accumulation of Contract
Values and monthly annuity payments on a variable basis. The Contract is
designed for use by individuals in retirement plans on a qualified or
non-qualified basis. The Contract may be purchased for retirement plans that
receive favorable tax treatment such as individual retirement annuities,
tax-sheltered annuities, pension and profit-sharing plans and deferred
compensation plans.
Your purchase payments will be allocated to a segregated investment account of
Sentry Life Insurance Company which has been designated Sentry Variable Account
II (the "Variable Account"). The Variable Account invests in shares of T. Rowe
Price Fixed Income Series, Inc., T. Rowe Price Equity Series, Inc., and Janus
Aspen Series. Through the Variable Account, you may invest in the following
Portfolios:
T. Rowe Price Fixed Income Series, Inc.
- T. Rowe Price Prime Reserve Portfolio
- T. Rowe Price Limited-Term Bond Portfolio
T. Rowe Price Equity Series, Inc.
- T. Rowe Price Personal Strategy Balanced Portfolio
Janus Aspen Series
- Aggressive Growth Portfolio
As the Owner of the Contract, you bear the complete investment risk for amounts
you allocate to the Variable Account.
The Contract:
- is not a bank deposit
- is not federally insured
<PAGE> 5
- is not endorsed by any bank or government agency
- is not guaranteed and may be subject to loss of principal
This Prospectus provides basic information you should know about the Contract
before investing. Please keep this Prospectus for future reference.
A Statement of Additional Information dated January 7, 2000, which is legally a
part of this Prospectus, contains further information about the Contract. It has
been filed with the Securities and Exchange Commission, along with this
Prospectus. You can obtain a copy of the Statement of Additional Information at
no charge by writing or calling Sentry Equity Services, Inc., 1800 North Point
Drive, Stevens Point, WI 54481, (800)533-7827. The Table of Contents for the
Statement of Additional Information can be found on page 36 of this Prospectus.
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, the Contract in any jurisdiction in which such offer or
solicitation may not be lawfully made.
INQUIRIES: If you have any questions regarding the Contract, you should call or
write the Annuity Service Office at the telephone number or address given above.
The Securities and Exchange Commission has not approved or disapproved these
securities or determined if this Prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
This Prospectus and the Statement of Additional Information are dated
January 7, 2000.
2
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Definition .................................................................................................. 5
Summary ......................................................................................................7
Fee Table .....................................................................................................9
Condensed Financial Information ..............................................................................11
Performance Information ......................................................................................11
Financial Statements .........................................................................................12
The Company ..................................................................................................12
The Variable Account ........................................................................................12
T. Rowe Price Fixed Income Series, Inc. ......................................................................13
T. Rowe Price Equity Series, Inc..............................................................................13
Janus Aspen Series ...........................................................................................13
Variable Account Voting Rights ...............................................................................14
Substitution of Securities .................................................................................14
Charges and Deductions .......................................................................................14
Contingent Deferred Sales Charge ...........................................................................14
Reduction or Elimination of Contingent Deferred Sales Charge ...............................................16
Deduction for Mortality and Expense Risk Premium ...........................................................16
Deduction for Contract Maintenance Charge ..................................................................17
Deduction for Premium Taxes and Other Taxes ................................................................17
Other Expenses................................................................................................17
The Contract .................................................................................................18
Transfers ..................................................................................................18
Telephone Transfers.........................................................................................19
No Default .................................................................................................19
Modification of the Contract ...............................................................................20
Contract Value .............................................................................................20
Ownership ..................................................................................................20
Assignment .................................................................................................20
Beneficiary ................................................................................................21
Annuity Provisions ...........................................................................................21
Income Date and Settlement Option ..........................................................................21
Changing the Income Date ...................................................................................21
Changing the Settlement Option .............................................................................21
Settlement Options .........................................................................................22
Mortality and Expense Guarantee ............................................................................22
Frequency of Annuity Payments ..............................................................................22
Amount of Annuity Payments .................................................................................23
Additional Provisions ......................................................................................23
</TABLE>
3
<PAGE> 7
TABLE OF CONTENTS (CONTINUED)
<TABLE>
<S> <C>
Death Benefit ................................................................................................24
Death of the Annuitant .....................................................................................24
Death of the Contract Owner ................................................................................24
Purchases and Contract Value .................................................................................25
Change in Purchase Payments ................................................................................25
Allocation of Purchase Payments ............................................................................25
Accumulation Units .........................................................................................26
Distribution of Contract ...................................................................................26
Surrenders ...................................................................................................26
Limitations on Withdrawals from 403(b) Annuities ...........................................................27
Texas Optional Retirement Program ..........................................................................28
Federal Tax Status ...........................................................................................28
General ....................................................................................................28
Diversification ............................................................................................29
Contract Owner Control of Investments.......................................................................29
Multiple Contracts .........................................................................................30
Owner Other than Natural Persons ...........................................................................30
Tax Treatment of Assignments ...............................................................................30
Income Tax Withholding .....................................................................................30
Tax Treatment of Withdrawals - Non-Qualified Contracts and Section 457 Contracts............................31
Qualified Plans ............................................................................................31
Tax Treatment of Withdrawals - Qualified Contracts .........................................................34
Tax Sheltered Annuities - Withdrawal Limitations ...........................................................35
Section 457 - Deferred Compensation Plans ..................................................................35
Legal Proceedings ............................................................................................35
Table of Contents of Statement of Additional Information .....................................................36
</TABLE>
4
<PAGE> 8
DEFINITIONS
Following are definitions of terms used in this Prospectus.
<TABLE>
<S> <C>
Accumulation Unit An accounting unit representing a share of ownership in the
Variable Account during the years before annuity payments begin.
Annuitant The person upon whose continuation of life any annuity payment
involving life contingencies depends and to whom annuity payments
will be made during the income phase of the Contract.
Annuity Unit An accounting unit of measure used to calculate annuity payments
during the income phase of the Contract.
Code Internal Revenue Code of 1986, as amended.
Company Sentry Life Insurance Company, 1800 North Point Drive, Stevens
Point, WI 54481.
Contingent Owner The Contingent Owner, if any, of the Contract must be the
spouse of the Contract Owner named on the application.
Contract Anniversary The same month and day each year calculated from the date the
Contract was first issued.
Contract Owner The Contract Owner is named on the application, unless changed,
and has all rights under the Contract.
Contract Value The dollar value of all amounts accumulated under the Contract as
calculated on any valuation date.
Contract Year A 12-month period beginning with the Contract issue date and each
Contract anniversary date thereafter.
Mutual Fund A Mutual Fund designated as an investment option for the Variable
Account.
Income Date The date on which annuity payments begin.
Non-Qualified Contract A contract issued under a non-qualified plan. This means that the
contract does not receive favorable tax treatment under Sections 401,
403, 408 or 457 of the Code.
Portfolio A segment of a Mutual Fund made up of a separate and distinct
class of shares.
Qualified Contract A contract that is issued under a tax-qualified plan. A
qualified plan, generally a retirement plan, is one that receives
favorable tax treatment.
Subaccount A segment of the Variable Account that invests in a Mutual Fund or
Portfolio.
</TABLE>
5
<PAGE> 9
DEFINITIONS (CONTINUED)
<TABLE>
<S> <C>
Valuation Date The date on which the Company determines the value of the
Contract. The valuation date is each day that the New York Stock
Exchange ("NYSE") is open for business, which is Monday through Friday,
except for New Year's Day, Martin Luther King Day, President's Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
Valuation Period The period beginning at the close of business on the NYSE on
each Valuation Date and ending at the close of business for the next
succeeding Valuation Date.
Variable Account Sentry Variable Account II, a separate investment account of
Sentry Life Insurance Company into which you can allocate your net purchase
payments. The Variable Account is divided into Subaccounts.
</TABLE>
6
<PAGE> 10
SUMMARY
THE CONTRACT
The Contract described in this Prospectus is an individual flexible purchase
payment deferred variable annuity contract. The Contract is intended for
retirement savings or other long-term investment purposes. "Flexible purchase
payments" means that you may choose to make purchase payments monthly, quarterly
or annually in whatever amount you choose, subject to certain minimum
requirements. A "deferred annuity contract" means that annuity payments do not
begin for a specified period (usually when you retire) or until you reach a
certain age. A "variable annuity" is one in which the contract values and
annuity payments may vary depending on the performance of the underlying
investments portfolios.
As with all deferred annuity contracts, the Contract has two phases: the
accumulation phase and the income phase. The accumulation phase is the period
during which you are making purchase payments. During the accumulation phase,
earnings accumulate on a tax-deferred basis, but are taxed as ordinary income if
you make a withdrawal. The income phase occurs when you begin receiving annuity
payments, usually when you retire.
Along with the investment experience of the Variable Account, the amount of your
purchase payments during the accumulation phase determines, in part, the amount
of the annuity payments you will receive during the income phase.
THE VARIABLE ACCOUNT
You can allocate purchase payments to the Variable Account, which is a
segregated investment account of the Company. The Variable Account invests in
shares of T. Rowe Price Fixed Income Series, Inc., T. Rowe Price Equity Series,
Inc., and Janus Aspen Series at their net asset value. As the Contract Owner,
you bear the investment risk for the purchase payments you select to be
allocated to the Variable Account.
TEN-DAY FREE LOOK
Within 10 days (or longer in states where required) of the day you receive the
Contract, you may return it to the Company or to your sales representative. When
the Company receives the returned Contract, it will be voided as if it had never
been issued and you will receive a full refund of your purchase payments.
CHARGES AND DEDUCTIONS
CONTINGENT DEFERRED SALES CHARGE
There is no sales charge when you purchase the Contract. However, if you
surrender the Contract, the Company may impose a contingent deferred sales
charge. The contingent deferred sales charge ranges from 0% to 6% depending on
how long the Company has had your purchase payment.
MORTALITY AND EXPENSE RISK PREMIUM
Each Valuation Period, the Company deducts a mortality and expense risk premium
from the Variable Account. The charge is equal, on an annual basis, to 1.20% of
the average daily net asset value of the Variable Account.
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<PAGE> 11
CONTRACT MAINTENANCE CHARGE
The Company deducts an annual contract maintenance charge of $30 from the
Contract Value. The Company reserves the right to change the amount of the
contract maintenance charge at any time before the Income Date. After the Income
Date, the Company may deduct a contract maintenance charge from your monthly
annuity payment.
PREMIUM TAXES
The Company will deduct for any premium taxes which must be paid to a state or
other governmental entity from the Contract Value. Currently, premium taxes
range from 0% to 4%.
TAXES
Your earnings in the Contract are not taxed until you take them out. If you take
money out before the Income Date, earnings come out first and are taxed as
income. If you are younger than 59 1/2 when you take money out, you may be
charged a 10% federal tax penalty on the earnings. The annuity payments you
receive during the income phase are considered partly a return of your original
investment. That part of each payment is not taxable as income.
8
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FEE TABLE
CONTRACT OWNER TRANSACTION EXPENSES
- Contingent Deferred Sales Charge (as a percentage of purchase payments)
<TABLE>
<CAPTION>
Time between when purchase payment
is allocated and date of surrender Percentage
-------------------------------------------- ----------
<S> <C>
Less than 1 year 6%
At least 1 year, but less than 2 years 5%
At least 2 years, but less than 3 years 4%
At least 3 years, but less than 4 years 3%
At least 4 years, but less than 5 years 2%
At least 5 years, but less than 6 years 1%
At least 6 years 0%
</TABLE>
CONTRACT MAINTENANCE CHARGE - $30 PER YEAR
VARIABLE ACCOUNT ANNUAL EXPENSES
- Mortality and Expense Risk Premium - 1.20% of daily net asset value
ANNUAL EXPENSES OF T. ROWE PRICE FIXED INCOME SERIES, INC., T. ROWE PRICE EQUITY
SERIES, INC., AND JANUS ASPEN SERIES
(as a percentage of the average daily net assets of a Portfolio)
<TABLE>
<CAPTION>
INVESTMENT MANAGEMENT OTHER TOTAL ANNUAL
PORTFOLIO AND ADMINISTRATION FEES EXPENSES EXPENSES
- --------- ----------------------- -------- ------------
<S> <C> <C> <C>
T. Rowe Price Fixed
Income Series, Inc.
- - T. Rowe Price
Prime Reserve 0.55% 0.00% 0.55%
- - T. Rowe Price
Limited-Term Bond 0.70% 0.00% 0.70%
T. Rowe Price Equity
Income Series, Inc.
- - T. Rowe Price
Personal Strategy 0.90% 0.00% 0.90%
Balanced
Janus Aspen Series
- - Aggressive Growth 0.72% 0.03% 0.75%
</TABLE>
Portfolios of T. Rowe Price Fixed Income Series, Inc. and T. Rowe Price Equity
Series, Inc. have an annual all-inclusive Investment Management and
Administrative Fee based on their average daily net assets, which includes all
expenses related to the Portfolio. The
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<PAGE> 13
Portfolios calculate and accrue the fees daily. The Investment Management and
Administrative Fee for the Janus Aspen Series are separate from related fees.
EXAMPLES
The following table shows the expenses that you, as a Contract Owner, would pay
on a $1,000 investment, assuming a 5% annual return on assets.
(a) shows the amounts that you would pay at the end of each time period
if you surrender the Contract.
(b) shows the amounts that you would pay if you do not surrender the
Contract.
<TABLE>
<CAPTION>
TIME PERIODS
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
T. Rowe Price Prime Reserve (a) $73 $ 100 $ 130 $ 261
Portfolio (b) $23 $ 70 $ 120 $ 261
T. Rowe Price Limited-Term (a) $71 $ 94 $ 119 $ 232
Bond Portfolio (b) $21 $ 64 $ 109 $ 232
T. Rowe Price Personal (a) $74 $ 103 $ 134 $ 259
Strategy Balanced (b) $24 $ 73 $ 124 $ 259
Portfolio
Aggressive Growth Portfolio (a) $72 $ 98 $ 126 $ 252
(b) $22 $ 68 $ 116 $ 252
</TABLE>
EXPLANATION OF FEE TABLE AND EXAMPLES
1. The purpose of the above table is to assist you in understanding the
various costs and expenses that you will incur, either directly or
indirectly. The table reflects expenses of the Variable Account, as well as
the Portfolios.
2. Premium taxes may apply; however, they are not reflected.
3. The examples do not reflect that after the first Contract Year, you may
make one surrender per Contract Year, on a non-cumulative basis, of up to
10% of the aggregate purchase payments (less any withdrawals) free from a
contingent deferred sales charge, provided the value of the Contract prior
to the surrender exceeds $10,000.
4. Neither the fee table nor the examples include a transfer fee. Currently,
there is no transfer fee, but the Company reserves the right to assess a
transfer fee in the future.
5. THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
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CONDENSED FINANCIAL INFORMATION
ACCUMULATION UNIT VALUES
The following table sets forth the Accumulation Unit values for the periods
shown. This data has been taken from the Variable Account's financial
statements. The financial statements (except the September 30, 1999 unaudited
financial statements) have been audited by PricewaterhouseCooprs LLP, an
independent accountant, and the audit report is included in the Statement of
Additional Information.
The following information should be read in conjunction with the Variable
Account's financial statements and related notes, which are included in the
Statement of Additional Information.
<TABLE>
<CAPTION>
Period Ended
September 30, Year Ended
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Liquid Asset Subaccount
Beginning of Period $17.954 $17.361 $16.779 $16.247 $15.653 $15.311
End of Period $18.342 17.954 17.361 16.779 16.247 15.653
Number of Accum.
Units Outstanding 165,204 140,566 115,558 145,387 162,165 217,211
Growth Subaccount
Beginning of Period $57.557 $39.662 $36.783 $28.257 $30.098 $28.524
End of Period $57.886 57.716 50.557 39.662 36.783 28.257
Number of Accum.
Units Outstanding 724,948 750,025 780,148 847,224 938,909 1,049,256
Limited Maturity Bond
Subaccount
Beginning of Period $25.048 $24.284 $23.024 $22.342 $20.381 $20.653
End of Period $25.096 25.048 24.284 23.024 22.342 20.381
Number of Accum.
Units Outstanding 213,443 238,960 258,942 317,877 384,749 460,025
Balanced Subaccount
Beginning of Period $22.613 $20.399 $17.283 $16.367 $13.382 $14.010
End of Period $22.653 $22.613 20.399 17.283 16.367 13.382
Number of Accum.
Units Outstanding 507,488 499,567 482,578 519,312 550,216 618,542
<CAPTION>
Year Ended
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Liquid Asset Subaccount
Beginning of Period $15.127 $14.825 $14.207 $13.368 $12.459
End of Period 15.311 15.127 14.825 14.207 13.368
Number of Accum.
Units Outstanding 270,994 414,153 544,747 646,044 502,722
Growth Subaccount
Beginning of Period $26.357 $20.558 $22.662 $17.711 $17,711
End of Period 30.098 28.524 26.357 20.558 22.662
Number of Accum.
Units Outstanding 1,156,057 1,231,668 1,363,149 1,375,719 1,503,684
Limited Maturity Bond
Subaccount
Beginning of Period $19.607 $18.867 $17.147 $16.026 $14.639
End of Period 20.653 19.607 18.867 17.147 16.026
Number of Accum.
Units Outstanding 527,775 624,082 696,573 765,968 837,082
Balanced Subaccount
Beginning of Period $13.323 $12.480 $10.288 $10.000 *
End of Period 14.010 13.323 12.480 $10.288 *
Number of Accum.
Units Outstanding 654,955 565,977 284,777 164,053 *
</TABLE>
* No Accumulation Unit Values for
this period. Sales of the Contract
in connection with this Portfolio
commenced on September 14, 1990.
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<PAGE> 15
PERFORMANCE INFORMATION
Periodically, the Company may advertise performance data for the Portfolios.
This data will show the change, as a percent, in the value of an Accumulation
Unit based on the investment performance over a period of time, usually a
calendar year. It is calculated by dividing the increase (decrease) in value for
the Accumulation Unit by the Accumulation Unit value at the beginning of the
period. Deductions for asset-based charges, contract maintenance charges, and
the operating expenses of the Portfolios will be reflected in the percentage
figure. A deduction for any contingent deferred sales charge will not be
reflected in the percentage figure. Deduction of a contingent deferred sales
charge would reduce any percentage increase or make greater any percentage
decrease.
Advertisements will also include average annual total return figures,
which will reflect deductions for contract maintenance charges, contingent
deferred sales charges, asset-based charges, and the operating expenses of the
Portfolios.
The Company may also distribute sales literature that compares the
percentage change in Accumulation Unit values for a Portfolio against such
market indices as Standard & Poor's 500 Composite Stock Price Index, the Dow
Jones Industrial Average, or other management investment companies having
similar investment objectives to the Portfolio being compared.
FINANCIAL STATEMENTS
This Prospectus does not contain any financial statements. The Statement of
Additional Information contains financial statements for both the Company and
the Variable Account.
THE COMPANY
The Company, meaning Sentry Life Insurance Company, is a stock life insurance
company incorporated under the laws of Wisconsin in 1958. Its home office is
located at 1800 North Point Drive, Stevens Point, Wisconsin. It is authorized to
conduct annuity, life, accident and health insurance business in the District of
Columbia and in all states, except New York. The Company is a wholly-owned
subsidiary of Sentry Insurance a Mutual Company ("SIAMCO"). SIAMCO, a Wisconsin
corporation, is a property and casualty insurance company. Its home office is
also located at 1800 North Point Drive, Stevens Point, Wisconsin. SIAMCO owns
and controls, either directly or through subsidiary companies, a group of
insurance and related companies, including Sentry Life Insurance Company of New
York and Sentry Equity Services, Inc.
THE VARIABLE ACCOUNT
The Variable Account was established by the Company's Board of Directors on
August 2, 1983. It is a segregated asset account of the Company and is
registered with the Securities and Exchange Commission as a unit investment
trust under the Investment Company Act of 1940. Registration of the Variable
Account does not mean that the Securities and Exchange Commission supervises the
management of the Variable Account or the Company.
On November 1, 1994, Sentry Investors Life Insurance Company ("SILIC")
transferred the assets (in the form of shares of Neuberger & Berman Advisers
Management Trust) and liabilities arising in connection with certain individual
flexible premium variable annuity contracts ("SILIC Contracts") issued by Sentry
Investors Variable Account II ("SILIC Account") from the SILIC Account to the
Variable Account. The Company has assumed all liabilities and obligations
arising under the SILIC Account assets and is responsible for satisfaction of
all liabilities and obligations arising under the SILIC Contracts pursuant to
the terms of an assumption reinsurance agreement between the
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<PAGE> 16
Company and SILIC.
Income, gains and losses, whether or not realized, are, in accordance with the
Contract, credited to or charged against the Variable Account without regard to
other income, gains or losses of the Company. Company obligations arising out of
the Contract are general corporate obligations of the Company.
The assets of the Variable Account are the property of the Company.
These assets, equal to the reserves and other contract liabilities of the
Variable Account, cannot be charged with liabilities arising out of any other
business of the Company.
The Company does not guarantee the investment performance of the Variable
Account. The value of the Contract and the amount of the annuity payments will
vary with the value of the assets underlying the Variable Account.
The assets of the Variable Account are divided into Subaccounts
within the Variable Account.
T. ROWE PRICE FIXED INCOME SERIES, INC.,
T. ROWE PRICE EQUITY SERIES, INC. AND
JANUS ASPEN SERIES
On November 17, 1999, the Securities and Exchange Commission issued an order
approving the substitution of shares of certain Portfolios of T. Rowe Price
Fixed Income Series, Inc., T. Rowe Price Equity Series, Inc. and Janus Aspen
Series for shares of the Portfolios of Neuberger Berman Advisers Management
Trust held by the Variable Account for fund variable annuity contracts issued by
the Company as follows:
(1) shares of the T. Rowe Price Prime Reserve Portfolio of T. Rowe Price Fixed
Income Series, Inc. for shares of Neuberger Berman AMT Liquid Asset
Portfolio;
(2) shares of the T. Rowe Price Limited-Term Bond Portfolio of T. Rowe Price
Fixed Income Series for shares of Neuberger Berman AMT Limited Maturity
Bond Portfolio;
(3) shares of the T. Rowe Price Personal Strategy Balanced Portfolio of T. Rowe
Price Equity Series, Inc. for shares of Neuberger Berman AMT Balanced
Portfolio; and
(4) shares of the Aggressive Growth Portfolio of Janus Aspen Series for shares
of Neuberger Berman AMT Growth Portfolio.
Each Subaccount invests in one Portfolio of T. Rowe Price Fixed Income
Series, Inc., T. Rowe Price Equity Series, Inc., or Janus Aspen Series
(collectively, the Funds).
Shares of the Funds may be offered in connection with certain variable annuity
contracts and variable life insurance policies of various insurance companies
which may or may not be affiliated with the Company. Certain Funds may also be
sold directly to qualified plans. The Funds believe that offering their shares
in this manner will not be disadvantageous to you.
The Company may enter into certain arrangements under which it is reimbursed by
the Funds' advisers, distributors and/or affiliates for the administrative
services which it provides to the Portfolios.
The investment objectives and policies of certain Portfolios are similar to the
investment objectives
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<PAGE> 17
and policies of other mutual funds that certain of the investment advisers
manage. Although the objectives and policies may be similar, the investment
results of the Portfolios my be higher or lower than the results of such other
mutual funds. The investment advisers cannot guarantee, and make representation,
that the investment results of similar funds will be comparable even though the
funds have the same investment advisers.
T. Rowe Price Fixed Income Series, Inc. and T. Rowe Price Equity Series, Inc.
are diversified open-end management investment companies of the series type.
Both are registered with the Securities and Exchange Commission under the
Investment Company Act of 1940.
T. Rowe Price Associates, Inc., located at 100 East Pratt Street, Baltimore,
Maryland, 21202, is registered with the Securities and Exchange Commission as an
investment adviser and serves as investment adviser to each of the Portfolios.
As the investment adviser, T. Rowe Price Associates, Inc. is responsible for
selection and management of the Portfolio investments. T. Rowe Price Associates,
Inc. is not affiliated with the Company, and the Company has no responsibility
for the management or operation of the Portfolios.
A summary of the investment objective of each Portfolio is set forth below.
There is no assurance that any Portfolio will achieve its objective. More
detailed information is contained in each Portfolio's prospectus, including the
risks associated with the investments and the investment techniques of each
Portfolio.
T. Rowe Price Prime Reserve Portfolio. The investment objectives of the Prime
Reserve Portfolio are preservation of capital, liquidity, and consistent with
these, the highest possible current income. It seeks to attain these objectives
by investing in high-quality, U.S. dollar-denominated money market securities.
T.Rowe Price Limited-Term Bond Portfolio. The investment objective of the
Limited-Term Bond Portfolio is to seek a high level of income consistent with
moderate fluctuations in principal value by investing primarily in short- and
intermediate-term investment grade debt securities.
T. Rowe Price Personal Strategy Balanced Portfolio. The investment objective of
the Personal Strategy Balanced Portfolio is to seek the highest total return
over time consistent with an emphasis on both capital appreciation and
income.
Janus Aspen Series is a non-diversified open-end management series company.
Janus Aspen Series is registered with the Securities and Exchange Commission
under the Investment Company Act of 1940. Janus Aspen Series offers 11
Portfolios, one of which, the Aggressive Growth Portfolio, is currently offered
in connection with the Contract.
Janus Capital, 100 Fillmore Street, Denver, Colorado, 80206-4928, registered
with the Securities and Exchange Commission as an investment adviser, is the
investment adviser to Janus Aspen Series and is responsible for the day-to-day
management of the investment portfolio and other business affairs.
Janus Capital is not affiliated with the Company, and the Company has no
responsibility for the management or operations of Janus Aspen Series.
A summary of the investment objective of Janus Aspen Series Aggressive Growth
Portfolio is set forth below. There can be no assurance that any portfolio will
achieve its objective. More detailed information is contained in the Portfolio's
prospectus, including the risks associated with the investments and the
investment techniques of the Portfolio.
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<PAGE> 18
Aggressive Growth Portfolio. The Aggressive Growth Portfolio seeks long-term
growth of capital through a non-diversified portfolio that invests primarily in
common stocks of foreign and domestic companies selected for their growth
potential. The Aggressive Growth Portfolio normally invests at least 50 percent
of its equity assets in securities issued by medium-sized companies.
VARIABLE ACCOUNT VOTING RIGHTS
The Company is the legal owner (shareholder) of the shares of T. Rowe Price
Fixed Income Series, Inc., T. Rowe Price Equity Series, Inc., and Janus Aspen
Series (collectively, "the Funds"). However, the Company believes that when a
Portfolio solicits proxies in connection with a vote of shareholders, it is
required to obtain from you, and other effected Contract Owners, instructions as
to how to vote those shares.
If any of the Series holds a shareholder meeting at which you are entitled to
vote, you will receive periodic reports relating to the Funds and/or the
Portfolio(s) in which you have an interest, proxy material, and a form on which
you can give voting instructions.
The Company will determine the number of shares that you will have a right to
vote as of a date chosen by it, which will not be more than 60 days prior to the
shareholder meeting. The Company will send you proxy material and the form for
giving voting instructions at least 14 days prior to the shareholder meeting.
For purposes of voting Fund shares held in the Variable Account at a shareholder
meeting of the Fund, your voting interest after the Income Date decreases as the
reserves underlying the Contract decrease.
In accordance with its view of present law, the Company will vote the shares of
the Funds held in the Variable Account in accordance with instructions received
from all persons having a voting interest in the Portfolio. The Company will
vote shares for which it has not received instructions in the same proportion as
it votes shares for which it has received instructions. The Company will vote
its own shares in the same proportion as it votes shares for which it has
received instructions.
If the applicable law with respect to voting rights is amended or if the
interpretation of the law changes, and it is determined that the Company has
authority to vote the shares of the Series in its own right, it may elect to do
so.
SUBSTITUTION OF SECURITIES
If a Portfolio is no longer available for investment by the Variable Account, or
if the Company's Board of Directors determines that further investment in a
Portfolio becomes inappropriate in view of the Variable Account's objectives,
the Company may substitute another Portfolio already available or that will
become available for investment by the Variable Account. However, the Company
may not make any substitution of securities in any Subaccount without the prior
approval, and subject to the requirements of, the Securities and Exchange
Commission.
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<PAGE> 19
CHARGES AND DEDUCTIONS
CONTINGENT DEFERRED SALES CHARGE
At the time you purchase the Contract, the Company does not deduct a sales
charge. However, the Company deducts a contingent deferred sales charge if you
make a surrender of purchase payments within six years after you made them. The
Company does not deduct a contingent deferred sales charge after it has had a
purchase payment for more than six years.
The contingent deferred sales charge reimburses the Company for its expenses in
selling the Contract. If the charge does not cover all its sale expenses, the
Company may use the mortality and expense risk premium to make up any
difference.
If you surrender all or a portion of the Contract, the Company will calculate
the contingent deferred sales charge at the time of the surrender and will
deduct it from the Contract Value. In calculating the contingent deferred sales
charge
- purchase payments will be allocated to the amount surrendered on a
first-in-first-out basis;
- in no event will the aggregate contingent deferred
sales charge exceed 6% of the total purchase payments made.
The amount of the contingent deferred sales charge is calculated by
(1) allocating purchase payments to the amount surrendered; and
(2) multiplying each such allocated purchase payment by the appropriate
percentage shown in the table below; and
(3) adding the products of each multiplication in (2) above.
Time between when purchase payment
is allocated and date of surrender Percentage
---------------------------------- ----------
Less than 1 year 6%
At least 1 year, but less than 2 years 5%
At least 2 years, but less than 3 years 4%
At least 3 years, but less than 4 years 3%
At least 4 years, but less than 5 years 2%
At least 5 years, but less than 6 years 1%
At least 6 years 0%
The contingent deferred sales charge percentage is based on the amount partially
surrendered and is deducted from the Contract Value remaining after the amount
requested is deducted.
Example: Amount requested: $1,000
Assume 5% contingent deferred sales charge: $ 50
Total amount withdrawn from Contract Value: $1,050
Amount you receive: $1,000
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<PAGE> 20
If, after the surrender amount is deducted, the remaining Contract Value is
insufficient to pay the contingent deferred sales charge, the charge will be
deducted from the amount you request to be surrendered.
Example: Amount requested: $1,000
Assume 5% contingent deferred sales charge: $ 50
Total amount withdrawn from Contract Value: $1,000
Amount you receive: $ 950
The Company will determine the amount deducted from the Contract Value by
canceling Accumulation Units from each applicable Subaccount in the ratio that
the value of each Subaccount bears to the total Contract Value. If you prefer
some other method of Accumulation Unit cancellation, you must notify the Company
in writing beforehand.
For purposes of determining the amount of the contingent deferred sales charge,
surrenders will be attributed to purchase payments on a first-in-first-out
basis. You should note that this is contrary to the allocation method used for
determining tax obligations. For tax purposes, withdrawals are considered to
have come from the last money into the Contract. Thus, for tax purposes,
earnings are considered to come out first.
The Company will not deduct a contingent deferred sales charge under the
following circumstances:
- After the first contract anniversary date, you may make one surrender per
Contract Year, on a non-cumulative basis, of up to 10% of the aggregate
purchase payments (less any withdrawals) without a contingent deferred
sales charge, provided the value of the Contract prior to the surrender
exceeds $10,000.
- When purchase payments that have been held by the Company for more than
six years are being withdrawn.
- When distributions under the Contract are made because of the death of
the Contract Owner or Annuitant, or as annuity payments.
- At the Company's option pursuant to its current guidelines or procedures.
REDUCTION OR ELIMINATION OF CONTINGENT DEFERRED SALES CHARGE
The amount of the contingent deferred sales charge may be reduced or eliminated
when the Contract is sold to individuals or to a group of individuals and
results in expense savings. The Company will determine if a group is entitled to
have the contingent deferred sales charge reduced or eliminated based on these
four factors:
(1) The size and type of group. Generally, sales expenses for large groups
are less than for small groups because more contracts can be issued to
a large group with fewer sales contacts.
(2) The total amount of purchase payments that will be received.
Per-contract sales expenses are likely to be less on larger purchase
payments than on smaller ones.
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<PAGE> 21
(3) Any prior or existing relationship with the Company. Per-contract sales
and administrative expenses are likely to be less when an established
relationship exists.
(4) Other group factors may come to light that warrant a reduction or
elimination of the contingent deferred sales charge.
The contingent deferred sales charge may be eliminated when the Contract is
issued to an officer, director or employee of the Company or any of its
affiliates. An employee's spouse and children under the age of 21 are also
included.
From time to time, the Company may modify both the amounts of reduction
and the criteria for qualification, but in no event will reduction or
elimination of the contingent deferred sales charge or of any other provision of
the Contract be permitted if it will be unfairly discriminatory to any
person.
DEDUCTION FOR MORTALITY AND EXPENSE RISK PREMIUM
The mortality and expense risk premium is equal, on an annual basis, to 1.20% of
the average daily net asset value of the Variable Account. This charge
compensates the Company for all the insurance benefits provided by the Contract,
e.g., guarantee of annuity rates, the death benefit, for certain expenses of the
Contract, and for assuming the risk (expense risk) that the current charges will
be sufficient in the future to cover the cost of administering the Contract. If
the mortality and expense risk premium is insufficient, the Company will bear
the loss. The Company may use any profits from this charge to pay for the costs
of distributing the Contract.
DEDUCTION FOR CONTRACT MAINTENANCE CHARGE
The Company incurs expenses in administering and maintaining the Contract. As
reimbursement for these expenses, the Company deducts a contract maintenance
charge of $30 on each Contract Anniversary date from the Contract Value. The
Company does this by canceling Accumulation Units from each Subaccount in the
ratio that the value of each Subaccount bears to the total Contract Value.
Other information you should know about the contract maintenance charge:
- The current charge is $30 annually; however, prior to the Income Date,
the Company has the right to change the amount.
- Once you begin receiving annuity payments, the Company may impose a
contract maintenance charge if certain pay-out or settlement options are
chosen. However, the amount of the charge after the Income Date will not
change from the amount you were charged during the Contract Year
immediately preceding the Income Date. If a charge is imposed after the
Income Date, it will be deducted on a monthly basis and will reduce
the amount of your annuity payment.
- If you surrender the Contract for its full surrender value, on other than
the Contract Anniversary date, the Company will deduct the contract
maintenance charge at the time of surrender.
- The contract maintenance charge will be deducted whether or not you are
making purchase payments.
- The Company does not profit from the contract maintenance charge.
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<PAGE> 22
DEDUCTION FOR PREMIUM TAXES AND OTHER TAXES
The Company will deduct for any premium taxes that are assessed because of the
Contract or the Variable Account from the Contract Value. State premium taxes
currently range from 0% to 4%. Some states assess premium taxes when purchase
payments are made; others assess premium taxes at the time of annuitization (at
the Income Date).
For those states assessing premium taxes when purchase payments are made, the
Company's current practice is to advance payment of the taxes and then deduct
that amount from the Contract Value at the Income Date or when you surrender the
Contract.
The amount of state or other governmental entity premium tax are subject to
change by legislatures, administrative interpretations or judicial acts. The
amount of premium taxes also depends on your state of residence, the status of
the Company in that state, and the state's insurance tax laws.
Any income taxes resulting from the operation of the Variable Account is
deducted from the Contract Value. The Company does not currently anticipate that
income taxes will become payable.
The Company will deduct any withholding taxes as required by applicable
law.
OTHER EXPENSES
There are other reductions from and expenses paid out of the assets of the
Portfolios of T. Rowe Price Fixed Income Series, Inc., T. Rowe Price Equity
Series, Inc., and Janus Aspen Series, which are described in the accompanying
Fund prospectuses.
THE CONTRACT
The assets of the Variable Account are divided into Subaccounts within the
Variable Account. Each Subaccount invests in one Portfolio. Subject to the terms
and conditions of the Company, your net purchase payments (purchase payments
minus applicable taxes) will be invested in one or more of the available
Subaccounts which you selected when you completed the application form. You may
change your investment selection prospectively without fee, penalty or other
charge by providing written instructions to the Company.
The Company may, from time to time, offer new investment options by adding
Mutual Funds and, when appropriate, Portfolios within a Mutual Fund. When new
Mutual Funds or Portfolios are added, you will be permitted to select the new
Mutual Funds or Portfolios, subject to terms and conditions imposed by the
Company.
TRANSFERS
You may transfer all or part of your Contract Value between investment options.
You may make only four transfers in any Contract Year prior to the Income Date.
After the Income Date, only one transfer may be made in any Contract
Year.
Transfers are subject to the following conditions:
(1) Requests for transfers must be in writing and must clearly state:
- the amount to be transferred; and
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<PAGE> 23
- the Mutual Fund or Portfolio the transfer is to be made from and
the Mutual Fund or Portfolio the transfer is to be made to.
(2) The minimum amount of any transfer is $250, or the remaining Contract Value
in the Portfolio if it is less than $250.
(3) No partial transfer will be made if the remaining Contract Value in the
Portfolio will be less than $250.
(4) Transfers are made using values determined as of the next Valuation Period
after the Company receives a proper transfer request. However, you may not
make transfers of your initial purchase payment until 25 days after the
Company receives it. In addition, you may not make a transfer if it is
within seven calendar days of the date your first annuity payment is
due.
(5) Prior to the Income Date, you may make transfers from the T. Rowe Price
Prime Reserve Portfolio and/or the T. Rowe Price Limited-Term Bond
Portfolio to the Aggressive Growth Portfolio or the T. Rowe Price Personal
Strategy Balanced Portfolio on a pre-authorized basis. The transfers will
only be made if you enter into a written agreement with the Company. These
transfers will be made monthly, with a minimum transfer amount of $250 per
month.
(6) While the Company does not currently charge a transfer fee, it may do so in
the future. In the event the Company imposes a transfer fee, you will be
notified in advance. The amount of the transfer fee will not be guaranteed
and the Company may change it at any time. The fee will be deducted from
the amount transferred.
(7) The Company reserves the right to terminate, suspend or modify the transfer
privileges described above at any time and without notice to any person.
TELEPHONE TRANSFERS
Transfers by telephone are permitted if you follow these steps:
(1) Check the "Yes" box in the telephone transfer section of the Contract
application form.
(2) Call the Annuity Service Office at the telephone number listed on page 1 of
this Prospectus. Be prepared to give the customer service representative
specific information about the Contract, including the Contract number, and
your social security number and/or birth date. You may be required to
provide additional information in order to verify that the request is
genuine.
(3) You must give specific detail to the customer service representative as to
the amount to be transferred, the Portfolio the transfer is being made
from, and the Portfolio the transfer is being made to.
Transfers requested by telephone before 3 p.m., C.S.T., will take effect that
day. Transfer requests received by telephone after 3 p.m. C.S.T. will take
effect on the next business day after the request is received.
To prevent losses due to unauthorized or fraudulent transfer instructions, the
Company will use reasonable procedures to ensure that a telephone transfer
request is genuine. The Company will
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<PAGE> 24
not be liable for losses incurred in complying with a telephone transfer request
it believes is genuine if reasonable procedures were followed to confirm the
legitimacy of the request.
The Company has the right to reject any telephone transfer request.
NO DEFAULT
Unless you surrender the Contract for the full surrender amount, the Contract
will remain in force until the Income Date and will not be in default even if no
additional purchase payments are made.
MODIFICATION OF THE CONTRACT
The Company cannot modify the Contract without your consent, except if
modifications are required by applicable law.
CONTRACT VALUE
The Contract Value is the sum of the values for each Subaccount. The value of
each Subaccount is determined by multiplying the number of Accumulation Units
attributable to the Subaccount by the value of one Accumulation Unit for the
Subaccount.
Example: Number of Accumulation Units in Subaccount = 250
Value of one Subaccount Accumulation Unit = $10
250 x $10 = $2,500 Contract Value
OWNERSHIP
As the Contract Owner, you have all the rights and may receive all benefits
under the Contract. During the lifetime of the Annuitant and prior to the Income
Date, the Contract Owner is the person designated on the application, unless
changed. On and after the Income Date, the Contract Owner is the Annuitant. On
and after the death of the Annuitant, the beneficiary is the Contract Owner.
As the Contract Owner, you may name a Contingent Contract Owner or a new
Contract Owner at any time. However, your spouse is the only person eligible to
be the Contingent Contract Owner. If you die, the Contingent Contract Owner
becomes the Contract Owner. By naming a new Contract Owner or a new Contingent
Contract Owner, any previous choice of Contract Owner or Contingent Contract
Owner will automatically be revoked.
In order to make a change in the Contract Owner or Contingent Contract Owner,
you must submit a dated and signed written request to the Company. The change
will be effective as of the date you signed the written request. A change in
Contract Owner or Contingent Contract Owner will not affect any payment made or
action taken by the Company prior to the time a request for change is received.
You should consult a tax adviser before you change the Contract Owner.
When a Non-Qualified Contract is owned by a non-natural person (e.g., a
corporation or certain other entities other than trust holding the Contract as
an agent for a natural person), the Contract generally will not be treated as an
annuity for tax purposes.
ASSIGNMENT
You may assign the Contract at any time during the Annuitant's lifetime prior to
the Income Date. The Company is not bound by any assignment until it receives
written notice that the Contract has
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<PAGE> 25
been assigned. The Company is not responsible for the validity of any assignment
and it will not be liable for any payment or other settlement it makes in
connection with the Contract before it receives the assignment.
If the Contract is issued pursuant to a qualified plan, it may not be assigned,
pledged or transferred except under the provisions of applicable law.
Assignment of the Contract may be a taxable event. You should consult your tax
adviser before assigning the Contract.
BENEFICIARY
You name the beneficiary in the application and, unless changed, that
beneficiary is entitled to receive the death benefit on your death or the death
of the Annuitant.
Unless you specify otherwise, the death benefit will be paid in equal shares, or
all to the survivor, as follows:
(1) to the primary beneficiary or beneficiaries who survive the Annuitant's
or Contract Owner's (as applicable) death; or, if there are none,
(2) to the contingent beneficiary or beneficiaries who survive the
Annuitant's or Contract Owner's (as applicable) death; or, if there are
none,
(3) to the Contract Owner, or the Contract Owner's estate.
As the Contract Owner, you may change the beneficiary or beneficiaries or the
contingent beneficiary or beneficiaries at any time during the Annuitant's
lifetime. You must submit a signed and dated written request to the Company in
order to change the beneficiary. The change will take effect as of the date
the request is signed, but the Company will not be liable for any payment it
makes or action it takes before it records the change.
ANNUITY PROVISIONS
INCOME DATE AND SETTLEMENT OPTION
You will select an Income Date and a settlement option at the time you
complete the application. The Income Date is the date on which the Annuitant
will start receiving annuity payments. The settlement option determines the
timing and, in part, the amount of your annuity payments.
The Income Date must fall on the first day of a calendar month and must be at
least one month after the date the Contract is effective. It may not be later
than the first day of the calendar month following the Annuitant's 75th
birthday, unless the Contract is issued pursuant to a qualified plan that
requires an earlier date.
CHANGING THE INCOME DATE
You may change the Income Date by submitting a signed and dated written notice
to the Company at least 30 days prior to the change. If you change the Income
Date, it must still fall on the first day of a calendar month. It cannot be
deferred beyond the first day of the calendar month following the Annuitant's
75th birthday, unless the Contract is issued pursuant to a qualified plan that
requires an earlier date.
CHANGING THE SETTLEMENT OPTION
You may change the settlement option at any time prior to the Income Date
by submitting a signed and dated written notice to the Company at least 30 days
prior to the Income Date. You may
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<PAGE> 26
select another available settlement option, or you may request an alternative
option acceptable to the Company.
SETTLEMENT OPTIONS
The net proceeds under the Contract may be paid under one of the following
options, or an alternative option acceptable to the Company:
OPTION 1 - LIFE ANNUITY
Under this option, the Annuitant will receive a monthly annuity payment during
the Annuitant's lifetime. Payments terminate upon the Annuitant's death. This
means that even if the Annuitant dies after receiving only one or two annuity
payments, the annuity payments will stop, regardless of how many purchase
payments you made or the remaining Contract Value.
OPTION 2 - LIFE ANNUITY WITH MONTHLY PAYMENTS GUARANTEED
Under this option, the Annuitant will receive a monthly annuity payment during
the Annuitant's lifetime, with the guarantee that if the Annuitant dies before
120 payments have been made, the remainder of the 120 payments will be made to
the beneficiary.
The beneficiary can elect to receive the remainder of the guaranteed annuity
payments in monthly installments, or it can be paid in a lump sum. The lump sum
payment will consist of the present value of the remaining guaranteed annuity
payments as of the date the Company receives the notice of death, commuted at
the assumed investment rate of 4%. The lump sum will be paid within seven days
of receiving the request.
OPTION 3 - JOINT AND LAST SURVIVORSHIP ANNUITY
Under this option, the monthly annuity payments are made during the joint
lifetime of the Annuitant and a second person and continue during the lifetime
of the survivor. In other words, if the Annuitant dies first, payments continue
during the second person's lifetime. It is possible to receive only one or two
annuity payments if both the Annuitant and the second person die after the first
or second payment is received.
IF NO SETTLEMENT OPTION IS SELECTED, OPTION 1 WILL AUTOMATICALLY BE APPLIED.
MORTALITY AND EXPENSE GUARANTEE
The Company guarantees that the dollar amount of each annuity payment after the
first will not be affected by variations in mortality experience (the death
rate) or the expenses of the Company. The Company also guarantees certain death
benefits.
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<PAGE> 27
FREQUENCY OF ANNUITY PAYMENTS
Annuity payments will be made in monthly installments. However, if the net
amount available under any settlement option is less than $5,000, the Company
has the right to pay the entire amount in a lump sum.
If the amount of a monthly annuity payment is or becomes less than $30, the
Company has the right to change the frequency of the annuity payments so that
each payment will be at least $30.
AMOUNT OF ANNUITY PAYMENTS
A variable annuity is an annuity with payments that
- are not predetermined as to dollar amount; and
- will vary in amount with the investment experience of the
applicable Subaccounts.
At the Income Date, the Contract Value of the Subaccounts will be applied to the
applicable annuity tables contained in the Contract. The annuity table that is
used will depend on the settlement option you choose. The same Contract Value
amount applied to each settlement option may produce a different initial annuity
payment.
The actual dollar amount of the annuity payments depends on four things:
(1) the Contract Value on the Income Date;
(2) the annuity table specified in the Contract;
(3) the settlement option selected; and
(4) the investment performance of the Portfolio(s) selected.
The annuity tables in the Contract are based on a 4% assumed investment rate. If
the actual net investment rate exceeds 4%, your monthly payments will increase.
Conversely, if the actual net investment rate is less than 4%, your monthly
payments will decrease. If a higher assumed interest rate were used, the initial
payment would be higher, but the actual net investment rate would have to be
higher in order for annuity payments to increase.
Your monthly annuity payment will be equal to the value of the fixed number of
annuity units each month. The value of a fixed number of annuity units will
reflect the investment performance of the Portfolio(s) selected, and the amount
of each annuity payment will vary accordingly. The Statement of Additional
Information contains information regarding annuity unit values.
ADDITIONAL PROVISIONS
- - Before the Company makes any life annuity payment, you may be required to
provide proof of the Annuitant's age. If the Annuitant's age has been
misstated, the amount of the payment will be the amount that the purchase
payments would have provided at the correct age. Once monthly life annuity
payments have begun, any underpayments will be made up in one lump sum with
the next annuity payment; overpayments will be deducted from future annuity
payments until the total is repaid.
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<PAGE> 28
- - You must return the Contract to the Company before a settlement option is
paid. Before a death benefit is paid, a certified copy of the death
certificate must be submitted to the Company.
- - Where payment under the Contract is contingent on the recipient being alive on
a certain date, the Company may require proof that the recipient is alive.
- - The U.S. Supreme Court has determined that, under certain circumstances, there
may be a violation of Title VII of the Civil Rights Act of 1964, as amended,
when retirement benefits are determined on the basis of the recipient's sex.
The annuity tables contained in the Contract are not based on the Annuitant's
sex.
DEATH BENEFIT
DEATH OF THE ANNUITANT
If the Annuitant who is not the Contract Owner dies before the Income Date, the
Company will pay the death benefit to the beneficiary. The amount of the death
benefit will be determined as of the Valuation Period next following the date
the Company receives
(1) a certified copy of the death certificate; AND
(2) an election to either receive the death benefit as a lump sum or
under one of the settlement options.
If a lump sum payment is elected, the Company will pay it within seven days
after it receives the election and the death certificate.
If the beneficiary does not elect a settlement option, the Company will pay the
death benefit in a lump sum.
If the beneficiary elects to have the death benefit paid under a settlement
option, the beneficiary has 90 days from the date the Company receives the death
certificate to select a settlement option. If no settlement option is selected
by the end of the 90-day period, the death benefit will be paid to the
beneficiary in a lump sum. The death benefit will be paid according to
applicable laws or regulations governing such payments.
The amount of the death benefit will be the greater of
(1) the sum of all purchase payments made, less surrendered amounts; or
(2) the Contract Value.
If the Annuitant dies on or after the Income Date, the death benefit, if any,
will be paid as provided for in the settlement option you selected. The Company
will require proof of the Annuitant's death.
DEATH OF THE CONTRACT OWNER
If the Contract is issued under a non-qualified plan, the death benefit will be
paid as follows:
If you, as the Contract Owner (regardless of whether you are the Annuitant), die
before the Income Date, the entire Contract Value must be distributed within
five years of the date of your death, unless:
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(1) it is payable over the lifetime of a designated beneficiary with
distributions beginning within one year of the date of your death; OR
(2) the Contingent Owner, if any, continues the contract is his or her own
name. (The Contingent Owner must be your spouse.)
If the owner of the Contract is a non-natural person, for purposes of the death
benefit, the Annuitant will be treated as the Contract Owner and the death of
the Annuitant or a change of the Annuitant will be treated as the death of the
Contract Owner.
PURCHASES AND CONTRACT VALUE
You may purchase the Contract under a flexible purchase payment plan. You can
make purchase payments to the Company as frequently and in the amount you select
on the application. The initial purchase payment is due on the date the Contract
becomes effective. The Company has the right to reject any application or
purchase payment.
<TABLE>
<CAPTION>
Minimum Initial Minimum Subsequent
Purchase Payment Purchase Payment
---------------- ------------------
<S> <C> <C>
Non-Qualified Contract $5,000 $250
Qualified Contract $1,000 $100
Contract issued under
an employer-sponsored
payroll deduction plan $ 50 $ 50
</TABLE>
The Company has the right to establish administrative policies that may
decrease the minimum purchase payment requirements.
CHANGE IN PURCHASE PAYMENTS
As the Contract Owner, you may elect to increase, decrease or change the
frequency or the amount of your purchase payments so long as you meet the
requirements set forth above.
ALLOCATION OF PURCHASE PAYMENTS
You can allocate purchase payments to the appropriate Subaccount(s) within the
Variable Account. The Company converts purchase payments into Accumulation
Units. Purchase payments allocated to a Subaccount are divided by the value of
that Subaccount's Accumulation Unit for the Valuation Period during which the
allocation occurs to determine the number of Accumulation Units attributable to
the purchase payments.
Example: Amount of purchase payment = $100
Value of one Subaccount Accumulation Unit = $ 10
$100 (divided by) $10 = 10 Accumulation Units
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For initial purchase payments, if the application is in good order, the Company
will apply the purchase payment to the Variable Account and will credit the
Contract with Accumulation Units within two business days.
If the application is not in good order, the Company will attempt to get it in
good order or the application and the initial purchase payment will be returned
within five business days. Once the application is deemed to be in good order,
the Company will apply the purchase payment to the Variable Account and credit
the Contract with Accumulation Units within two business days.
For subsequent purchase payments, the Company will apply the purchase payments
to the Variable Account and will credit the Contract with Accumulation Units
during the next Valuation Period after the Valuation Period in which it receives
the purchase payment.
ACCUMULATION UNITS
Purchase payments are converted into Accumulation Units. The Company does this
by dividing the amount of the purchase payment you allocate to a Subaccount by
the Accumulation Unit for that Subaccount.
Initially, the Company set the value of an Accumulation Unit at $10. For each
subsequent Valuation Period, the Company determines the Accumulation Unit value.
It does this by
1. determining the total amount of money invested in the particular
Subaccount;
2. subtracting from that amount the mortality and expense risk premium and
any other charges such as taxes the Company has deducted; and
3. dividing this amount by the number of outstanding Accumulation Units.
The value of an Accumulation Unit may increase or decrease from Valuation Period
to Valuation Period. It is affected by
- the investment performance of the Subaccount,
- expenses, and
- deduction of certain charges.
The value of an Accumulation Unit is determined each day that the New York Stock
Exchange is open for trading. See the definition of "Valuation Date" on page 6
of this Prospectus.
DISTRIBUTION OF CONTRACT
Sentry Equity Services, Inc. ("Sentry Equity"), 1800 North Point Drive, Stevens
Point, Wisconsin, a wholly-owned subsidiary of SIAMCO, is the principal
underwriter of the Contract. The Contract is sold through licensed insurance
agents in states where the Contract may lawfully be sold. The agents are
registered representatives of broker-dealers registered under the Securities
Exchange Act of 1934 and are members of the National Association of Securities
Dealers, Inc. Sentry Equity is paid first-year and renewal commissions, not to
exceed 4.7% of purchase payments, for its services in distributing the Contract.
Sentry Equity, in turn, pays all or a portion of these amounts to the selling
agent or agency.
SURRENDERS
While the Contract is in effect, and before the earlier of the Income Date or
the Annuitant's death, the Company will allow you to make a surrender of all or
a portion of the Contract for its surrender
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<PAGE> 31
value. You must submit a request in writing to the Company for a surrender. The
Company will pay the surrender amount within seven days.
Surrenders will result in the cancellation of Accumulation Units from each
applicable Subaccount in the ratio that the value of each Subaccount bears to
the total Contract Value. If you would like some other method of cancellation to
be used, you must notify the Company beforehand in writing.
The surrender value will be the Contract Value for the next Valuation Period
following the Valuation Period during which the Company receives your written
request, reduced by the sum of:
(1) the total of any applicable premium taxes not previously
deducted; PLUS
(2) any applicable contract maintenance charge; PLUS
(3) any applicable contingent deferred sales charge.
Because of the potential tax consequences of a surrender, including possible tax
penalties, you should consult your tax adviser before making a surrender.
The Company may suspend the right to surrender or delay payment of a surrender
for more than seven days when:
(1) the New York Stock Exchange is closed on other than customary weekend
and holiday closings;
(2) trading on the New York Stock Exchange is restricted;
(3) an emergency exists and it is not reasonably practicable to dispose of
the securities held in the Variable Account, or it is not reasonably
practicable to determine the net asset value of the Variable Account;
or
(4) during any other period when the Securities and Exchange Commission
permits suspension of payments.
The applicable rules and regulations of the Securities and Exchange Commission
will control as to whether conditions (2) or (3) exist.
LIMITATIONS ON SURRENDERS FROM 403(B) ANNUITIES
If the Contract is a 403(b) annuity with contributions made under a salary
reduction agreement (as defined in Section 403(b)(11) of the Code) withdrawals
can only be taken under certain circumstances. In order to take a withdrawal
from a 403(b) annuity, you must meet one the following conditions:
- be at least age 59 1/2;
- separate from the service of your employer;
- die
- become disabled (as defined in the Code); or
- have a case of hardship.
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<PAGE> 32
Withdrawals for hardship are restricted to the portion of the Contract value
represented by your contributions and does not include investment earnings. The
limitations on withdrawals were effective January 1, 1989, and apply only
to:
- salary reduction contributions made after December 31, 1988;
- income attributable to such contributions; and
- income attributable to amounts held as of December 31, 1988.
These limitations will apply to all amounts (regardless of when or how
contributions were originally made) which are transferred or rolled over from a
TSA custodial account (as defined in the Code) into your account. The
limitations on withdrawals do not affect rollovers or transfers between certain
qualified plans. Tax penalties may also apply. You should consult your tax
adviser regarding any withdrawals from a 403(b) annuity.
TEXAS OPTIONAL RETIREMENT PROGRAM
If the Contract is issued to a participant in the Texas Optional Retirement
Program("ORP"), it will contain an ORP endorsement amending the Contract in two
ways. First, if for any reason the second year of the ORP participation is not
begun, the total amount of the State of Texas' first-year contribution will be
returned to the appropriate institution of higher education at its request.
Second, no benefits will be payable, through surrender or otherwise, unless the
participant dies, accepts retirement, terminates employment in all Texas
institutions of higher education, or attains the age of 70-1/2 . The value of
the Contract may, however, be transferred to other contracts or carriers during
the period of ORP participation. A participant in ORP is required to obtain a
certificate of termination from the employer before the Contract can be
redeemed.
FEDERAL TAX STATUS
NOTE: The following discussion is based on the Company's understanding of
current federal income tax law applicable to annuities in general. The Company
cannot predict if changes to these laws will be made. You are cautioned to seek
tax advice as to possible changes. The Company does not guarantee the tax status
of the Contract. You bear the complete risk that the contract may not be treated
as an annuity contract under federal income tax laws. You should also understand
that the following discussion is not exhaustive and that special rules not
discussed here may be applicable in certain situations. Moreover, no attempt has
been made to consider any applicable state or other tax laws.
GENERAL
Section 72 of the Code governs taxation of annuities in general. You will not be
taxed on the increases in value of the Contract until distribution occurs,
either as a lump sum payment or as annuity payments under the settlement option
selected. If you take a lump sum payment as a total surrender of the Contract
before the Income Date, you will be taxed on the portion of the lump sum payment
that exceeds the cost basis of the Contract. With a Non-Qualified Contract, the
cost basis generally equals the purchase payments, which have already been
taxed. With a Qualified Contract, there may be no cost basis. The taxable
portion of a lump sum payment is taxed at ordinary income tax rates.
When the Annuitant starts receiving annuity payments on the Income Date, a
portion of each payment in excess of an exclusion amount is included in taxable
income. The exclusion amount for payments based on a variable settlement option
is determined by dividing the cost basis of the Contract (adjusted for any
period certain or refund guarantee) by the number of years over which the
annuity is expected to be paid. The annuity payments you receive after the
investment in the
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<PAGE> 33
contract has been recovered (i.e., when the total of the excluded amount equals
the investment in the Contract) are fully taxed. The taxable portion is taxed at
ordinary income tax rates.
You are urged to consult your tax adviser regarding the tax consequences of any
type of distribution or payment under the Contract.
The Company is taxed as a life insurance company under the Code. For federal
income tax purposes, the Variable Account is not a separate entity from the
Company and its operations form a part of the Company.
DIVERSIFICATION
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of variable annuity contracts. The Code provides that a
variable annuity contract will not be treated as an annuity contract for any
period (and any subsequent period) when the investments are not adequately
diversified, as required by U.S. Treasury Department regulations.
If it is determined that the Contract does not meet the definition of an annuity
contract, you, as the Contract Owner, would be liable for federal income tax on
the earnings portion of the Contract prior to the receipt of income. The Code
contains a safe harbor provision which provides that annuity contracts meet the
diversification requirements if, at the close of each quarter, the underlying
assets meet the diversification standards for a regulated investment company and
no more than 55% of the total assets consist of cash, cash items, U.S.
Government securities and securities of other regulated investment companies.
In 1989, the Treasury Department issued regulations that amplify the
diversification requirements for variable contracts contained in the Code and
provide an alternative to the safe harbor provision described above. Under the
regulations, an investment portfolio is deemed adequately diversified if
- no more than 55% of the value of the total assets of the portfolio is
represented by any one investment;
- no more than 70% of the value of the total assets of the portfolio is
represented by any two investments;
- no more than 80% of the value of the total assets of the portfolio is
represented by any three investments; and
- no more than 90% of the value of the total assets of the portfolio is
represented by any four investments.
For purposes of these regulations, all securities of the same issuer are treated
as a single investment. The Code provides that, for purposes of diversification,
each U.S. government agency or instrumentality is treated as a separate
issuer.
The Company intends that the Mutual Funds underlying the Contract will be
managed by the investment advisers so as to comply with the diversification
requirements.
CONTRACT OWNER CONTROL OF INVESTMENTS
Currently, there is no official guidance as to whether, or under what
circumstances, control of the investments of the Variable Account by the
Contract Owner will cause the owner to be treated as the owner of the assets of
the Variable Account, thereby causing the Contract to lose its favorable tax
treatment.
The amount of Contract Owner control which may be exercised under the
Contract is different in some respect from the situations addressed in published
rulings issued by the Internal Revenue
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<PAGE> 34
Service in which it was held that a policy owner was not the owner of the assets
of a separate account. It is unknown whether these differences, such as the
Contract Owner's ability to transfer among investment choices or the number and
type of investment choices available, would cause the Contract Owner to be
considered the owner of the assets of the Variable Account.
In the event any forthcoming guidance or ruling sets forth a new position, the
guidance or ruling will generally be applied only prospectively. However, if the
ruling or guidance is not considered to set forth a new position, it may be
applied retroactively, resulting in the Contract Owner being determined to
retroactively be the owner of the assets of the Variable Account.
Due to the uncertainty in this area, the Company reserves the right to modify
the Contract in an attempt to maintain favorable tax treatment.
MULTIPLE CONTRACTS
Federal tax laws provide that multiple non-qualified annuity contracts that are
issued within a calendar year period to the same Contract Owner by one company
or its affiliates are treated as one annuity contract for purposes of
determining the tax consequences of any distribution. Such treatment may result
in adverse tax consequences including more rapid taxation of the distributed
amounts from the combination of contracts. For purposes of this rule, Contracts
received in a Section 1035 exchange will be considered issued in the year of the
exchange. You should consult your tax adviser before purchasing more than one
non-qualified annuity contract in any calendar year.
OWNER OTHER THAN NATURAL PERSONS
Under Section 72(u) of the Code, the investment earnings on purchase payments
will be taxed currently to the Contract Owner if the Contract Owner is a
non-natural person, such as a corporation or certain other entities. A contract
held by a non-natural person will generally not be treated as an annuity for
federal income tax purposes.
However, this does not apply to a contract held by a trust or other entity as an
agent for a natural person, nor does it apply to a contract held by a qualified
plan. You should consult your own tax adviser before purchasing the Contract if
it is to be held by a non-natural person.
TAX TREATMENT OF ASSIGNMENTS
If you assign or pledge the Contract, there may be tax implications. You should
consult your tax adviser before assigning or pledging the Contract.
DEATH BENIFITS
Any death benefits paid under the Contract are taxable to the beneficiary. The
rules governing the taxation of payments from an annuity contract, as discussed
above, generally apply to the payment of death benefits and depend on whether
the death benefits are paid as a lump sum or as annuity payments. Estate taxes
may also apply.
INCOME TAX WITHHOLDING
All distributions under the Contract, or the portion of the distribution that is
included in your gross income, are subject to federal income tax withholding.
Generally, if you are receiving periodic payments, the withholding rate is the
same as for wages; for non-periodic payments, the withholding rate is 10%.
However, you may elect not to have taxes withheld or to have them withheld at a
different rate.
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Effective January 1, 1993, certain distributions from retirement plans qualified
under Sections 401 or 403(b) of the Code that are not directly rolled over to
another qualified retirement plan, an individual retirement account, or an
individual retirement annuity, are subject to a mandatory 20% withholding for
federal income tax. The 20% withholding requirement generally does not apply to
(1) a series of substantially equal payments made at least annually for the
life or life expectancy of the participant or joint and last survivor
expectancy of the participant and a designated beneficiary, or
distributions for a specified period of 10 years or more; or
(2) distributions that are required minimum distributions; or
(3) the portion of the distribution that is not includable in gross income
(the return of any after-tax contributions); or
(4) hardship withdrawals.
You should consult your tax adviser regarding withholding requirements.
TAX TREATMENT OF WITHDRAWALS - NON-QUALIFIED CONTRACTS AND SECTION 457
CONTRACTS
Section 72 of the Code governs the treatment of distributions from annuity
contracts. It provides that if the Contract Value exceeds the aggregate purchase
payments made, any amount withdrawn under the Contract will be treated as first
coming from earnings and then, only after the earnings portion is exhausted, as
coming from the purchase payments. Earnings that are withdrawn must be included
in your gross income.
Section 72 further provides that a 10% penalty will apply to the earnings
portion of any distribution. However, the 10% penalty does not apply to amounts
received:
(1) after the taxpayer reaches age 59 1/2;
(2) after the Contract Owner's death;
(3) if the taxpayer is totally disabled (as defined in the Code);
(4) in a series of substantially equal periodic payments made at least
annually during the taxpayer's lifetime (or expected lifetime) or for
the joint lives (or joint live expectancies) of the taxpayer and his or
her beneficiary;
(5) under an immediate annuity; or
(6) that are allocable to purchase payments made prior to August 14, 1982.
With respect to (4) above, if the series of substantially equal periodic
payments is modified before the later of your attaining age 59 1/2 or 5 years
from the date of the first periodic payment, then the tax for the year of the
modification is increased by an amount equal to the tax which would have been
imposed (the 10% penalty tax) but for the exception, plus interest for the tax
years in which the exception is used.
The Contract provides that if the Annuitant dies prior to the Income Date, the
death benefit will be paid to the beneficiary. Payments made upon the death of
the Annuitant who is not the Contract Owner do not qualify for the
death-of-contract-owner exception in (2) above and will be subject to
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the 10% penalty, unless the beneficiary is at least age 59 1/2 or one of the
other exceptions to the penalty applies.
The above information applies to Qualified Contracts issued under Section 457 of
the Code, but does not apply to other Qualified Contracts. However, separate tax
withdrawal penalties and restrictions may apply to other Qualified Contracts
(see below).
QUALIFIED PLANS
The Contract offered by this Prospectus is suitable for use under various types
of qualified plans. The tax implications for participants in qualified plans
varies with the type of plan and the terms and conditions of each plan. You need
to be aware that benefits under a qualified plan may be subject to the terms and
conditions of the plan, regardless of the terms and conditions of the Contract.
Some retirement plans are subject to distribution and other requirements that
are not incorporated into the Company's administrative procedures. You are
responsible for determining that contributions, distributions and other
transactions with respect to the Contract comply with applicable law.
Following are general descriptions of the types of qualified plans that can be
used with the Contract. The descriptions are not comprehensive and are for your
general information only. Tax laws and regulations regarding qualified plans are
very complex and have different applications depending on individual facts and
circumstances. You should consult your tax adviser before purchasing the
Contract under a qualified plan.
If the Contract is issued pursuant to a qualified plan, it may contain special
provisions that are more restrictive than the Contract provisions described in
this Prospectus. Generally, if the Contract is issued under a qualified plan,
the Contract is not transferable except if it is surrendered or annuitized.
Various penalties and excise taxes may apply to purchase payments
(contributions) or distributions made in violation of applicable limits. Certain
withdrawal penalties and restrictions may apply to surrenders from a Qualified
Contract.
The Contract is no longer available in connection with H.R. 10 (Keogh) Plans or
corporate pension and profit-sharing plans. The information provided below is
being included to provide disclosure to owners of Contracts that were issued
under these types of plans.
TAX SHELTERED ANNUITIES
The Code permits the purchase of tax-sheltered annuities by public schools
and certain charitable, educational and scientific organizations. These
qualifying employers may make contributions to these annuities on behalf of
their employees. The contributions are not included in the gross income of
the employees until the employees receive distributions from the annuities.
The amount of contributions is limited to certain maximums imposed by the
Code. The Code also provides restrictions on transferability,
distributions, nondiscrimination and withdrawals of tax-sheltered
annuities. You should consult with your tax adviser regarding the tax
consequences of investing in a tax-sheltered annuity.
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INDIVIDUAL RETIREMENT ANNUITIES
The Code permits eligible individuals to contribute to an individual
retirement plan known as an "individual retirement annuity" or "IRA." Under
applicable limits, you can contribute certain amounts to an IRA that can be
deducted from your taxable income. There are also limits with respect to
eligibility, contributions, transferability and distributions. Under
certain conditions, distributions from other IRAs and other qualified plans
may be rolled over or transferred on a tax-deferred basis into an IRA. If
the Contract is to be used as an IRA, there are specific requirements
imposed by the Code. In addition, the Company is required to give you
additional informational disclosure if you purchase the Contract as an IRA.
However, you should consult with your tax adviser regarding the tax
consequences and suitability of investing in an IRA.
Roth IRA. Under an individual retirement annuity known as a Roth IRA,
contributions are made with after-tax dollars, but the earnings are
distributed tax-free if certain conditions are met. Subject to certain
income limits, a maximum of $2,000 per year may be contributed to a Roth
IRA. Distributions from a Roth IRA are tax-free if it has been held for at
least five years AND it meets one of the following requirements:
- the distribution is made after age 59-1/2 or the taxpayer has died or is
disabled;
- the distribution is being used for a qualified first-time home purchase,
subject to a $10,000 lifetime maximum, by the taxpayer, a spouse, child,
grandchild, or ancestor.
Certain penalties may apply if you receive a non-qualified distribution.
Rollovers to or from a Roth IRA can be made under certain circumstances,
however, there may be a tax liability of the rollover involves a non-Roth
IRA.
If you are considering a Roth IRA, you should consult with your tax adviser
regarding the tax implications and suitability.
PENSION AND PROFIT-SHARING PLANS
The Code permits employers, including self-employed individuals, to
establish various types of retirement plans for employees. Contributions to
the plans for the benefit of employees are not included in the employees'
gross income until distribution from the plan. The employees' tax
liabilities may vary depending on the particular plan design. However, the
Code places limits and restrictions on all plans with respect to such
things as amount of allowable contributions; form, manner and timing of
distributions; transfer of benefits; vesting and non-forfeiture of
interests; nondiscrimination in eligibility and participation; and tax
treatment of distributions, withdrawals and surrenders. You should consult
your tax adviser regarding the tax consequences and suitability of
investing in pension and profit-sharing plans.
TAX TREATMENT OF WITHDRAWALS - QUALIFIED CONTRACTS
In the case of a withdrawal from a Qualified Contract, a ratable portion of the
amount you receive is taxable, generally based on the ratio of your cost basis
to your total accrued benefit under the plan. Special tax rules may apply to
certain distributions from a Qualified Contract. The Code imposes a 10% penalty
on the taxable portion of any distribution from qualified retirement plans.
To the extent amounts are not includable in gross income because they have been
rolled over to an IRA or to another eligible qualified plan, no tax penalty is
imposed. The tax penalty will also not apply to the following
distributions:
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(1) distributions made on or after age 59 1/2;
(2) distributions following death or disability;
(3) after separation from service, distributions that are part of
substantially equal periodic payments made at least annually for the
life (or life expectancy) of the Contract Owner or the Annuitant (as
applicable) or the joint lives (or joint life expectancies) of the
Contract Owner and Annuitant (as applicable) and the designated
beneficiary;
(4) distributions after separation from service after age 55;
(5) under limited conditions, distributions made for amounts paid during
the taxable year for medical care;
(6) distributions paid to an alternate payee pursuant to a qualified
domestic relations order;
(7) under limited conditions, distributions from an IRA to purchase medical
insurance;
(8) under limited conditions, distributions from an IRA made for qualified
higher education expenses; and
(9) with limitations, distributions from an IRA for qualified first-time
home purchases.
The exceptions in (4) and (6) above do not apply in the case of an IRA. The
exception in (3) above applies to an IRA without the requirement that there be a
separation from service. With respect to (3) above, if the series of
substantially equal periodic payments is modified before the later of your
attaining age 59 1/2 or 5 years from the date of the first periodic payment,
then the tax for the year of the modification is increased by an amount equal to
the tax which would have been imposed (the 10% penalty tax) but for the
exception, plus interest for the tax years in which the exception is
used.
Generally, if the Contract is issued under a qualified plan, annuity payments
must begin no later than April 1 of the calendar year following the calendar
year in which you reach age 70 1/2; OR the calendar year in which you retire,
whichever is LATER.
Under a qualified plan, annuity payments must be made over a period not
exceeding your life expectancy or the life expectancies of you and your
designated beneficiary. If the required minimum distributions are not made, a
50% penalty tax is imposed on the amount not distributed.
TAX SHELTERED ANNUITIES - WITHDRAWAL LIMITATIONS
If the Contract is a 403(b) annuity (also known as a tax-sheltered annuity) with
contributions made under a salary reduction agreement (as defined in the Code)
withdrawals can only be taken under certain circumstances. In order to take a
withdrawal from a 403(b) annuity, you must meet one the following conditions:
- be at least age 59 1/2;
- separate from the service of your employer;
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- die
- become disabled (as defined in the Code); or
- have a case of hardship.
Withdrawals for hardship are restricted to the portion of the Contract Value
represented by your contributions and does not include investment earnings. The
limitations on withdrawals became effective January 1, 1989, and apply only
to:
- salary reduction contributions made after December 31, 1988;
- income attributable to such contributions; and
- income attributable to amounts held as of December 31, 1988.
The limitations on withdrawals do not affect rollovers or transfers between
certain qualified plans. Tax penalties may also apply. You should consult your
tax adviser regarding any withdrawals from a 403(b) annuity.
SECTION 457 - DEFERRED COMPENSATION PLANS
Under Section 457 of the Code, governmental and
certain other tax-exempt employers may establish deferred compensation plans,
which may invest in annuity contracts, for the benefit of their employees. As
with qualified plans, the Code establishes limits and restrictions on
eligibility, contributions, and distributions. Under a Section 457 plan,
contributions made for the benefit of employees will not be included in the
employees' gross income until they are distributed from the plan. Under a
Section 457 plan, the plan assets remain solely the property of the employer,
subject only to the claims of the employer's general creditors, until such time
as they are available for distribution to the employee or the employee's
beneficiary. However, for plans established after August 20, 1996, it is
required that plan assets be held in trust for the benefit of employees and not
be subject to claims by the employer's general creditors. After January 1, 1999,
this requirement is mandatory for all Section 457 plans.
LEGAL PROCEEDINGS
Neither the Variable Account nor the underwriter, Sentry Equity, is a party to
any legal proceedings. The Company is engaged in routine litigation which, in
the opinion of the Company, is not material in relation to the total capital and
surplus of the Company.
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TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
ITEM PAGE
---- ----
<S> <C>
THE COMPANY .............................................................................. 3
DISTRIBUTION OF THE CONTRACT ............................................................. 3
INDEPENDENT ACCOUNTANT ................................................................... 3
LEGAL OPINIONS ........................................................................... 3
YIELD CALCULATION FOR T. ROWE PRICE PRIME RESERVE SUBACCOUNT ............................. 3
ANNUITY PAYMENTS ......................................................................... 4
Annuity Unit ...................................................................... 4
Amount of Annuity Payments ........................................................ 4
Net Investment Factor ............................................................. 5
FINANCIAL STATEMENTS ..................................................................... 5
</TABLE>
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PART B
<PAGE> 42
STATEMENT OF ADDITIONAL INFORMATION
INDIVIDUAL FLEXIBLE PURCHASE PAYMENT DEFERRED
VARIABLE ANNUITY CONTRACT
ISSUED BY
SENTRY VARIABLE ACCOUNT II
AND
SENTRY LIFE INSURANCE COMPANY
This is not a prospectus. This statement of additional information should be
read in conjunction with the prospectus for the individual flexible purchase
payment deferred variable annuity contract which is referred to herein.
The prospectus concisely presents information that a prospective investor should
know before investing. For a copy of the prospectus, call or write the Company
at 1800 North Point Drive, Stevens Point, WI 54481, (800)533-7827.
This Statement of Additional Information and the Prospectus are dated January 7,
2000.
<PAGE> 43
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Item Page
- ---- ----
<S> <C>
THE COMPANY ....................................................... 3
DISTRIBUTION OF THE CONTRACT ...................................... 3
INDEPENDENT ACCOUNTANT ............................................ 3
LEGAL OPINIONS .................................................... 3
YIELD CALCULATION FOR T. ROWE PRICE PRIME RESERVE SUBACCOUNT ...... 3
ANNUITY PAYMENTS .................................................. 4
Annuity Unit ............................................. 4
Amount of Annuity Payments ............................... 4
Net Investment Factor .................................... 5
FINANCIAL STATEMENTS .............................................. 5
</TABLE>
<PAGE> 44
THE COMPANY
Sentry Life Insurance Company (the "Company") is a stock life insurance company
incorporated in 1958 pursuant to the laws of the State of Wisconsin. Its home
office is located at 1800 North Point Drive, Stevens Point, Wisconsin. It is
licensed to conduct life, annuity and accident and health insurance business in
all states, except New York, and in the District of Columbia. The Company is a
wholly-owned subsidiary of Sentry Insurance a Mutual Company ("SIAMCO"). SIAMCO
is a mutual insurance company incorporated under the laws of Wisconsin with
headquarters at 1800 North Point Drive, Stevens Point, Wisconsin. SIAMCO owns
and controls, either directly or through subsidiary companies, a group of
insurance and related companies, including Sentry Life Insurance Company of New
York and Sentry Equity Services, Inc.
DISTRIBUTION OF THE CONTRACT
Sentry Equity Services, Inc. ("Sentry Equity"), 1800 North Point Drive, Stevens
Point, Wisconsin, a wholly-owned subsidiary of SIAMCO, serves as the principal
underwriter of the Contract. The Contract is sold through licensed insurance
agents in those states where the Contract may be lawfully sold. The agents are
registered representatives of broker-dealers that are registered under the
Securities Exchange Act of 1934 and are members of the National Association of
Securities Dealers, Inc. Sentry Equity will be paid first-year and renewal
commissions for its services in distributing the Contract, not to exceed 4.7% of
purchase payments. Sentry Equity will, in turn, pay all or a portion of these
amounts to the selling agent or agency. The Contract is sold on a continuous
basis.
Sentry Equity also acts as principal underwriter for Sentry Fund, Inc., an
open-end management investment company. Sentry Equity was paid underwriter
commissions in the aggregate for the years 1996, 1997 and 1998 of $338,226,
$309,674, and $392,706, respectively. Of those amounts, it retained $286,484,
$259,161, and $236,907, respectively.
INDEPENDENT ACCOUNTANT
The statutory financial statements of the Company as of December 31, 1998 and
1997, and for the years then ended, and the financial statements of the Variable
Account as of December 31, 1998 and 1997, and for each of the two years in the
period then ended, have been audited by, PricewaterhouseCoopers, an independent
accountant, whose reports appear herein and have been included in reliance on
its authority as an expert in accounting and auditing.
LEGAL OPINIONS
Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut, has provided advice on
certain matters relating to the federal securities and income tax laws in
connection with the Contract.
YIELD CALCULATION OF T. ROWE PRICE PRIME RESERVE SUBACCOUNT
The T. Rowe Price Fixed Income Series, Inc. Prime Reserve subaccount of the
Variable Account will calculate its current yield based on the seven days ended
on the date of calculation.
The current yield of the Prime Reserve subaccount is computed by determining the
net change (exclusive of capital changes) in the value of a hypothetical
pre-existing contract owner account having a balance of one accumulation unit of
the subaccount at the beginning of the period, subtracting the mortality and
expense risk premium and contract maintenance charge, dividing the difference by
the value of the account at the beginning of the same period to obtain the base
period return and multiplying the results by (365/7).
<PAGE> 45
Net investment income for yield quotation purposes will not include either
realized capital gains and losses or unrealized appreciation and depreciation,
whether reinvested or not.
The yields quoted should not be considered a representation of the yield of the
Prime Reserve subaccount in the future since the yield is not fixed. Actual
yields will depend not only on the type, quality and maturities of the
investments held by the Prime Reserve subaccount and changes in the interest
rates on such investments, but also on changes in the Prime Reserve subaccount's
expenses during the period.
Yield information may be useful in reviewing the performance of the Prime
Reserve subaccount and for providing a basis of comparison with other investment
alternatives. However, the Prime Reserve subaccount's yield fluctuates, unlike
bank deposits or other investments which typically pay a fixed yield for a
stated period of time. The yield information does not reflect the deduction of
any applicable contingent deferred sales charge at the time of the surrender.
(See "Charges and Deduction - Contingent Deferred Sales Charge" in the
Prospectus.)
ANNUITY PAYMENTS
ANNUITY UNIT
Initially, the value of an Annuity Unit was set at $10. For each subsequent
Valuation Period, the Annuity Unit value is determined as follows:
(1) the Annuity Unit value for a Subaccount for the last
Valuation Period is multiplied by the net investment factor
for the Subaccount for the next Valuation Period;
(2) the result is divided by the assumed investment factor for
that Valuation Period.
The net investment factor may be greater or less than one; therefore, the
Annuity Unit value may increase or decrease.
AMOUNT OF ANNUITY PAYMENTS
The dollar amount of annuity payments after the first payment is determined as
follows:
(1) The dollar amount of the first annuity payment is divided by the value
of an Annuity Unit as of the income date. This establishes the number
of Annuity Units for each monthly payment. The number of Annuity Units
remains fixed during the annuity payment period, subject to any
transfers.
(2) The fixed number of Annuity Units is multiplied by the Annuity Unit
value for the last Valuation Period of the month preceding the month
for which the payment is due. This result is the dollar amount of the
payment.
The total dollar amount of each variable annuity payment is the sum of all
subaccount variable annuity payments less any applicable contract maintenance
charge.
The subaccount Annuity Unit value at the end of any Valuation Period is
determined by multiplying the subaccount Annuity Unit value for the immediately
preceding Valuation Period by the quotient of (1) and (2), where:
<PAGE> 46
(1) is the net investment factor for the Valuation Period for which the
subaccount Annuity Unit value is being determined; and
(2) is the assumed investment factor for such Valuation Period. The
assumed investment factor adjusts for the interest assumed in
determining the first variable annuity payment. Such factor for any
Valuation Period is the accumulated value of $1.00 deposited at the
beginning of such period at the assumed investment rate of 4%.
NET INVESTMENT FACTOR
The net investment factor for any subaccount for any Valuation Period is
determined by dividing (1) by (2) and subtracting (3) from the result where:
(1) is the net result of:
(a) the net asset value per share of the Mutual Fund or Portfolio held in
the subaccount determined as of the current Valuation Period; PLUS
(b) the per share amount of any dividend or capital gain distribution made
by the Mutual Fund or Portfolio held in the subaccount if the
"ex-dividend" date occurs during the current Valuation Period; PLUS OR
MINUS
(c) a per share charge or credit, which is determined by the Company, for
changes in tax reserves resulting from investment operations of the
subaccount;
(2) is the net result of:
(a) the net asset value per share of the Mutual Fund or Portfolio held in
the subaccount determined as of the immediately preceding Valuation
Period; PLUS OR MINUS
(b) the per share charge or credit for any changes in tax reserve for the
immediately preceding Valuation Period; and
(3) is the percentage factor representing the mortality and expense risk
premiums.
The net investment factor may be greater or less than one; therefore, the
Annuity Unit value may increase or decrease.
FINANCIAL STATEMENTS
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under the
Contract.
<PAGE> 47
SENTRY LIFE INSURANCE COMPANY
SENTRY VARIABLE ACCOUNT II
--------------------------
FINANCIAL STATEMENTS (UNAUDITED)
AS OF SEPTEMBER 30, 1999
7
<PAGE> 48
SENTRY LIFE INSURANCE COMPANY
SENTRY VARIABLE ACCOUNT II
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1999 (Unaudited)
<TABLE>
<CAPTION>
ASSETS:
Investments at market value:
<S> <C>
Neuberger Berman Advisers Management Trust:
Liquid Asset Portfolio, 3,020,011
shares (cost $3,020,011) $ 3,020,011
Growth Portfolio, 1,673,332
shares (cost $40,234,214) 41,967,162
Limited Maturity Bond Portfolio, 406,136
shares (cost $5,578,683) 5,356,938
Balanced Portfolio, 727,233
shares (cost $11,375,423) 11,497,551
-----------
Total investments 61,841,662
Dividends receivable 10,686
-----------
Total assets 61,852,348
LIABILITIES:
Accrued expenses 5,287
-----------
NET ASSETS $61,847,061
===========
</TABLE>
The accompanying notes are an integral part of these financial statements
9
<PAGE> 49
SENTRY LIFE INSURANCE COMPANY
SENTRY VARIABLE ACCOUNT II
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
For the nine months ended September 30, 1999 and 1998 (Unaudited)
<TABLE>
<CAPTION>
SUB-ACCOUNTS INVESTING IN:
--------------------------
LIQUID ASSET GROWTH
PORTFOLIO PORTFOLIO
-------------------------- -----------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Income:
Dividends $ 82,505 $ $83,479 $ -- $ --
Expenses:
Mortality and expense risk 24,310 21,703 375,634 364,329
---------- ----------- ---------- -----------
Net investment income (loss) 58,195 61,776 (375,634) (364,329)
---------- ----------- ---------- -----------
Realized net investment gain -- -- 502,876 692,324
Unrealized appreciation
(depreciation), net -- -- (2,308,510) (14,462,234)
Capital gain distributions
received -- -- 2,286,697 10,487,400
---------- ----------- ----------- -----------
Realized and unrealized gain
(loss) on investments and
capital gain distributions,
net -- -- 481,063 (3,282,510)
---------- ----------- ----------- -----------
Net increase (decrease) in
contract owners' equity from
operations 58,195 61,776 105,429 (3,646,839)
---------- ----------- ----------- -----------
Purchase payments 165,910 $ 1,240,504 2,205,608 2,366,285
Transfers between subaccounts,
net 543,194 321,355 (106,395) 252,888
Withdrawals (257,729) (360,861) (3,472,889) (3,992,838)
Contract maintenance fees (2,404) (2,189) (37,998) (32,901)
Surrender charges (685) (2,551) (18,036) (10,954)
---------- ----------- ----------- ------------
Net decrease in contract
owners' equity derived from
principal transactions 448,286 1,196,258 (1,429,710) (1,923,296)
---------- ----------- ------------ -----------
Total increase (decrease) in
contract owners' equity 506,481 1,258,034 (1,324,281) (5,570,135)
Contract owners' equity
at beginning of year 2,523,709 2,006,216 43,288,702 39,441,707
---------- ----------- ------------ -----------
Contract owners' equity at
end of period $3,030,190 $ 3,264,250 $41,964,421 $33,871,572
========== =========== ============= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
10
<PAGE> 50
<TABLE>
<CAPTION>
LIMITED MATURITY BALANCED
BOND PORTFOLIO PORTFOLIO TOTAL
------------------------ ------------------------ -----------------------
1999 1998 1999 1998 1999 1998
------ ------ ------ ------ ------ ------
<C> <C> <C> <C> <C> <C>
$ 319,622 $ 397,136 $ 185,833 $ 230,506 $ 587,960 $ 711,121
50,383 56,165 101,499 93,927 551,826 536,124
---------- ----------- ----------- ----------- ----------- -----------
269,239 340,971 84,334 136,579 36,134 174,997
---------- ----------- ----------- ----------- ----------- -----------
(53,432) (36,408) 104,266 102,951 553,710 758,867
(205,290) (110,814) (442,622) (2,396,849) (2,956,422) (16,969,897)
-- -- 275,308 1,619,027 2,562,005 12,106,427
---------- ----------- ----------- ----------- ----------- -----------
(258,722) (147,222) (63,048) (674,871) 159,293 (4,104,603)
---------- ----------- ----------- ----------- ----------- -----------
10,517 193,749 21,286 (538,292) 195,427 (3,929,606)
---------- ----------- ----------- ----------- ----------- -----------
128,274 65,362 1,320,986 1,529,011 3,820,778 5,201,162
(161,895) (123,573) (274,904) 55,106 -- --
(598,393) (434,175) (855,715) (643,674) (5,184,726) (5,431,548)
(4,638) (5,222) (8,751) (7,476) (53,791) (47,788)
(2,808) (450) (3,523) (2,661) (25,052) (16,616)
---------- ----------- ----------- ----------- ----------- -----------
(639,460) (498,058) 178,093 930,306 (1,442,791) (294,790)
---------- ----------- ----------- ---------- ----------- -----------
(628,943) (304,309) 199,379 392,014 (1,247,364) (4,224,396)
5,985,476 6,288,074 11,296,538 9,844,273 63,094,425 57,580,270
---------- ----------- ----------- ----------- ----------- -----------
$5,356,533 $ 5,983,765 $11,495,917 $10,236,287 $61,847,061 $53,355,874
========== =========== =========== =========== =========== ===========
</TABLE>
11
<PAGE> 51
SENTRY LIFE INSURANCE COMPANY
SENTRY VARIABLE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999 AND 1998
1. ORGANIZATION AND CONTRACTS
The Sentry Variable Account II (the Variable Account) is a segregated
investment account of the Sentry Life Insurance Company (the Company) and is
registered with the Securities and Exchange Commission as a unit investment
trust pursuant to the provisions of the Investment Company Act of 1940. The
Variable Account was established by the Company on August 2, 1983 and
commenced operations on May 3, 1984. Accordingly, it is an accounting entity
wherein all segregated account transactions are reflected. The financial
statements have been prepared in conformity with generally accepted
accounting principles which permit management to make certain estimates and
assumptions at the date of the financial statements. Actual results could
differ from those estimates.
The assets of the Variable Account are invested in one or more of the
portfolio's of Neuberger Berman Advisers Management Trust (the Trust) at the
portfolio's net asset value in accordance with the selection made by the
contract owners.
A copy of the Neuberger Berman Advisers Management Trust Annual Report is
included in the Variable Account's Annual Report.
2. SIGNIFICANT ACCOUNTING POLICIES
VALUATION OF INVESTMENTS
Investments in the Trust are valued at the reported net asset values of such
portfolios, which value their investment securities at fair value.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded on the trade date (the date the order to
buy and sell is executed). Dividend income is recorded on the ex-dividend
date. The cost of investments sold and the corresponding investment gains and
losses are determined on a specific identification basis.
FEDERAL INCOME TAXES
The Company is taxed as a life insurance company under the provisions of the
Internal Revenue Code. The operations of the Variable Account are part of the
total operations of the Company and are not taxed as a separate entity.
Under Federal income tax law, net investment income and net realized
investment gains of the Variable Account which are applied to increase net
assets are not taxed.
12
<PAGE> 52
SENTRY LIFE INSURANCE COMPANY
SENTRY VARIABLE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (UNAUDITED - CONTINUED)
SEPTEMBER 30, 1999 AND 1998
3. EXPENSES
A mortality and expense risk premium is deducted by the Company from the
Variable Account on a daily basis which is equal, on an annual basis, to
1.20% (.80% mortality and .40% expense risk) of the daily net asset value of
the Variable Account. This mortality and expense risk premium compensates the
Company for assuming these risks under the variable annuity contract. The
liability for accrued mortality and expense risk premium amounted to $5,287
at September 30, 1999.
The Company deducts, on the contract anniversary date, an annual contract
maintenance charge of $30, per contract holder, from the contract value by
canceling accumulation units. If the contract is surrendered for its full
surrender value, on other than the contract anniversary, the contract
maintenance charge will be deducted at the time of such surrender. This
charge reimburses the Company for administrative expenses relating to
maintenance of the contract.
There are no deductions made from purchase payments for sales charges at the
time of purchase. However, a contingent deferred sales charge may be deducted
in the event of a surrender to reimburse the Company for expenses incurred
which are related to contract sales. Contingent deferred sales charges apply
to each purchase payment and are graded from 6% during the first contract
year to 0% in the seventh contract year.
Any premium tax payable to a governmental entity as a result of the existence
of the contracts or the Variable Account will be charged against the contract
value. Premium taxes up to 4% are currently imposed by certain states. Some
states assess their premium taxes at the time purchase payments are made;
others assess their premium taxes at the time of annuitization. In the event
contracts would be issued in states assessing their premium taxes at the time
purchase payments are made, the Company currently intends to advance such
premium taxes and deduct the premium taxes from a contract owner's contract
value at the time of annuitization or surrender.
13
<PAGE> 53
SENTRY LIFE INSURANCE COMPANY
SENTRY VARIABLE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (UNAUDITED - CONTINUED)
SEPTEMBER 30, 1999 AND 1998
4. NET ASSETS
Net Assets are represented by accumulation units in the related Variable
Account.
At September 30, 1999, ownership of the Variable Account was represented by
the following accumulation units and accumulation unit values:
<TABLE>
<CAPTION>
ACCUMULATION ACCUMULATION
UNITS UNIT VALUE VALUE
------------ ------------ -----
<S> <C> <C> <C>
Liquid Asset Portfolio 165,204 $18.34 $ 3,030,190
Growth Portfolio 724,948 57.89 41,964,421
Limited Maturity Bond Portfolio 213,443 25.10 5,356,533
Balanced Portfolio 507,488 22.65 11,495,917
-----------
Total net assets $61,847,061
===========
</TABLE>
At September 30, 1998, ownership of the Variable Account was
represented by the following accumulation units and accumulation unit values:
<TABLE>
<CAPTION>
ACCUMULATION ACCUMULATION
UNITS UNIT VALUE VALUE
------------ ------------ -----
<S> <C> <C> <C>
Liquid Asset Portfolio 183,285 $17.81 $ 3,264,250
Growth Portfolio 743,603 45.55 33,871,572
Limited Maturity Bond Portfolio 238,862 25.05 5,983,765
Balanced Portfolio 526,067 19.46 10,236,287
-----------
Total net assets $53,355,874
===========
</TABLE>
5. PURCHASES AND SALES OF SECURITIES
In 1999, purchases and proceeds on sales of the Trust's shares aggregated
$10,261,507 and $9,107,852, respectively, and were as follows:
<TABLE>
<CAPTION>
LIQUID ASSET GROWTH LIMITED MATURITY BALANCED
PORTFOLIO PORTFOLIO BOND PORTFOLIO PORTFOLIO TOTAL
------------ ---------- ---------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Purchases $1,640,811 $5,892,819 $594,708 $2,133,169 $10,261,507
Proceeds on sales 1,135,530 5,411,836 965,545 1,594,941 9,107,852
</TABLE>
In 1998, purchases and proceeds on sales of the Trust's shares aggregated
$21,604,450 and $9,621,886, respectively, and were as follows:
<TABLE>
<CAPTION>
LIQUID ASSET GROWTH LIMITED MATURITY BALANCED
PORTFOLIO PORTFOLIO BOND PORTFOLIO PORTFOLIO TOTAL
------------ ----------- ---------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Purchases $2,635,193 $14,354,712 $632,318 $3,982,227 $21,604,450
Proceeds on sales 1,381,641 6,154,613 789,241 1,296,391 9,621,886
</TABLE>
14
<PAGE> 54
SENTRY LIFE INSURANCE COMPANY
SENTRY VARIABLE ACCOUNT II
FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
15
<PAGE> 55
[PricewaterhouseCoopers LLP Letterhead]
REPORT OF INDEPENDENT ACCOUNTANTS
THE BOARD OF DIRECTORS
SENTRY LIFE INSURANCE COMPANY
AND
THE CONTRACT OWNERS OF
SENTRY VARIABLE ACCOUNT II:
In our opinion, the accompanying combined statement of assets and liabilities
and the related combined and separate statements of operations and changes in
net assets present fairly, in all material respects, the financial position of
the Sentry Variable Account II, and the Liquid Asset Portfolio, Growth
Portfolio, Limited Maturity Bond Portfolio and Balanced Portfolio thereof, at
December 31, 1998, the results of each of their operations and changes in each
of their net assets for each of the two years in the period then ended, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of Sentry Life Insurance Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1998, by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCooper LLP
Chicago, Illinois
February 11, 1999
16
<PAGE> 56
SENTRY LIFE INSURANCE COMPANY
SENTRY VARIABLE ACCOUNT II
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
<TABLE>
<CAPTION>
ASSETS:
Investments at market value:
<S> <C>
Neuberger Berman Advisers Management Trust:
Liquid Asset Portfolio, 2,514,730
shares (cost $2,514,730) $ 2,514,730
Growth Portfolio, 1,646,703
shares (cost $39,250,355) 43,291,814
Limited Maturity Bond Portfolio, 433,176
shares (cost $6,002,953) 5,986,497
Balanced Portfolio, 691,412
shares (cost $10,732,929) 11,297,678
-----------
Total investments 63,090,719
Dividends receivable 9,167
-----------
Total assets 63,099,886
LIABILITIES:
Accrued expenses 5,461
-----------
NET ASSETS $63,094,425
===========
</TABLE>
The accompanying notes are an integral part of these financial statements
17
<PAGE> 57
SENTRY LIFE INSURANCE COMPANY
SENTRY VARIABLE ACCOUNT II
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
For the Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
SUB-ACCOUNTS INVESTING IN:
----------------------------
LIQUID ASSET GROWTH
PORTFOLIO PORTFOLIO
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income:
Dividends $ 115,086 $ 104,541 $ -- $ --
Expenses:
Mortality and expense charges 30,299 27,213 474,117 450,947
------------ ------------ ------------ ------------
Net investment income (loss) 84,787 77,328 (474,117) (450,947)
------------ ------------ ------------ ------------
Realized net investment gain (loss) -- -- 588,794 1,540,740
Unrealized appreciation (depreciation), net -- -- (5,211,880) 4,937,957
Capital gain distributions received -- -- 10,487,400 2,948,192
------------ ------------ ------------ ------------
Realized and unrealized gain (loss)
on investments and capital
gain distributions, net -- -- 5,864,314 9,426,889
------------ ------------ ------------ ------------
Net increase in net assets
from operations 84,787 77,328 5,390,197 8,975,942
------------ ------------ ------------ ------------
Purchase payments 1,292,248 94,695 3,248,943 1,192,713
Transfers between subaccounts, net 25,234 (37,697) (126,390) 115,753
Withdrawals (879,099) (561,881) (4,612,799) (4,384,625)
Contract maintenance fees (2,851) (3,317) (39,072) (41,415)
Surrender charges (2,826) (2,360) (13,884) (19,220)
------------ ------------ ------------ ------------
Net increase (decrease) in net assets
derived from principal transactions 432,706 (510,560) (1,543,202) (3,136,794)
------------ ------------ ------------ ------------
Total increase (decrease) in net assets 517,493 (433,232) 3,846,995 5,839,148
Net assets at beginning of year 2,006,216 2,439,448 39,441,707 33,602,559
------------ ------------ ------------ ------------
Net assets at end of year $ 2,523,709 $ 2,006,216 $ 43,288,702 $ 39,441,707
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
18
<PAGE> 58
<TABLE>
<CAPTION>
LIMITED MATURITY BALANCED
BOND PORTFOLIO PORTFOLIO TOTAL
- ---------------------------- ---------------------------- ----------------------------
1998 1997 1998 1997 1998 1997
- ------------ ------------ ------------ ------------ ------------ ------------
<C> <C> <C> <C> <C> <C>
$ 397,136 $ 414,044 $ 230,506 $ 164,097 $ 742,728 $ 682,682
74,360 80,334 125,291 113,868 704,067 672,362
- ------------ ------------ ------------ ------------ ------------ ------------
322,776 333,710 105,215 50,229 38,661 10,320
- ------------ ------------ ------------ ------------ ------------ ------------
(46,651) 2,573 28,391 213,070 570,534 1,756,383
(82,604) 18,458 (721,893) 869,649 (6,016,377) 5,826,064
-- -- 1,619,027 421,183 12,106,427 3,369,375
- ------------ ------------ ------------ ------------ ------------ ------------
(129,255) 21,031 925,525 1,503,902 6,660,584 10,951,822
- ------------ ------------ ------------ ------------ ------------ ------------
193,521 354,741 1,030,740 1,554,131 6,699,245 10,962,142
- ------------ ------------ ------------ ------------ ------------ ------------
156,457 220,322 1,758,511 441,443 6,456,159 1,949,173
105,524 (252,094) (4,368) 174,038 -- --
(750,978) (1,343,699) (1,315,396) (1,281,938) (7,558,272) (7,572,143)
(6,327) (7,254) (9,679) (9,845) (57,929) (61,831)
(795) (2,672) (7,543) (8,821) (25,048) (33,073)
- ------------ ------------ ------------ ------------ ------------ ------------
(496,119) (1,385,397) 421,525 (685,123) (1,185,090) (5,717,874)
- ------------ ------------ ------------ ------------ ------------ ------------
(302,598) (1,030,656) 1,452,265 869,008 5,514,155 5,244,268
6,288,074 7,318,730 9,844,273 8,975,265 57,580,270 52,336,002
- ------------ ------------ ------------ ------------ ------------ ------------
$ 5,985,476 $ 6,288,074 $ 11,296,538 $ 9,844,273 $ 63,094,425 $ 57,580,270
============ ============ ============ ============ ============ ============
</TABLE>
19
<PAGE> 59
SENTRY LIFE INSURANCE COMPANY
SENTRY VARIABLE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
1. ORGANIZATION AND CONTRACTS
The Sentry Variable Account II (the Variable Account) is a segregated
investment account of the Sentry Life Insurance Company (the Company) and is
registered with the Securities and Exchange Commission as a unit investment
trust pursuant to the provisions of the Investment Company Act of 1940. The
Variable Account was established by the Company on August 2, 1983 and
commenced operations on May 3, 1984. Accordingly, it is an accounting entity
wherein all segregated account transactions are reflected. The financial
statements have been prepared in conformity with generally accepted
accounting principles which permit management to make certain estimates and
assumptions at the date of the financial statements. Actual results could
differ from those estimates.
The assets of the Variable Account are invested in one or more of the
portfolios of Neuberger Berman Advisers Management Trust (the Trust) at the
portfolio's net asset value in accordance with the selection made by the
contract owners.
A copy of the Neuberger Berman Advisers Management Trust Annual Report is
included in the Variable Account's Annual Report.
2. SIGNIFICANT ACCOUNTING POLICIES
VALUATION OF INVESTMENTS
Investments in the Trust are valued at the reported net asset values of such
portfolios, which value their investment securities at fair value.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded on the trade date (the date the order
to buy and sell is executed). Dividend income is recorded on the ex-dividend
date. The cost of investments sold and the corresponding investment gains
and losses are determined on a specific identification basis.
FEDERAL INCOME TAXES
The Company is taxed as a life insurance company under the provisions of the
Internal Revenue Code. The operations of the Variable Account are part of
the total operations of the Company and are not taxed as a separate entity.
Under Federal income tax law, net investment income and net realized
investment gains of the Variable Account which are applied to increase net
assets are not taxed.
20
<PAGE> 60
SENTRY LIFE INSURANCE COMPANY
SENTRY VARIABLE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. EXPENSES
A mortality and expense risk premium is deducted by the Company from the
Variable Account on a daily basis which is equal, on an annual basis, to
1.20% (.80% mortality and .40% expense risk) of the daily net asset value of
the Variable Account. This mortality and expense risk premium compensates
the Company for assuming these risks under the variable annuity contract.
The liability for accrued mortality and expense risk premium amounted to
$5,461 at December 31, 1998.
The Company deducts, on the contract anniversary date, an annual contract
maintenance charge of $30, per contract holder, from the contract value by
canceling accumulation units. If the contract is surrendered for its full
surrender value, on other than the contract anniversary, the contract
maintenance charge will be deducted at the time of such surrender. This
charge reimburses the Company for administrative expenses relating to
maintenance of the contract.
There are no deductions made from purchase payments for sales charges at the
time of purchase. However, a contingent deferred sales charge may be
deducted in the event of a surrender to reimburse the Company for expenses
incurred which are related to contract sales. Contingent deferred sales
charges apply to each purchase payment and are graded from 6% during the
first contract year to 0% in the seventh contract year.
Any premium tax payable to a governmental entity as a result of the
existence of the contracts or the Variable Account will be charged against
the contract value. Premium taxes up to 4% are currently imposed by certain
states. Some states assess their premium taxes at the time purchase payments
are made; others assess their premium taxes at the time of annuitization. In
the event contracts would be issued in states assessing their premium taxes
at the time purchase payments are made, the Company currently intends to
advance such premium taxes and deduct the premium taxes from a contract
owner's contract value at the time of annuitization or surrender.
21
<PAGE> 61
SENTRY LIFE INSURANCE COMPANY
SENTRY VARIABLE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. NET ASSETS
Net Assets are represented by accumulation units in the related Variable
Account.
At December 31, 1998 ownership of the Variable Account was represented by
the following accumulation units and accumulation unit values:
<TABLE>
<CAPTION>
ACCUMULATION ACCUMULATION
UNITS UNIT VALUE VALUE
------------ ------------ -----------
<S> <C> <C> <C>
Liquid Asset Portfolio 140,566 $17.95 $ 2,523,709
Growth Portfolio 750,025 57.72 43,288,702
Limited Maturity Bond Portfolio 238,960 25.05 5,985,476
Balanced Portfolio 499,567 22.61 11,296,538
-----------
Total net assets $63,094,425
===========
</TABLE>
At December 31, 1997 ownership of the Variable Account was represented by
the following accumulation units and accumulation unit values:
<TABLE>
<CAPTION>
ACCUMULATION ACCUMULATION
UNITS UNIT VALUE VALUE
------------ ------------- ------------
<S> <C> <C> <C>
Liquid Asset Portfolio 115,558 $17.36 $ 2,006,216
Growth Portfolio 780,148 50.56 39,441,707
Limited Maturity Bond Portfolio 258,942 24.28 6,288,074
Balanced Portfolio 482,578 20.40 9,844,273
-----------
Total net assets $57,580,270
===========
</TABLE>
5. PURCHASES AND SALES OF SECURITIES
In 1998, purchases and proceeds on sales of the Trust's shares aggregated
$24,882,854 and $13,922,844, respectively, and were as follows:
<TABLE>
<CAPTION>
LIQUID ASSET GROWTH LIMITED MATURITY BALANCED
PORTFOLIO PORTFOLIO BOND PORTFOLIO PORTFOLIO TOTAL
------------ ----------- ---------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Purchases $3,392,077 $15,934,442 $ 968,445 $4,587,890 $24,882,854
Proceeds on sales 2,876,339 7,463,244 1,141,430 2,441,831 13,922,844
</TABLE>
In 1997, purchases and proceeds on sales of the Trust's shares aggregated
$9,252,852 and $11,592,525, respectively, and were as follows:
<TABLE>
<CAPTION>
LIQUID ASSET GROWTH LIMITED MATURITY BALANCED
PORTFOLIO PORTFOLIO BOND PORTFOLIO PORTFOLIO TOTAL
------------ ----------- ---------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Purchases $1,524,938 $ 5,657,165 $ 650,882 $1,419,867 $ 9,252,852
Proceeds on sales $1,956,814 6,298,766 1,703,235 1,633,710 11,592,525
</TABLE>
22
<PAGE> 62
SENTRY LIFE INSURANCE COMPANY
FINANCIAL STATEMENTS (UNAUDITED)
AS OF SEPTEMBER 30, 1999
23
<PAGE> 63
SENTRY LIFE INSURANCE COMPANY
STATUTORY-BASIS BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
- ------ ---- ----
<S> <C> <C>
Investments:
Bonds ......................... $1,127,943,499 $1,130,624,679
Investments in subsidiaries ... 10,281,432 10,206,594
Mortgage loans ................ 6,654 26,690
Policy loans .................. 23,161,556 23,974,328
Cash and short-term
investments .................. 23,147,612 14,540,594
-------------- --------------
Total investments ....... 1,184,540,753 1,179,372,885
Accrued investment income ....... 21,076,101 21,074,987
Premiums deferred and
uncollected ................... 4,637,053 4,426,796
Other assets .................... 9,100,731 1,559,654
Assets held in separate
accounts ...................... 560,700,934 495,182,361
-------------- --------------
Total admitted assets ... $1,780,052,572 $1,701,616,683
============== ==============
</TABLE>
24
<PAGE> 64
SENTRY LIFE INSURANCE COMPANY
STATUTORY-BASIS BALANCE SHEETS (UNAUDITED - CONTINUED)
SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
LIABILITIES 1999 1998
- ----------- ---- ----
<S> <C> <C>
Future policy benefits:
Life ................................................. $ 388,918,170 $ 387,871,709
Accident and health .................................. 15,985,405 15,347,489
Policy and contract claims ............................. 4,775,480 3,117,375
Premium and other deposit funds ........................ 644,955,667 624,372,014
Other policyholder funds ............................... 2,527,810 10,377,093
Accounts payable and other liabilities ................. 4,118,239 9,775,857
Federal income taxes accrued ........................... 7,307,197 8,212,827
Asset valuation reserve ................................ 5,828,518 5,664,196
Interest maintenance reserve ........................... 6,544,838 6,676,287
Liabilities related to separate accounts................ 559,597,017 494,243,621
------------- -------------
Total liabilities .......................... 1,640,558,341 1,565,658,468
============= =============
CAPITAL STOCK AND SURPLUS
- -------------------------
Capital stock, $10 par value;
authorized 400,000 shares; issued and
outstanding 316,178 shares in 1999 and 1998 .......... 3,161,780 3,161,780
Paid-in surplus ........................................ 43,719,081 43,719,081
Earned surplus, unappropriated ......................... 92,613,370 89,077,354
------------- -------------
Total capital stock and surplus ............ 139,494,231 135,958,215
------------- -------------
Total liabilities, capital stock and
surplus ................................... $1,780,052,572 $1,701,616,683
============= =============
</TABLE>
25
<PAGE> 65
SENTRY LIFE INSURANCE COMPANY
STATUTORY-BASIS STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Premiums and other income:
Premiums and annuity considerations ............ $ 52,807,864 $ 52,600,382
Other fund deposits ............................ 56,525,089 45,372,902
Commissions and expense allowances on
reinsurance ceded ............................ 8,269,116 8,645,969
Net investment income .......................... 68,267,580 69,343,845
Other income ................................... 5,722,551 7,104,853
------------- -------------
Total premiums and other income ........... 191,592,200 183,067,951
------------- -------------
Benefits and expenses:
Policyholder benefits and fund withdrawals ..... 131,475,967 147,796,088
Increase in future policy benefits and
other reserves .............................. 12,744,839 18,816,606
Commissions .................................... 5,857,448 5,406,847
Other expenses ................................. 21,056,442 20,796,168
Transfers to (from) separate accounts, net ..... 3,349,210 (22,051,914)
------------- -------------
Total benefits and expenses ............... 174,483,906 170,763,795
------------- -------------
Income before Federal income tax expense and
net realized losses on investments ............. 17,108,294 12,304,156
Federal income tax expense, less tax on net
realized losses and transfers to the
IMR ..................................... 6,108,486 5,027,266
------------- -------------
Income before net realized losses on investments.. 10,999,808 7,276,890
Net realized losses on investments ........ (784,996) (459,939)
------------- -------------
Net income ....................................... $ 10,214,812 $ 6,816,951
============= =============
</TABLE>
26
<PAGE> 66
SENTRY LIFE INSURANCE COMPANY
STATUTORY-BASIS STATEMENTS OF CHANGES IN CAPITAL STOCK AND SURPLUS (UNAUDITED)
FOR THE PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Capital stock, beginning and end of year ......... $ 3,161,780 $ 3,161,780
------------- -------------
Paid-in surplus, beginning and end of year ....... 43,719,081 43,719,081
------------- -------------
Earned surplus, unappropriated:
Balance at beginning of year ................... 81,771,668 82,275,478
Net income ..................................... 10,214,812 6,816,951
Change in non-admitted assets .................. 67 (4,402)
Change in liability for reinsurance ............ -- --
Change in asset valuation reserve .............. (121,532) (399,617)
Dividend to stockholder ........................ -- --
Change in net unrealized gains on investments... 748,355 388,944
------------- -------------
Balance at end of year ......................... 92,613,370 89,077,354
------------- -------------
Total capital stock and surplus .......... $ 139,494,231 $ 135,958,215
============= =============
</TABLE>
27
<PAGE> 67
SENTRY LIFE INSURANCE COMPANY
STATUTORY-BASIS STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Premiums and annuity considerations ................... $ 52,738,461 $ 52,504,532
Other fund deposits ................................... 56,525,089 45,372,902
Other premiums, considerations and deposits ........... 60,632 132,018
Allowances and reserve adjustments received on
reinsurance ceded .................................. 8,320,648 8,641,969
Investment income received (excluding realized gains
and losses and net of investment expenses) ......... 64,366,476 64,693,695
Other income received ................................. 5,613,828 6,972,836
Life and accident and health claims paid .............. (53,336,172) (57,318,645)
Surrender benefits .................................... (77,994,312) (107,863,652)
Other benefits to policyholders paid .................. (349,398) (427,469)
Commissions, other expenses, and taxes paid
(excluding federal income taxes) ................... (26,342,727) (25,954,995)
Net transfers (to) from separate accounts ............. (3,425,528) 21,765,038
Cash in receivable status from separate accounts ...... -- 4,318,397
Changes in asset charges receivable ................... -- --
Dividends to policyholders paid ....................... (52,953) (53,493)
Federal income taxes paid ............................. (6,615,383) (8,853,213)
Net decrease in policy loans .......................... 874,942 1,046,309
------------- -------------
Net cash from operations ........................... 20,383,603 4,976,229
------------- -------------
Proceeds from investments sold, matured, or repaid:
Bonds .............................................. 97,801,733 112,038,884
Mortgage loans ..................................... 12,069 41,967
Tax on net capital gains ........................... (1,608,247) (577,663)
------------- -------------
Total investment proceeds ................... 96,205,555 111,503,188
------------- -------------
Other cash provided ................................... 944,727 15,420,228
------------- -------------
Total cash provided ......................... 117,533,885 131,899,645
------------- -------------
Cost of investments acquired .......................... 107,370,126 136,744,391
Other cash applied:
Dividend to stockholder ............................ -- --
Other applications, net ............................ 16,893,159 1,250,784
------------- -------------
Total cash applied .......................... 124,263,285 137,995,175
------------- -------------
Net change in cash and short-term investments (6,729,400) (6,095,530)
Cash and short-term investments:
Beginning of year .................................. 29,877,012 20,636,124
------------- -------------
End of year ........................................ $ 23,147,612 $ 14,540,594
============= =============
</TABLE>
Note: The interim financial data as of September 30, 1999 and for the nine
months ended September 30, 1999 and September 30, 1998 is unaudited; however, in
the opinion of the Company, the interim data includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair statement
of the results for the interim periods.
28
<PAGE> 68
SENTRY LIFE INSURANCE COMPANY
REPORT ON AUDITS OF STATUTORY-BASIS FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
29
<PAGE> 69
[PRICEWATERHOUSECOOPERS LLP LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Sentry Life Insurance Company
We have audited the accompanying statutory-basis balance sheets of Sentry Life
Insurance Company (the Company) as of December 31, 1998 and 1997, and the
related statutory-basis statements of operations, changes in capital stock and
surplus and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to report
on these financial statements based on our audits.
We conducted our audits of the accompanying financial statements in accordance
with generally accepted auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed more fully in Note 1 to the financial statements, the Company
prepared these financial statements using accounting practices prescribed or
permitted by the insurance department of the State of Wisconsin, which practices
differ from generally accepted accounting principles (GAAP). We have only been
engaged by the Company to audit the accompanying financial statements on a
statutory basis of accounting. The Company is not required to prepare GAAP
financial statements and does not prepare GAAP financial statements. The effects
on the financial statements of the variances between the statutory basis of
accounting and GAAP, although not reasonably determinable, are presumed to be
material. We are therefore required in the following paragraph to issue an
adverse opinion on GAAP.
In our opinion, because of the effects of the matter discussed in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of Sentry Life Insurance Company as of December 31, 1998 and 1997, or the
results of its operations and its cash flows for the years then ended.
In our opinion, the statutory-basis financial statements referred to above
present fairly, in all material respects, the admitted assets, liabilities, and
capital stock and surplus of Sentry Life Insurance Company as of December 31,
1998 and 1997, and the results of its operations and its cash flows for the
years then ended in conformity with accounting practices prescribed or permitted
by the insurance department of the State of Wisconsin.
Our audit was conducted for the purpose of forming an opinion on the
statutory-basis financial statements taken as a whole. The accompanying
supplemental schedule of assets and liabilities is presented to comply with the
National Association of Insurance Commissioners' annual statement instructions
and is not a required part of the statutory-basis financial statements. Such
information has been subjected to the auditing procedures applied in our audit
of the statutory basis financial statements and, in our opinion, is fairly
stated, in all material respects, in relation to the statutory-basis financial
statements taken as a whole.
PricewaterhouseCoopers L.L.P.
Chicago, Illinois
February 12, 1999
30
<PAGE> 70
SENTRY LIFE INSURANCE COMPANY
STATUTORY-BASIS BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
----------------------
<TABLE>
<CAPTION>
ASSETS 1998 1997
- ------ ---- ----
<S> <C> <C>
Investments:
Bonds ......................... $1,118,191,869 $1,103,011,418
Investments in subsidiaries ... 9,532,940 9,817,647
Mortgage loans ................ 18,723 68,657
Policy loans .................. 24,036,498 25,020,637
Cash and short-term investments 29,877,016 20,636,124
-------------- --------------
Total investments ....... 1,181,657,046 1,158,554,483
Accrued investment income ....... 18,681,577 18,231,430
Premiums deferred and uncollected 4,474,663 4,377,983
Due from affiliates ............. -- 3,008,778
Other assets .................... 1,177,498 6,099,831
Assets held in separate accounts 604,877,464 533,613,785
-------------- --------------
Total admitted assets ... $1,810,868,248 $1,723,886,290
============== ==============
</TABLE>
The accompanying notes are an integral part of these
statutory-basis financial statements.
31
<PAGE> 71
SENTRY LIFE INSURANCE COMPANY
STATUTORY-BASIS BALANCE SHEETS (CONTINUED)
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
LIABILITIES 1998 1997
- ----------- ---- ----
<S> <C> <C>
Future policy benefits:
Life ........................................................ $ 255,692,269 $ 250,618,823
Accident and health ......................................... 15,440,434 14,967,065
Annuity ..................................................... 134,582,450 138,902,775
Policy and contract claims .................................... 4,140,344 4,720,182
Premium and other deposit funds ............................... 624,627,002 604,285,476
Other policyholder funds ...................................... 10,445,827 26,118,724
Accounts payable and other liabilities ........................ 11,177,061 3,477,182
Federal income taxes accrued .................................. 9,417,827 11,555,703
Asset valuation reserve ....................................... 5,706,987 5,264,578
Interest maintenance reserve .................................. 7,087,699 6,175,922
Liabilities related to separate accounts ...................... 603,897,819 528,643,523
-------------- --------------
Total liabilities ................................... $1,682,215,719 $1,594,729,953
============== ==============
CAPITAL STOCK AND SURPLUS
- -------------------------
Capital stock, $10 par value; authorized 400,000 shares; issued
and outstanding 316,178 shares in 1998 and 1997 ...... 3,161,780 3,161,780
Paid-in surplus ............................................... 43,719,081 43,719,081
Earned surplus, unappropriated ................................ 81,771,668 82,275,476
-------------- --------------
Total capital stock and surplus ..................... 128,652,529 129,156,337
-------------- --------------
Total liabilities, capital stock and surplus ........ $1,810,868,248 $1,723,886,290
============== ==============
</TABLE>
The accompanying notes are an integral part of these
statutory-basis financial statements.
32
<PAGE> 72
SENTRY LIFE INSURANCE COMPANY
STATUTORY-BASIS STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Premiums and other income:
Premiums and annuity considerations ...................... $ 76,847,662 $ 74,408,562
Other fund deposits ...................................... 62,791,049 52,574,356
Commissions and expense allowances on
reinsurance ceded ...................................... 11,560,785 18,912,935
Net investment income .................................... 93,544,822 91,589,939
Other income ............................................. 8,931,046 8,512,462
------------- -------------
Total premiums and other income .................... 253,675,364 245,998,254
------------- -------------
Benefits and expenses:
Policyholder benefits and fund withdrawals ............... 199,613,380 188,108,969
Increase in future life policy benefits
and other reserves ..................................... 21,803,214 7,695,811
Commissions .............................................. 7,358,122 10,638,144
Other expenses ........................................... 27,780,333 30,477,161
Transfers from separate accounts, net .................... (16,816,030) (16,336,976)
------------- -------------
Total benefits and expenses ........................ 239,739,019 220,553,109
------------- -------------
Income before federal income tax expense
and net realized losses on investments ................... 13,936,345 25,445,145
Federal income tax expense, less tax on net realized
losses and transfers to the IMR .................. 5,684,753 9,177,337
------------- -------------
Income before net realized losses on investments ........... 8,251,592 16,267,808
Net realized losses on investments ................. (514,506) (272,063)
------------- -------------
Net income ................................................. $ 7,737,086 $ 15,995,745
============= =============
</TABLE>
The accompanying notes are an integral part of these
statutory-basis financial statements.
33
<PAGE> 73
SENTRY LIFE INSURANCE COMPANY
STATUTORY-BASIS STATEMENTS OF CHANGES IN CAPITAL STOCK AND SURPLUS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Capital stock, beginning and end of year ........... $ 3,161,780 $ 3,161,780
------------ ------------
Paid-in surplus, beginning and end of year ......... 43,719,081 43,719,081
------------ ------------
Earned surplus, unappropriated:
Balance at beginning of year ..................... 82,275,476 67,368,745
Net income ....................................... 7,737,086 15,995,745
Change in non-admitted assets .................... (4,430) 1,850
Change in liability for reinsurance .............. (9,348) (650)
Change in asset valuation reserve ................ (442,409) 6,192,639
Dividend to stockholder .......................... (7,500,000) (7,500,000)
Change in net unrealized gains on investments .... (284,707) 217,147
------------ -------------
Balance at end of year ........................... 81,771,668 82,275,476
------------ -------------
Total capital stock and surplus ............. $128,652,529 $ 129,156,337
============ =============
</TABLE>
The accompanying notes are an integral part of these
statutory-basis financial statements.
34
<PAGE> 74
SENTRY LIFE INSURANCE COMPANY
STATUTORY-BASIS STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
----------------------------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Premiums and annuity considerations .................. $ 76,630,869 $ 74,046,843
Other fund deposits .................................. 62,791,049 52,574,356
Other premiums, considerations and deposits .......... 165,851 170,518
Allowances and reserve adjustments received on
reinsurance ceded .................................. 11,507,443 25,981,339
Investment income received (excluding realized gains
and losses and net of investment expenses) ......... 90,358,325 88,152,129
Other income received ................................ 13,079,807 8,341,945
Life and accident and health claims paid ............. (35,698,918) (24,600,136)
Surrender benefits ................................... (132,575,939) (99,192,578)
Other benefits to policyholders paid ................. (48,180,669) (46,821,006)
Commissions, other expenses, and taxes paid
(excluding federal income taxes) ................... (34,763,025) (41,375,759)
Net transfers from separate accounts ................. 16,492,034 16,364,694
Cash in receivable status from separate accounts ..... -- (4,318,844)
Changes in asset charges receivable .................. -- 6,765
Dividends to policyholders paid ...................... (317,700) (316,156)
Federal income taxes paid ............................ (8,853,213) (9,002,003)
Net decrease in policy loans ......................... 984,139 368,610
------------- -------------
Net cash from operations ........................... 11,620,053 40,380,717
------------- -------------
Proceeds from investments sold, matured, or repaid:
Bonds .............................................. 147,260,947 101,049,805
Mortgage loans ..................................... 49,934 82,308
Tax on net capital gains ........................... (577,663) (105,566)
------------- -------------
Total investment proceeds ................... 146,733,218 101,026,547
------------- -------------
Other cash provided .................................. 17,175,517 10,746,587
------------- -------------
Total cash provided ......................... 175,528,788 152,153,851
------------- -------------
Cost of investments acquired ......................... 157,699,531 146,935,141
Other cash applied:
Dividend to stockholder ............................ 7,500,000 7,500,000
Other applications, net ............................ 1,088,365 5,819,079
------------- -------------
Total cash applied .......................... 166,287,896 160,254,220
------------- -------------
Net change in cash and short-term investments 9,240,892 (8,100,369)
Cash and short-term investments:
Beginning of year .................................. 20,636,124 28,736,493
------------- -------------
End of year ........................................ $ 29,877,016 $ 20,636,124
============= =============
</TABLE>
The accompanying notes are an integral part of these
statutory-basis financial statements.
35
<PAGE> 75
SENTRY LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS
-----------------------
(1) BASIS OF PRESENTATION AND SIGNIFICANT STATUTORY-BASIS ACCOUNTING POLICIES
BASIS OF PRESENTATION
Sentry Life Insurance Company (the Company) is a wholly-owned subsidiary of
Sentry Insurance a Mutual Company (SIAMCO). The Company writes insurance
products in all states except New York primarily through direct writers who
market the Company's individual life insurance, annuities and group health
and pension products. The Company also uses direct mail and third party
administrators for the marketing of its group life and health products.
The accompanying statutory-basis financial statements of the Company have
been prepared in conformity with the accounting practices prescribed or
permitted by the insurance department of the State of Wisconsin. Prescribed
statutory accounting principles include a variety of publications of the
National Association of Insurance Commissioners (NAIC), as well as state
laws, regulations, and general administrative rules. Permitted statutory
accounting practices encompass all accounting practices not so prescribed.
The Company does not employ any material permitted practices in the
preparation of its statutory-basis financial statements.
The accompanying statutory-basis financial statements have been prepared in
accordance with statutory accounting principles which require management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
these estimates.
SIGNIFICANT STATUTORY ACCOUNTING POLICIES
A. INVESTMENT SECURITIES
Investments are valued in accordance with the requirements of the
NAIC. Bonds which qualify for amortization are stated at amortized
cost; bonds not qualifying are carried at the lesser of amortized cost
or NAIC market values. Under GAAP, bonds would be classified as either
trading, available for sale, or held-to-maturity. Bonds classified as
trading or as available for sale would be carried at market with
unrealized gains and losses, net of applicable taxes, recognized as
net income (trading securities) or as a direct surplus adjustment
(available for sale). Common stock of the Company's unconsolidated
subsidiary is carried at its underlying statutory capital and surplus.
The change in the subsidiary's underlying equity between years is
reflected as a change in unrealized gains (losses). Under GAAP, this
entity's balance sheet and results of operations would be consolidated
with the Company. Mortgage loans on real estate are carried at their
aggregate unpaid principal balances. Policy loans are carried at the
aggregate of unpaid principal balances plus accrued interest and are
not in excess of cash surrender values of the related policies.
Short-term investments are carried at amortized cost, which
approximates market value. Investment income is recorded when earned.
Market value adjustments, on investments carried at market, are
reflected in earned surplus as unrealized gains (losses) on
investments. Realized gains and losses are determined on the specific
identification method and are recorded directly in the statements of
operations, net of federal income taxes and after transfers to the
Interest Maintenance Reserve, as prescribed by the NAIC.
Income on mortgage-backed securities is recognized using a constant
effective yield based on anticipated prepayments and the estimated
economic life of the securities. When actual prepayments differ
significantly from anticipated prepayments, the effective yield is
recalculated to reflect actual payments to date and anticipated future
payments. The net investment in the securities is adjusted to the
amount that would have existed had the new effective yield been
applied since the acquisition of the securities. This adjustment is
reflected in net investment income.
36
<PAGE> 76
SENTRY LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
---------------------------
B. SEPARATE ACCOUNT BUSINESS AND LIABILITY FOR PREMIUM AND OTHER DEPOSIT FUNDS
The Company issues group annuity contracts both to affiliated companies and
others. The deposits received in connection with these contracts are placed
in deposit administration funds and in separate accounts. The Company also
issues variable annuity contracts and variable universal life contracts.
Deposits for those contracts are also placed in separate accounts. A
separate account is an accounting entity segregated as a discrete operation
within an insurance company. The stockholder of the Company and its
policyholders have no claim to assets held in the separate accounts. The
contract holders are the only persons having rights to any assets in the
separate accounts or to income arising from these assets. All separate and
variable accounts held by the Company are non-guaranteed and represent
funds where the benefit is determined by the performance of the investments
held in the separate account. Assets are carried at market value and
reserves are calculated using the cash value of the contract. All reserves
fall into the category allowing discretionary withdrawals at market value.
For the variable annuity contract, if it has been in effect at least six
years, there is no surrender charge. For the variable universal life
contract, there is a surrender charge through the ninth year. The admitted
asset value of separate accounts consists primarily of common stock.
C. NON-ADMITTED ASSETS
For statutory accounting purposes, certain assets designated as
"non-admitted" (principally certain receivables) have been excluded from
the statutory-basis balance sheets and charged to earned surplus. Under
GAAP, such assets would be recognized at net realizable value.
Non-admitted assets totaled $4,752 and $322 at December 31, 1998 and 1997,
respectively.
D. POLICY BENEFITS
Liabilities for traditional life and limited-payment life contracts are
computed using methods, mortality and morbidity tables and interest rates
which conform to the valuation laws of the State of Wisconsin. The
liabilities are primarily calculated on a modified reserve basis. The
effect of using a modified reserve basis partially offsets the effect of
immediately expensing acquisition costs by providing a policy benefit
reserve increase in the first policy year which is less than the reserve
increase in renewal years.
Future policy benefits for life policies and contracts were primarily
determined using the Commissioner's reserve valuation method with interest
rates ranging from 2.5% to 6%. Additional statutory policy deficiency
reserves have been provided where the valuation net premium exceeds the
gross premiums.
Future policy benefits for annuity contracts, primarily for individual and
group deferred annuities, were primarily determined using the
Commissioner's annuity reserve valuation method with interest rates ranging
from 3% to 11%. Group Health reserves consist predominantly of long-term
disability reserves representing present value of amounts not yet due
calculated using standard disability tables and various interest rates.
Reserves for universal life-type and investment contracts are based on the
contract account balance, if future benefit payments in excess of the
account balance are not guaranteed, or on the present value of future
benefit payments when such payments are guaranteed.
GAAP reserves are computed using mortality, withdrawal and interest rate
assumptions that are based on Company experience.
E. INTEREST MAINTENANCE RESERVE (IMR)
Realized investment gains and losses on bonds attributable to interest rate
changes are deferred in the IMR account. The IMR is recorded as a liability
and amortized into investment income over the approximate remaining
maturities of the bonds sold. This policy for recognition of such realized
gains and losses is prescribed by the NAIC in order to smooth the impact of
such activity on the Company's earned surplus. For GAAP purposes, there is
no such reserve.
37
<PAGE> 77
SENTRY LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
-------------------------------
F. ASSET VALUATION RESERVE (AVR)
The AVR mitigates fluctuations in the values of invested assets including
bonds, stocks, mortgage loans, real estate and other invested assets.
Changes in the AVR are included in policyholders' surplus. For GAAP
purposes, a writedown, for other than temporary declines in value, is
recognized as a realized loss on an individual asset basis.
G. REVENUE AND EXPENSE RECOGNITION
Premiums for traditional life insurance policies and limited-payment
contracts are taken into income when due. For investment contracts without
mortality risk (such as deferred annuities and immediate annuities with
benefits paid for a period certain) and contracts that permit the insured
to make changes in the contract terms (such as universal life products),
deposits are recorded as revenue when received. Under GAAP, deposits are
recorded as increases to liabilities and revenue is recognized as mortality
and other assessments are charged to policyholders.
As the Company has no direct employees and does not own equipment, it
utilizes services provided by employees and equipment of SIAMCO and
occupies space in SIAMCO's office building. Accordingly, the Company
participates in an expense allocation system with certain affiliated
companies. Expenses of the Company consist of direct charges incurred and
an allocation of expenses (principally salaries, salary-related items,
rent, and data processing services) between certain affiliated companies.
The Company recognized expenses of $29,212,951 and $31,900,482 for 1998 and
1997, respectively, under this allocation agreement.
H. ACQUISITION COSTS
Costs directly related to the acquisition of insurance premiums, such as
commissions and premium taxes, are charged to operations as incurred. Under
GAAP, such acquisition costs would be capitalized and amortized over the
policy periods.
I. FEDERAL INCOME TAX
The Company is included in the consolidated federal income tax return of
SIAMCO. Income taxes payable or recoverable are determined on a separate
return basis by the Company in accordance with a written tax allocation
agreement. Deferred federal income taxes are not provided for temporary
differences between tax and financial reporting as they would be under
GAAP. Additionally, federal income taxes are not provided for unrealized
gains (losses) on investments.
J. PENSION PLAN AND OTHER POSTRETIREMENT BENEFITS
The Company participates with SIAMCO and certain other affiliated companies
in a defined benefit pension plan which covers substantially all of their
employees. Generally, the companies' funding and accounting policies are to
make the maximum contribution required under applicable regulations and to
charge such contributions to expense in the year they are deductible for
tax purposes. GAAP periodic net pension expense is based on the cost of
incremental benefits for employee service during the period, interest on
the projected benefit obligation, actual return on plan assets and
amortization of actuarial gains and losses.
In addition to providing the pension benefits, the Company, with SIAMCO and
its affiliated subsidiaries, provides certain health care, dental and life
insurance benefits to retired employees and their dependents. Substantially
all of the employees may become eligible for those benefits if they reach
normal retirement age while working for the Companies. The expected costs
of providing those benefits to employees and the employees' beneficiaries
and covered dependents are accounted for on an accrual basis during the
years that employees render service in accordance with NAIC policy. SIAMCO
is amortizing its transition obligation, created upon the initial valuation
of postretirement benefits, over a period of twenty years and a portion of
the annual expense is allocated to the Company.
38
<PAGE> 78
SENTRY LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
---------------------------
(2) INVESTMENTS
The book value and estimated market value of bonds are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
BOOK UNREALIZED UNREALIZED MARKET
AT DECEMBER 31, 1998 VALUE GAINS LOSSES VALUE
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
US Treasury securities and
obligations of US Government
corporations and agencies $ 44,847,324 $ 3,875,945 0 $ 48,723,269
Obligations of states and
political subdivisions 441,814 92,159 0 533,973
Corporate securities 819,379,743 73,859,271 (3,201,476) 890,037,538
Mortgage-backed securities 253,522,988 14,734,376 (20,123) 268,237,241
-------------- -------------- -------------- --------------
Total $1,118,191,869 $ 92,561,751 $ (3,221,599) $1,207,532,021
============== ============== ============== ==============
<CAPTION>
GROSS GROSS ESTIMATED
BOOK UNREALIZED UNREALIZED MARKET
AT DECEMBER 31, 1997 VALUE GAINS LOSSES VALUE
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
US Treasury securities and
obligations of US Government
corporations and agencies $ 51,872,626 $ 3,446,572 $ (609) $ 55,318,589
Obligations of states and
political subdivisions 439,817 99,564 0 539,381
Corporate securities 757,760,027 60,329,883 (1,178,355) 816,911,555
Mortgage-backed securities 292,938,948 22,571,116 (553,953) 314,956,111
-------------- -------------- -------------- --------------
Total $1,103,011,418 $ 86,447,135 $ (1,732,917) $1,187,725,636
============== ============== ============== ==============
</TABLE>
Book value and estimated market value of bonds at December 31, 1998, by
contractual maturity, are shown below. Actual maturities may differ from
contractual maturities because certain issuers have the right to call or
prepay obligations with or without call or prepayment penalties. Because
most mortgage-backed securities provide for periodic payments throughout
their lives, they are listed below in a separate category.
<TABLE>
<CAPTION>
ESTIMATED
BOOK MARKET
VALUE VALUE
-------------- --------------
<S> <C> <C>
Due in one year or less $ 18,650,144 $ 19,101,785
Due after one year through five years 66,661,672 69,833,730
Due after five years through ten years 157,206,519 169,106,006
Due after ten years 622,150,546 681,253,259
-------------- --------------
Subtotal 864,668,881 939,294,780
Mortgage-backed securities 253,522,988 268,237,241
-------------- --------------
Total $1,118,191,869 $1,207,532,021
============== ==============
</TABLE>
39
<PAGE> 79
SENTRY LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
------------------------------
The bond portfolio distribution by quality rating (primarily Moody's) at
December 31, 1998 is summarized as follows:
<TABLE>
<S> <C>
Aaa 28.04%
Aa 5.35%
A 42.06%
Baa 22.98%
Ba & below and not rated 1.57%
------
100.00%
======
</TABLE>
Generally, bonds with ratings Baa and above are considered to be investment
grade.
Proceeds from sales of bonds during 1998 and 1997, including maturities and
calls, were $147,260,947 and $101,049,805, respectively. In 1998 and 1997,
respectively, gross gains of $3,633,126 and $1,525,602, and gross losses of
$508,150 and $652,460 were realized on these sales before transfer to the
IMR liability.
At December 31, 1998 and 1997, investments carried at $4,335,822 and
$4,384,747, respectively, were on deposit with various governmental
agencies as required by law.
(3) UNCONSOLIDATED SUBSIDIARIES
The Company wholly owed Sentry Life Insurance Company of New York (SLONY)
during 1998 and 1997. Condensed financial information regarding SLONY is
shown as follows:
<TABLE>
<CAPTION>
SLONY
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Investments $33,868,989 $35,406,623
Total assets 38,308,361 38,955,256
Policy reserves and benefits 19,401,383 19,699,749
Total liabilities 28,775,421 29,137,609
Statutory capital and surplus 9,532,940 9,817,647
Premium income 7,151,770 8,331,937
Net investment income 2,627,438 2,783,625
Benefits and expenses 8,687,989 9,917,561
Net income 659,539 764,439
</TABLE>
(4) NET INVESTMENT INCOME AND NET REALIZED AND UNREALIZED GAINS (LOSSES)
Sources of net investment income for 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Dividends received from affiliates $ 880,000 $ 750,000
Interest:
Bonds 89,112,233 87,232,271
Short-term investments 1,111,775 1,124,220
Other investments 1,676,371 1,763,787
Amortization of IMR 1,119,458 1,113,741
----------- -----------
Gross investment income 93,899,837 91,984,019
Investment expense 355,015 394,081
----------- -----------
Net investment income $93,544,822 $91,589,939
=========== ===========
</TABLE>
40
<PAGE> 80
SENTRY LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
---------------------------------
The components of net realized gains (losses) and changes in net unrealized
gains (losses) on investments which are reflected in the accompanying
statutory-basis financial statements are as follows:
<TABLE>
<CAPTION>
REALIZED UNREALIZED
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Common stock of unconsolidated -- -- $ (284,707) $ 217,147
subsidiary
Bonds 3,124,975 873,142 -- --
Capital gains tax (1,608,247) (577,663) -- --
----------- ----------- ----------- -----------
Pre-IMR capital gains, net of tax 1,516,728 295,479 (284,707) 217,147
IMR capital gains transferred
into the reserve net of taxes (2,031,234) (567,542) -- --
----------- ----------- ----------- -----------
$ (514,506) $ (272,063) $ (284,707) $ 217,147
=========== =========== =========== ===========
</TABLE>
(5) INCOME TAXES
Federal income tax expense in the statutory-basis statements of operations
differs from that computed based on the federal statutory corporate income
tax rate of 35%. The reasons for these differences are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Federal income tax calculated at statutory rate
of 35% of income before federal income taxes and
net realized gains on investments $ 4,877,721 $ 8,905,800
Accrual of bond discount (937,906) (633,561)
Adjustment for deferred acquisition costs (33,295) 12,178
Dividends received from subsidiaries (308,000) (262,500)
Different basis used to compute future policy benefits 2,678,735 1,720,817
Amortization of interest maintenance reserve (391,810) (389,809)
Other, net) (200,692) (175,588)
------------ ------------
Total $ 5,684,753 $ 9,177,337
============ ============
</TABLE>
Under pre-1984 life insurance company income tax laws, a portion of a life
insurance company's "gain from operations" was not subject to current
income taxation but was accumulated, for tax purposes, in a memorandum
account designated as the "policyholders' surplus account." The amounts
included in this account are includable in taxable income of later years at
rates then in effect if the life insurance company elects to distribute tax
basis policyholders' surplus to stockholders as dividends or takes certain
other actions. Any distributions are first made from another tax memorandum
account known as the "stockholders' surplus account." The accumulation in
the tax policyholders' surplus and stockholders' surplus accounts of the
Company were $5,605,476 and $84,735,704, respectively, at December 31,
1998.
Federal income tax returns of SIAMCO have been examined through 1994 and
the Company and the Internal Revenue Service have reached agreement on all
issues relating to 1994 and prior years. In the opinion of management, the
Company has adequately provided for the possible effect of future
assessments related to prior years.
(6) DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 (SFAS 107),
"Disclosures about Fair Values of Financial Instruments," requires
disclosure of fair value information about financial instruments, whether
or not recognized in the balance sheets, for which it is practicable to
estimate those values. SFAS 107 defines fair value of a financial
instrument as the amount at which that instrument could be exchanged in a
current transaction between willing parties, other than in a forced or
liquidated sale.
The fair values presented on the next page represent management's best
estimates and may not be substantiated by comparisons to independent
markets and, in many cases, could not be realized in immediate settlement
of the instruments. Certain financial instruments and all nonfinancial
instruments are exempt from the disclosure requirements of SFAS 107.
Financial instruments which are exempt include life policy benefits with
mortality or morbidity risk. Therefore, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
41
<PAGE> 81
SENTRY LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
-----------------------------
For cash and short-term investments and accrued investment income, the
carrying amount approximates fair value.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value:
BONDS
Estimated fair value is generally based on quotes provided by independent
pricing services. If a quoted market price is not available, fair value is
estimated by management based on the quoted market price of comparable
instruments.
POLICY LOANS
Policy loans have no stated maturity dates; therefore, no reasonable
estimate of fair value can be made. Interest rates range from 5 to 8
percent.
SEPARATE ACCOUNTS
The fair value of the assets held in separate accounts and offsetting
liabilities are estimated based on the fair value of the underlying assets.
AGGREGATE RESERVES FOR INVESTMENT-TYPE CONTRACTS
The fair value of investment-type insurance contracts is estimated by
reducing the policyholder liability for applicable surrender charges.
STRUCTURED SETTLEMENTS
The fair value of the liability for structured settlements is estimated by
discounting future cash flows using the current rates being offered for
similar settlements.
LIABILITY FOR PREMIUM AND OTHER DEPOSIT FUNDS
The fair value for contracts with stated maturities is estimated by
discounting future cash flows using current rates being offered for similar
contracts. For those contracts with no stated maturity, the fair value is
estimated by calculating the surrender value.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
STATEMENT ESTIMATED
AT DECEMBER 31, 1998 VALUE FAIR VALUE
-------------- --------------
<S> <C> <C>
Assets:
Bonds $1,118,191,869 $1,207,532,021
Assets held in separate accounts 604,877,464 604,877,464
Liabilities:
Aggregate reserves for
investment-type contracts 75,976,747 75,638,874
Structured settlements 53,328,059 63,023,295
Liability for premium and
other deposit funds 624,627,002 624,347,222
Liabilities related to
separate accounts 603,897,819 603,897,819
</TABLE>
42
<PAGE> 82
SENTRY LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
------------------
<TABLE>
<CAPTION>
STATEMENT ESTIMATED
AT DECEMBER 31, 1997 VALUE FAIR VALUE
-------------- --------------
<S> <C> <C>
Assets:
Bonds $1,103,011,148 $1,187,725,636
Assets held in separate accounts 533,613,785 533,613,785
Liabilities:
Aggregate reserves for
investment-type contracts 80,815,675 80,386,603
Structured settlements 52,717,040 59,537,099
Liability for premium and
other deposit funds 604,285,476 603,300,638
Liabilities related to
separate accounts 528,643,523 528,643,523
</TABLE>
(7) PENSION AND 401K PLANS AND OTHER POSTRETIREMENT BENEFITS
The Company participates with SIAMCO and certain other affiliated
companies in a defined benefit pension plan which covers substantially
all of their employees. The benefits are based on years of service, the
average of the three highest of the last fifteen years of an employee's
compensation and primary social security benefits, as defined in the
plan. The Company is not a separately assignable entity for purposes of
allocation of accumulated plan benefits or assets. The Company was
allocated pension expense by SIAMCO of approximately $0 and $283,000 in
1998 and 1997, respectively.
The Company participates with SIAMCO and its affiliated subsidiaries in
a qualified 401k Plan. Employees who meet certain eligibility
requirements may elect to participate in the Plan. Participants must
contribute at least one percent but no more than 16 percent of base
compensation. Highly compensated employees may contribute a maximum of
10 percent on a pre-tax basis. For non-highly compensated employees,
the entire 16% may be deposited on a pre-tax basis. The Company matches
up to 25% of employee contributions up to the first 6 percent of base
salary deposited by an employee. The Company may make additional annual
contributions to the Plan based on operating profit. The Company was
allocated approximately $429,000 and $260,000 by SIAMCO for 401k Plan
benefits in 1998 and 1997, respectively.
In addition to the above-mentioned benefits, the Company, with SIAMCO
and its affiliated subsidiaries, provides certain health care, dental
and life insurance benefits to retired employees and their covered
dependents. The retiree health care benefits allocated to the Company
by SIAMCO were approximately $470,000 for 1998 and $445,000 for 1997.
(8) REINSURANCE
The Company had entered into reinsurance contracts for participation in
reinsurance pools and surplus protection for its wholly-owned
subsidiaries. Assumed life in-force amounted to approximately 31% and
30% of total in-force (before ceded reinsurance) at December 31, 1998
and 1997, respectively.
The Company has entered into reinsurance ceded contracts to limit the
net loss potential arising from large risks. Generally, life benefits
in excess of $250,000 and all group health liabilities, except for
liabilities relating to SIAMCO's employee benefit plans, are ceded to
reinsurers. The group health liabilities are ceded to SIAMCO.
43
<PAGE> 83
SENTRY LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
------------------
The Company cedes insurance to other insurers under various contracts
which cover individual risks or entire classes of business. Although
the ceding of insurance does not discharge the Company from its primary
liability to policyholders in the event any reinsurer might be unable
to meet the obligations assumed under the reinsurance agreements, it is
the practice of insurers to reduce their balances for amounts ceded.
The amounts included in the accompanying statutory-basis financial
statements for reinsurance were as follows:
<TABLE>
<CAPTION>
1998
(000'S OMITTED)
---------------
AFFILIATED UNAFFILIATED
---------- ------------
ASSUMED CEDED ASSUMED CEDED
------- ----- ------- -----
<S> <C> <C> <C> <C>
Premiums $306 $28,380 $6,459 $3,563
Benefits 372 43,926 6,539 1,634
Commissions 10 11,083 (3) 477
Future Policy Benefits:
Life & Annuities 34 - 18 1,213
Accident & Health - 226,031 175 73
Intercompany Receivable - 333 - -
<CAPTION>
1997
(000'S OMITTED)
---------------
AFFILIATED UNAFFILIATED
---------- ------------
ASSUMED CEDED ASSUMED CEDED
------- ----- ------- -----
<S> <C> <C> <C> <C>
Premiums $306 $55,101 $6,628 $7,891
Benefits 8 59,973 6,602 4,437
Commissions 5 17,718 (2) 1,195
Future Policy Benefits:
Life & Annuities 34 - 19 1,347
Accident & Health - 232,386 291 159
Intercompany Receivable - 8,650 - -
</TABLE>
(9) COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are various legal actions and
proceedings pending against the Company. In the opinion of management
and legal counsel, the ultimate resolution of these matters will not
have a material adverse impact on the Company's statutory-basis
financial statements.
State guaranty funds can assess the Company for losses of insolvent or
rehabilitated companies. Mandatory assessments may be partially
recovered through a reduction in future premium taxes in some states.
The Company believes that its ultimate cost for these assessments is
not expected to have a material adverse effect on the financial
statements.
(10) OTHER RELATED PARTY TRANSACTIONS
The Company is the direct writer of certain employee benefit plans for
SIAMCO. Premiums included in the accompanying statutory-basis
statements of operations (net of ceded premiums) are approximately
$25,742,000 and $20,360,000 in 1998 and 1997, respectively.
The Company has provided coverage in the form of annuity contracts as
structured settlements for SIAMCO workers' compensation claims.
Reserves for future policy benefits at December 31, 1998 and 1997
included $53,328,059 and $52,717,040, respectively, relating to these
contracts.
Also, see Notes 7 and 8 for other related party transactions.
(11) WITHDRAWAL CHARACTERISTICS OF ANNUITY RESERVES AND DEPOSIT LIABILITIES
Annuity reserves and deposits of approximately $1,286.0 million and
$1,202.0 million in 1998 and 1997, respectively, are subject to
withdrawal at the discretion of the annuity contract holders.
Approximately 96% and 95%, respectively, carry surrender charges.
44
<PAGE> 84
SENTRY LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF ASSETS AND LIABILITIES
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1998
45
<PAGE> 85
SENTRY LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF ASSETS AND LIABILITIES
FOR THE YEAR ENDED DECEMBER 31, 1998
SCHEDULE 1 - SELECTED FINANCIAL DATA
The following is a summary of certain financial data included in other exhibits
and schedules subjected to audit procedures by independent auditors and utilized
by actuaries in the determination of reserves.
<TABLE>
<CAPTION>
Investment Income Earned:
<S> <C>
Government Bonds........................................................ $ 322,647
Other bonds (unaffiliated).............................................. 88,789,586
Common stocks of affiliates............................................. 880,000
Mortgage loans.......................................................... 4,509
Premium notes, policy loans and liens................................... 1,631,171
Short-term investments.................................................. 1,111,775
Aggregate write-ins for investment income............................... 40,691
--------------
Gross investment income.................................................. $ 92,780,379
==============
Mortgage Loans - Book Value:
Residential mortgages.................................................... $ 18,723
==============
Mortgage Loans By Standing - Book Value:
Good standing........................................................... $ 18,723
==============
Bonds and Stocks of Parents, Subsidiaries and Affiliates - Book Value:
Common stocks............................................................ $ 9,532,940
==============
Bonds and Short-Term Investments by Class and Maturity:
Bonds by Maturity - Statement Value
Due within one year or less............................................ $ 39,078,263
Over 1 year through 5 years............................................ 164,828,536
Over 5 years through 10 years.......................................... 263,873,963
Over 10 years through 20 years......................................... 310,147,916
Over 20 years.......................................................... 340,263,191
--------------
Total by Maturity....................................................... $1,118,191,869
==============
</TABLE>
46
<PAGE> 86
<TABLE>
<CAPTION>
Bonds by Class - Statement Value
<S> <C>
Class 1............................................................... $ 798,070,889
Class 2............................................................... 304,364,338
Class 3............................................................... 15,756,642
Class 4............................................................... 0
Class 5............................................................... 0
Class 6............................................................... 0
--------------
Total by Class......................................................... $1,118,191,869
==============
Total Bonds Publicly Traded............................................ $1,111,613,198
==============
Total Bonds Privately Placed........................................... $ 6,578,671
==============
Short-Term Investments - Book Value....................................... $ 29,877,016
==============
Cash on Deposit........................................................... $ 0
==============
Life Insurance In Force (000's omitted):
Ordinary............................................................... $ 4,684,362
==============
Group Life............................................................. $ 3,189,201
==============
Amount of Accidental Death Insurance In Force Under Ordinary
Policies (000's omitted).................................................. $ 116,889
==============
Life Insurance Policies with Disability Provisions In Force:
Ordinary............................................................... 21,189
==============
Group Life............................................................. 115
==============
Supplementary Contracts In Force:
Ordinary - Not Involving Life Contingencies
Amount on Deposit...................................................... $ 0
==============
Income Payable......................................................... $ 390,642
==============
Ordinary - Involving Life Contingencies
Income Payable......................................................... $ 195,275
==============
</TABLE>
47
<PAGE> 87
<TABLE>
<CAPTION>
Annuities:
Ordinary
<S> <C>
Immediate - Amount of Income Payable................................... $ 1,707,764
==============
Deferred - Fully paid account balance.................................. $ 20,071,365
==============
Deferred - Not fully paid account balance.............................. $ 89,150,724
==============
Group
Amount of income payable............................................... $ 5,081,573
==============
Fully paid account balance............................................. $ 9,507,969
==============
Not fully paid account balance......................................... $1,166,706,277
==============
Accident and Health Insurance - Premiums In Force:
Ordinary............................................................... $ 157,622
==============
Group.................................................................. $ 36,000,900
==============
Deposit Funds and Dividend Accumulations:
Dividend Accumulations - Account Balance............................... $ 349,083
==============
Claim Payments 1998:
Group Accident and Health Year - Ended December 31, 199X
1998................................................................... $ 2,665,883
==============
1997................................................................... $ 1,954,794
==============
1996................................................................... $ 1,606,833
==============
1995 & prior........................................................... $ 7,612,173
==============
Other Accident & Health
1998................................................................... $ 16,632
==============
1997................................................................... $ 33,798
==============
1996................................................................... $ 15,336
==============
1995 & prior........................................................... $ 89,013
==============
</TABLE>
48
<PAGE> 88
PART C
<PAGE> 89
PART C
OTHER INFORMATION
-----------------
ITEM 24 Financial Statements and Exhibits
(a) Financial Statements of Sentry Variable Account II
Included in Part A:
Condensed Financial Information
Included in Part B:
Statement of Assets and Liabilities, September 30, 1999
(Unaudited)
Statement of Operations and Change in Net Assets,
September, 30, 1999 (Unaudited)
Notes to Unaudited Financial Statements, September 30, 1999
and 1998
Report of Independent Accountant
Statement of Assets, Liabilities and Contract Owners'
Equity, December 31, 1998
Statements of Operations and changes in Contract Owners'
Equity for the years ended December 31, 1998 and 1997
Notes to Financial Statements, December 31, 1998 and 1997
Financial Statements of Sentry Life Insurance Company
Included in Part B
Statutory-Basis Balance Sheet, September 30, 1999 and 1998
(Unaudited)
Statutory-Basis Statement of Operations, September 30, 1999
and 1998 (Unaudited)
Statutory-Basis Statement of Changes in Capital Stock
and Surplus, September 30, 1999 and 1998 (Unaudited)
Statutory-Basis Statement of Cash Flow, September 30, 1999
and 1998 (Unaudited)
Report of Independent Accountant
Statutory-Basis Balance Sheets, December 31, 1998 and 1997
Statutory-Basis Statements of Operations for the years ended
December 31, 1998 and 1997
Statutory-Basis Statements of Changes in Capital Stock and
Surplus for the years ended December 31, 1998 and 1997
Statutory-Basis Statements of Cash Flow for the years ended
December 31, 1998 and 1997
Notes to Statutory-Basis Financial Statements
<PAGE> 90
ITEM 24
(b) Exhibits
(1) Resolutions of the Board of Directors of Sentry Life
Insurance Company*
(2) Not Applicable
(3)(i) Principal Underwriter Agreement*
(3)(ii) Registered Representatives Agreement*
(3)(iii) General Agent Agreement*
(4)(i) Individual Flexible Purchase Payment Deferred Variable
Annuity Contract**
(4)(ii) Contract Amendment pursuant to Tax Reform Act of 1984**
(5) Application Form
(6)(i) Articles of Incorporation of Sentry Life
Insurance Company*
(6)(ii) Bylaws*
(7) Not Applicable
(8)(i) Fund Participation Agreement with T. Rowe Price Fixed Income
Series, Inc. and T. Rowe Price Equity Series, Inc.
(8)(ii) Fund Participation Agreement with Janus Aspen Series
(9) Opinion and Consent of Counsel
(10) Consent of Independent Accountants
(11) Not Applicable
(12) Agreement Governing Contribution to Sentry Variable
Account II*
(13) Not applicable
* Exhibits (1), (3)(i), (3)(ii), (3)(iii), (6)(i), (6)(ii), and (12) are
incorporated herein by reference to such exhibits in Registrant's
(File Nos. 2087027 and 811-3875) Post-Effective Amendment No. 17 to
Form N-4 filed electronically on or about April 30, 1997.
** Exhibits 4(i) and 4(ii) are incorporated herein by reference to such
exhibits in Registrant's (File Nos. 2087027 and 811-3875)
Post-Effective Amendment No. 20 to Form N-4 filed electronically on or
about December 1, 1999.
ITEM 25 Directors and Officers of the Depositor
The following persons are the officers and directors of Sentry Life
Insurance Company. The principal business address for each director
and officer of the Depositor is 1800 North Point Drive, Stevens Point,
Wisconsin 54481.
Positions and Offices
Name With Depositor
---- ---------------------
Dale R. Schuh Director, Chairman of the Board and
President
Wallace D. Taylor Vice President
William M. O'Reilly Director and Secretary
William J. Lohr Director and Treasurer
Janet L. Fagan Director
James J. Weishan Director
<PAGE> 91
ITEM 26 Persons Controlled By or Under Common Control With Depositor
The following is a description of all persons who might be considered to be
directly or indirectly controlled by or under common control with the Depositor:
1. The Depositor, a Wisconsin corporation, is a wholly-owned subsidiary of
Sentry Insurance a Mutual Company ("Sentry Insurance"), a Wisconsin
corporation.
2. The following companies are also wholly-owned subsidiaries of Sentry
Insurance:
(a) Middlesex Insurance Company ("Middlesex"), a Wisconsin corporation;
(b) Dairyland Insurance Company ("Dairyland"), a Wisconsin corporation;
(c) Sentry Fund, Inc., a Maryland corporation;
(d) Parker Stevens Agency, Inc., a Wisconsin corporation;
(e) Parker Stevens Agency of Mass., Inc., a Massachusetts corporation;
(f) Sentry Investment Management, Inc., a Delaware corporation;
(g) Sentry Equity Services, Inc., a Delaware corporation;
(h) Sentry Services, Inc., a Wisconsin corporation;
(i) Sentry Aviation Services, Inc., a Wisconsin corporation; and
(j) WAULECO, Inc., a Wisconsin corporation.
3. Sentry Insurance is also affiliated with Sentry Insurance Foundation, Inc.,
a Wisconsin corporation.
4. Sentry Insurance is also affiliated with Sentry Lloyd's of Texas, a Texas
Lloyd's corporation.
5. Patriot General Insurance Company, a Wisconsin corporation, is a
wholly-owned subsidiary of Middlesex.
6. Sentry Life Insurance Company of New York, a New York corporation, is a
wholly-owned subsidiary of the Depositor.
7. Dairyland County Mutual Insurance Company of Texas, a Texas corporation, is
affiliated with Dairyland.
ITEM 27 Number of Contract Owners
As of December 1, 1999, there were 1,941 qualified contract owners and 558
non-qualified contract owners.
ITEM 28 Indemnification
Under the Bylaws of Sentry Life Insurance Company, each director and officer of
the Company shall be indemnified by the Company against all costs and expenses
actually and necessarily incurred by him or her in connection with the defense
of any action, suit or proceeding in which he or she is made a party by reason
of his or her being or having been a director or officer of the Company, whether
or not he or she continues to be a director or officer at the time of incurring
such costs or expense, except in relation to matters as to which he or she shall
be adjudged in such action, suit or proceeding to be liable for gross negligence
or willful misconduct in the performance of his or her duties as such director
or officer. This right of indemnification shall not be exclusive of other rights
to which any director or officer may be entitled as a matter of law or
agreement.
Sentry Equity Services, Inc., the principal underwriter, is a Delaware
corporation. The Delaware General Corporation Law, Section 145, provides for
indemnification of directors, officers, employees and agents as follows:
145 INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS -(a) A
corporation shall have power to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that the person is or
was a director, officer, employee or agent of the corporation, or is or
was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by the person in connection with such action,
<PAGE> 92
suit or proceeding if the person acted in good faith and in a manner
the person reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action
or proceeding, had no reasonable cause to believe the person's conduct
was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner
which the person reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal
action or proceeding, had reasonable cause to believe that the
person's conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that the person is or was a
director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture,
trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by the person in connection with the
defense or settlement of such action or suit if the person acted in
good faith and in a manner the person reasonably believed to be in or
not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter
as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery or
the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of
all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or
such other court shall deem proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense
of any action, suit or proceeding referred to in subsections (a) and
(b) of this section, or in defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper
in the circumstances because the person has met the applicable standard
of conduct set forth in subsections (a) and (b) of this section. Such
determination shall be made (1) by a majority vote of the directors who
are not parties to such action, suit or proceeding, even though less
than a quorum, or (2) if there are no such directors, or if such
directors so direct, by independent legal counsel in a written opinion,
or (3) by the stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or
investigative action, suit or proceeding may be paid by the corporation
in advance of the final disposition of such action, suit or proceeding
upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that
he is not entitled to be indemnified by the corporation as authorized
in this section. Such expenses (including attorneys' fees) incurred by
other employees and agents may be so paid upon such terms and
conditions, if any, as the board of directors deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be
deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action
in another capacity while holding such office.
<PAGE> 93
(g) A corporation shall have power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against him and incurred by him in any
such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such
liability under this section.
(h) For purposes of this section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors,
officers, and employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation,
or is or was serving at the request of such constituent corporation as
a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in
the same position under this section with respect to the resulting or
surviving corporation as he would have with respect to such constituent
corporation if its separate existence had continued.
(i) For purposes of this section, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on a person with respect to any
employee benefit plan; and references to "serving at the request of the
corporation" shall include any service as a director, officer, employee
or agent of the corporation which imposes duties on, or involves
services by, such director, officer, employee or agent with respect to
an employee benefit plan, its participants or beneficiaries; and a
person who acted in good faith and in a manner he reasonably believed
to be in the interest of the participants and beneficiaries of an
employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in
this section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be
director, officer, employee or agent and shall inure to the benefit of
the heirs, executors and administrators of such a person.
(k) The Court of Chancery is hereby vested with exclusive jurisdiction
to hear and determine all actions for advancement of expenses or
indemnification brought under this section or under any bylaw,
agreement, vote of stockholders or disinterested directors, or
otherwise. The Court of Chancery may summarily determine a
corporation's obligation to advance expenses (including attorneys'
fees).
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 officer or controlling person in connection with the
securities being registered) the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of whether such indemnification by it
is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
ITEM 29 Principal Underwriter
(a) Sentry Equity Services, Inc., the Principal Underwriter for the
Contracts, also acts as Principal Underwriter for:
Sentry Variable Account I
Sentry Variable Life Account I
Sentry Fund, Inc.
<PAGE> 94
(b) The following persons are the officers and directors of Sentry
Equity Services, Inc. The principal business address for each
director and officer of the Principal Underwriter is 1800 North
Point Drive, Stevens Point, Wisconsin 54481:
Positions and Offices
Name With Underwriter
---- ---------------------
Dale R. Schuh Director and Chairman of the Board
Susan M. DeBruin President
Glen E. Scott Jr. Vice President
William M. O'Reilly Director and Secretary
William J. Lohr Director and Treasurer
(c)
<TABLE>
<CAPTION>
Name of Net Underwriting
Principal Discounts & Compensation On Brokerage
Underwriter Commissions Redemption Commissions Compensation
- ----------- ----------------- ----------------- ----------- ------------
<S> <C> <C> <C> <C>
Sentry Equity
Services, Inc. $155,799 $ 0.00 $ 0.00 $392,706
</TABLE>
ITEM 30 Location of Accounts and Records
As required to be maintained by Section 31(a) of the
Investment Company Act of 1940 and the rules promulgated
thereunder, Sentry Equity Services, Inc. and Sentry Life
Insurance Company maintain physical possession of the
accounts, books or documents of the Separate Account at 1800
North Point Drive, Stevens Point, Wisconsin 54481.
ITEM 31 Management Services
Not Applicable.
ITEM 32 Undertakings
(a) Registrant hereby undertakes to file a Post-Effective
Amendment to this Registration Statement as
frequently as is necessary to ensure that the audited
financial statements in the Registration Statement
are never more than sixteen (16) months old for so
long as payments under the variable annuity contracts
may be accepted.
(b) Registrant hereby undertakes to include either: (1)
as part of any application to purchase a contract
offered by the Prospectus, a space that an applicant
can check to request a Statement of Additional
Information, or (2) a postcard or similar written
communication affixed to or included in the
Prospectus that the applicant can remove to send for
a Statement of Additional Information.
(c) Registrant hereby undertakes to deliver any Statement
of Additional Information and any financial statement
required to be made available under this Form
promptly upon written or oral request.
(d) Sentry Life Insurance Company ("Company") hereby
represents that the fees and charges deducted under
the Contracts described in the Prospectus, in the
aggregate, are reasonable in relation to the services
rendered, the expenses to be incurred and the risks
assumed by the Company.
<PAGE> 95
REPRESENTATIONS
The Registrant hereby represents that it is relying upon a No Action Letter
issued to the American Council of Life Insurance dated November 28, 1988
(Commission ref. IP-6-88), and that the following provisions have been complied
with:
1. Include appropriate disclosure regarding the redemption restrictions
imposed by Section 403(b)(11) in each Registration Statement, including
the Prospectus, used in connection with the offer of the contract;
2. Include appropriate disclosure regarding the redemption restrictions
imposed by Section 403(b)(11) in any sales literature used in
connection with the offer of the contract;
3. Instruct sales representatives who solicit participants to purchase the
contract specifically to bring the redemption restrictions imposed by
Section 403(b)(11) to the attention of the potential participants; and
4. Obtain from each plan participant who purchases a Section 403(b)
annuity contract, prior to or at the time of such purchase, a signed
statement acknowledging the participant's understanding of: (1) the
restrictions on redemption imposed by Section 403(b)(11), and (2) other
investment alternatives available under the employer's Section 403(b)
arrangement to which the participant may elect to transfer his or her
contract value.
<PAGE> 96
Signatures
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant certifies that it meets the requirements of Securities Act
Rule 485(b) for effectiveness of this Registration Statement and has caused this
Registration Statement to be signed on its behalf, in the City of Stevens Point,
State of Wisconsin, on the 27th day of December, 1999.
Sentry Variable Account II
Registrant
By: Sentry Life Insurance Company
By: s/ Dale R. Schuh
------------------------------------------
Dale R. Schuh, Chairman of the Board,
President and Director
Sentry Life Insurance Company
Depositor
By: s/ Dale R. Schuh
-----------------------------------------
Dale R. Schuh, Chairman of the Board,
President and Director
<PAGE> 97
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.
s/ Dale R. Schuh December 27, 1999
- ---------------------------------------
Dale R. Schuh, Chairman of the Board,
President and Director
s/ Wallace D. Taylor December 27, 1999
- ---------------------------------------
William M. O'Reilly, Secretary and
Director
s/ William M. O'Reilly December 27, 1999
- --------------------------------------
William M. O'Reilly, Secretary and
Director
s/William J. Lohr December 27, 1999
- --------------------------------------
William J. Lohr, Treasurer and
Director
s/ Janet L. Fagan December 27, 1999
- --------------------------------------
Janet L. Fagan, Director
s/ James J. Weishan December 27, 1999
- --------------------------------------
James J. Weishan, Director
<PAGE> 1
EXHIBIT 5
<PAGE> 2
[SENTRY LIFE INSURANCE COMPANY LOGO]
<TABLE>
<S><C>
VARIABLE ANNUITY APPLICATION
____________________________________________________________________________________________________________________________________
1. ANNUITANT
Name_________________________________________________________ Soc. Sec. No._______________________Date of Birth____________________
Address______________________________________________________ Telephone No.________________________________________________________
City________________________________State _______ Zip________ Sentry Employee? [ ] Yes [ ] No Male [ ]
Date Annuity Payments Begin ___________,_____________________ Spouse? [ ] Yes [ ] No Female [ ]
(Month) (Year)
____________________________________________________________________________________________________________________________________
2. CONTRACT OWNER (Complete only if different from Annuitant.) Date of Birth_________________________________________
Name_________________________________________________________________________ Soc. Sec. No._________________________________________
Address_________________________________________________________________________City________________________State________Zip________
Contingent Owner ___________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________________
3. BENEFICIARIES (Show full name[s], relationship[s] and percentage each is to receive.)
Primary Beneficiary__________________________________________________________ Relationship______________________________ _________%
Contingent Beneficiary_______________________________________________________ Relationship______________________________ _________%
____________________________________________________________________________________________________________________________________
4. PURCHASE PAYMENTS AND ALLOCATION T. Rowe Price Fixed Income Series, Inc.
Initial Purchase Payment.................. __________________ PRIME RESERVE PORTFOLIO....................________________%
Planned Subsequent Purchase Payments*....$___________________ LIMITED-TERM BOND PORTFOLIO................________________%
Bill Me: _____ Monthly _____ Qtrly _____ Annually T. Rowe Price Equity Series, Inc.
PERSONAL STRATEGY BALANCED PORTFOLIO......._________________%
*Subsequent payments will be allocated as shown unless Janus Aspen Series
otherwise directed. AGGRESSIVE GROWTH PORTFOLIO................_________________%
Total Allocation must equal 100 %
__________________________________________________________________________________________________________________________________
5. PLAN TYPE (CHECK AS MANY BOXES AS APPLY.) [ ] Qualified Plan
[ ] Non Qualified Plan [ ] Traditional IRA - Tax Contribution Year __________
[ ] 1035 Transfer (Non-Qualified only) [ ] Roth IRA - Tax Contribution Year _______
[ ] SEP IRA (Please attach form 5305-SEP)
Cost Basis of contract being replaced $ _________________ [ ] Rollover IRA
Original date of contract being replaced ________________ [ ] Transfer IRA (Complete Transfer Form)
____________________________________________________________________________________________________________________________________
6.A. Make Check Payable To: 6.B. TELEPHONE EXCHANGE PRIVILEGE
SENTRY LIFE INSURANCE COMPANY
Send Check With Application To: [ ] The undersigned Contract Owner hereby elects
ANNUITY SERVICE OFFICE the Telephone Exchange Privilege and agrees
P.O. Box 867 to the terms and conditions as described on
Stevens Point, WI 54481 the reverse side of this application.
____________________________________________________________________________________________________________________________________
7. SPECIAL REQUESTS
____________________________________________________________________________________________________________________________________
8. ANNUITANT REQUESTS STATEMENT OF ADDITIONAL INFORMATION. [ ] Yes [ ] No
____________________________________________________________________________________________________________________________________
9. IS THE ANNUITY APPLIED FOR INTENDED TO REPLACE OR CHANGE ANY EXISTING LIFE INSURANCE OR ANNUITY? [ ] Yes [ ] No
____________________________________________________________________________________________________________________________________
10. I (WE) ACKNOWLEDGE RECEIPT OF THE CURRENT PROSPECTUS OF SENTRY VARIABLE ACCOUNT II, T. ROWE PRICE FIXED INCOME SERIES, INC.,
T. ROWE PRICE EQUITY INCOME SERIES, INC., AND JANUS ASPEN SERIES. PAYMENTS AND VALUES PROVIDED BY THE CONTRACT FOR WHICH APPLICATION
IS MADE ARE VARIABLE AND ARE NOT GUARANTEED AS TO DOLLAR AMOUNT. I (WE) CERTIFY UNDER PENALTIES OF PERJURY THAT THE ABOVE SOCIAL
SECURITY NUMBER IS CORRECT.
This application has been signed in________________________________________________________________, ______________________________
City State
on_____________________________________________ month____________________________________________________day __________________ year
Signature Signature of
of Annuitant________________________________________________________ Owner__________________________________________________________
(Owner unless otherwise indicated) (If other than Annuitant)
____________________________________________________________________________________________________________________________________
11. AGENT'S REPORT
Will the annuity replace an existing life insurance If Yes, indicate type of contract: [ ] Life Insurance
or annuity contract? [ ] Yes [ ] No (Submit any required replacement forms.) [ ] Annuity
Signature of Agent_________________________________________________ Phone Number (______)__________________________________________
Print Agent Name _________________________________________________ Sales Code ____________________________________________________
Name of Broker Dealer_____________________________________________________Address___________________________________________________
City____________________________________________________________________________State __________________________ Zip________________
____________________________________________________________________________________________________________________________________
32-103 (D) Sentry Life Insurance Company - Stevens Point, Wisconsin 1-00
</TABLE>
<PAGE> 3
TELEPHONE EXCHANGE PRIVILEGE
The Contract Owner hereby authorizes Sentry Life Insurance Company to honor
telephone instructions to effect a transfer of all or part of the Contract
Values between Eligible Mutual Fund(s) or Portfolio(s) of the Contract, subject
to the minimums stated in the contract provisions.
The Company will employ reasonable procedures to confirm that telephone transfer
requests are legitimate. The Company will not be liable for complying with
telephone transfer request it believes to be legitimate and for which it
followed reasonable procedures to ensure legitimacy. Sentry Life Insurance
Company reserves the right to reject any telephone instruction. The Contract
Owner understands and agrees that this exchange privilege is for the convenience
of the Contract Owner and may be suspended or revoked for any reason at anytime
without prior notice.
INSTRUCTIONS FOR TELEPHONE EXCHANGES
When you wish to effect an exchange in your account, telephone the Annuity
Service Office toll free at 1 (800) 533-7827. Be prepared to state the name of
the account, your account number and your social security number.
If your telephone call is received on any business day BEFORE 3:00 P.M. CENTRAL
TIME, the exchange of accumulation units will be made on the basis of the
Valuation Period as of the close of that same day. If your telephone call is
received AFTER 3:00 P.M. CENTRAL TIME, the exchange of accumulation units will
be made on the basis of the Valuation Period NEXT FOLLOWING the day your
telephone call was received.
<PAGE> 1
EXHIBIT 8(i)
<PAGE> 2
PARTICIPATION AGREEMENT
Among
T. ROWE PRICE EQUITY SERIES, INC.,
T. ROWE PRICE FIXED INCOME SERIES, INC.,
T. ROWE PRICE INTERNATIONAL SERIES, INC.,
T. ROWE PRICE INVESTMENT SERVICES, INC.,
and
SENTRY LIFE INSURANCE COMPANY
THIS AGREEMENT, made and entered into as of this 1st day of June, 1999 by
and among Sentry Life Insurance Company (hereinafter, the "Company"), a
Wisconsin insurance company, on its own behalf and on behalf of each segregated
asset account of the Company set forth on Schedule A hereto as may be amended
from time to time (each account hereinafter referred to as the "Account"), and
the undersigned funds, each, a corporation organized under the laws of Maryland
(each hereinafter referred to as the "Fund") and T. Rowe Price Investment
Services, Inc. (hereinafter the "Underwriter"), a Maryland corporation.
WHEREAS, the Fund engages in business as an open-end management investment
company and is or will be available to act as the investment vehicle for
separate accounts established for variable life insurance and variable annuity
contracts (the "Variable Insurance Products") to be offered by insurance
companies which have entered into participation agreements with the Fund and
Underwriter (hereinafter "Participating Insurance Companies"); and
WHEREAS, the beneficial interest in the Fund is divided into several series
of shares, each designated a "Portfolio" and representing the interest in a
particular managed portfolio of securities and other assets; and
WHEREAS, the Fund has obtained an order from the Securities and Exchange
Commission ("SEC") granting Participating Insurance Companies and variable
annuity and variable life insurance separate accounts exemptions from the
provisions of sections 9(a), 13(a), 15(a), and 15(b) of the Investment Company
Act of 1940, as amended, (hereinafter the "1940 Act") and Rules 6e-2(b)(15) and
6e-3(T) (b)(15) thereunder, to the extent necessary to permit shares of the Fund
to be sold to and held by variable annuity and variable life insurance separate
accounts of both affiliated and unaffiliated life insurance companies
(hereinafter the "Shared Funding Exemptive Order"); and
<PAGE> 3
2
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and shares of the Portfolios are registered under the
Securities Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, T. Rowe Price Associates, Inc. and Rowe Price-Fleming
International, Inc. (each hereinafter referred to as the "Adviser") are each
duly registered as an investment adviser under the Investment Advisers Act of
1940, as amended, and any applicable state securities laws; and
WHEREAS, the Company has registered certain variable life insurance or
variable annuity contracts supported wholly or partially by the Account (the
"Contracts") under the 1933 Act, and said Contracts are listed in Schedule A
hereto, as it may be amended from time to time by mutual written agreement; and
WHEREAS, the Account is duly established and maintained as a segregated
asset account, established by resolution of the Board of Directors of the
Company, on the date shown for such Account on Schedule A hereto, to set aside
and invest assets attributable to the aforesaid Contracts; and
WHEREAS, the Company has registered the Account as a unit investment trust
under the 1940 Act; and
WHEREAS, the Underwriter is registered as a broker dealer with the SEC
under the Securities Exchange Act of 1934, as amended (hereinafter the "1934
Act"), and is a member in good standing of the National Association of
Securities Dealers, Inc. (hereinafter "NASD"); and
WHEREAS, said Accounts presently utilize as their investment vehicle
another investment company (the "Predecessor Investment Company"), but the
Company has indicated its intention to secure necessary regulatory approvals to
terminate the agreement with the Predecessor Investment Company; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios listed in
Schedule A hereto, as it may be amended from time to time by mutual written
agreement (the "Designated Portfolios") on behalf of the Account to fund the
aforesaid Contracts upon completion of the termination of the present agreement
with the Predecessor Investment Company, and the Underwriter is authorized to
sell such shares to unit investment trusts such as the Account at net asset
value;
NOW, THEREFORE, in consideration of their mutual promises, the Company, the
Fund and the Underwriter agree as follows upon completion of the termination of
the present agreement with the Predecessor Investment Company:
ARTICLE I. Sale of Fund Shares
1.1 The Underwriter agrees to sell to the Company those shares of the
Designated Portfolios which the Account orders, executing such orders on a daily
basis at the net asset value
<PAGE> 4
3
next computed after receipt by the Fund or its designee of the order for the
shares of the Designated Portfolios.
1.2 The Fund agrees to make shares of the Designated Portfolios
available for purchase at the applicable net asset value per share by the
Company and the Account on those days on which the Fund calculates its net asset
value pursuant to rules of the SEC, and the Fund shall use its best efforts to
calculate such net asset value on each day which the New York Stock Exchange is
open for trading. Notwithstanding the foregoing, the Board of Directors of the
Fund (hereinafter the "Board") may refuse to sell shares of any Designated
Portfolio to any person, or suspend or terminate the offering of shares of any
Designated Portfolio if such action is required by law or by regulatory
authorities having jurisdiction, or is, in the sole discretion of the Board
acting in good faith and in light of their fiduciary duties under federal and
any applicable state laws, necessary in the best interests of the shareholders
of such Designated Portfolio.
1.3 The Fund and the Underwriter agree that shares of the Fund will be
sold only to Participating Insurance Companies and their separate accounts. No
shares of any Designated Portfolios will be sold to the general public. The Fund
and the Underwriter will not sell Fund shares to any insurance company or
separate account unless an agreement containing provisions substantially the
same as Articles I, III and VII of this Agreement is in effect to govern such
sales.
1.4 The Fund agrees to redeem, on the Company's request, any full or
fractional shares of the Designated Portfolios held by the Company, executing
such requests on a daily basis at the net asset value next computed after
receipt by the Fund or its designee of the request for redemption, except that
the Fund reserves the right to suspend the right of redemption or postpone the
date of payment or satisfaction upon redemption consistent with Section 22(e) of
the 1940 Act and any sales thereunder, and in accordance with the procedures and
policies of the Fund as described in the then current prospectus.
1.5 For purposes of Sections 1.1 and 1.4, the Company shall be the
designee of the Fund for receipt of purchase and redemption orders from the
Account, and receipt by such designee shall constitute receipt by the Fund;
provided that the Company receives the order by 4:00 p.m. Baltimore time and the
Fund receives notice of such order by 9:30 a.m. Baltimore time on the next
following Business Day. "Business Day" shall mean any day on which the New York
Stock Exchange is open for trading and on which the Fund calculates its net
asset value pursuant to the rules of the SEC.
1.6 The Company agrees to purchase and redeem the shares of each
Designated Portfolio offered by the then current prospectus of the Fund and in
accordance with the provisions of such prospectus.
1.7 The Company shall pay for Fund shares one Business Day after receipt
of an order to purchase Fund shares is made in accordance with the provisions of
Section 1.5 hereof Payment shall be in federal funds transmitted by wire by 3:00
p.m. Baltimore time. If payment in Federal Funds for any purchase is not
received or is received by the Fund after 3:00 p.m. Baltimore time on such
Business Day, the Company shall promptly, upon the Fund's request,
<PAGE> 5
4
reimburse the Fund for any charges, costs, fees, interest or other expenses
incurred by the Fund in connection with any advances to, or borrowings or
overdrafts by, the Fund, or any similar expenses incurred by the Fund, as a
result of portfolio transactions effected by the Fund based upon such purchase
request. For purposes of Section 2.8 and 2.9 hereof, upon receipt by the Fund of
the federal funds so wired, such funds shall cease to be the responsibility of
the Company and shall become the responsibility of the Fund.
1.8 Issuance and transfer of the Fund's shares will be by book entry
only. Stock certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for each
Account or the appropriate subaccount of each Account.
1.9 The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Company of any income, dividends or
capital gain distributions payable on the Designated Portfolios' shares. The
Company hereby elects to receive all such income, dividends, and capital gain
distributions as are payable on Designated Portfolio shares in additional shares
of that Portfolio. The Company reserves the right to revoke this election and to
receive all such income dividends and capital gain distributions in cash. The
Fund shall notify the Company of the number of shares so issued as payment of
such dividends and distributions.
1.10 The Fund shall make the net asset value per share for each
Designated Portfolio available to the Company on a daily basis as soon as
reasonably practical after the net asset value per share is calculated (normally
by 6:30 p.m. Baltimore time) and shall use its best efforts to make such net
asset value per share available by 7 p.m. Baltimore time. If the net asset value
is materially incorrect through no fault of the Company, the Company on behalf
of each Account, shall be entitled to an adjustment to the number of shares
purchased or redeemed to reflect the correct net asset value in accordance with
Fund procedures. Any material error in the net asset value shall be reported to
the Company promptly upon discovery. Any administrative or other costs or losses
incurred for correcting underlying Contract owner accounts shall be at Company's
expense.
1.11 The Parties hereto acknowledge that the arrangement contemplated by
this Agreement is not exclusive; the Fund's shares may be sold to other
insurance companies (subject to Section 1.3 and Article VI hereof) and the cash
value of the Contracts may be invested in other investment companies.
ARTICLE II. Representations and Warranties
2.1 The Company represents and warrants that the Contracts are or will
be registered under the 1933 Act; that the Contracts will be issued and sold in
compliance in all material respects with all applicable federal and state laws,
and that the sale of the Contracts shall comply in all material respects with
state insurance suitability requirements. The Company further represents and
warrants that it is an insurance company duly organized and in good standing
under applicable law and that it has legally and validly established the Account
prior to any issuance or sale thereof as a segregated asset account under the
Wisconsin insurance laws and has registered or, prior to any issuance or sale of
the Contracts, will register the Account as a
<PAGE> 6
5
unit investment trust in accordance with the provisions of the 1940 Act to serve
as a segregated investment account for the Contracts.
2.2 The Fund represents and warrants that Fund shares sold pursuant to
this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the state of Wisconsin and all
applicable federal and state securities laws and that the Fund is and shall
remain registered under the 1940 Act. The Fund shall amend the Registration
Statement for its shares under the 1933 Act and the 1940 Act from time to time
as required in order to effect the continuous offering of its shares. The Fund
shall register and qualify the shares for sale in accordance with the laws of
the various states only if and to the extent deemed advisable by the Fund or the
Underwriter.
2.3 The Fund currently does not intend to make any payments to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act, although it may
make such payments in the future. To the extent that it decides to finance
distribution expenses pursuant to Rule 12b-1, the Fund will undertake to have
the Board, a majority of whom are not interested persons of the Fund, formulate
and approve any plan pursuant to Rule 12b-1 under the 1940 Act to finance
distribution expenses.
2.4 The Fund makes no representations as to whether any aspect of its
operations, including but not limited to, investment policies, fees and
expenses, complies with the insurance and other applicable laws of the various
states, except that the Fund represents that the Fund's investment policies,
fees and expenses are and shall at all times remain in compliance with the laws
of the state of Wisconsin to the extent required to perform this Agreement.
2.5 The Fund represents that it is lawfully organized and validly
existing under the laws of the State of Maryland and that it does and will
comply in all material respects with the 1940 Act.
2.6 The Underwriter represents and warrants that it is a member in good
standing of the NASD and is registered as a broker-dealer with the SEC. The
Underwriter further represents that it will sell and distribute the Fund shares
in accordance with the laws of the State of Wisconsin and any applicable state
and federal securities laws.
2.7 The Underwriter represents and warrants that the Adviser is and
shall remain duly registered under all applicable federal and state securities
laws and that the Adviser shall perform its obligations for the Fund in
compliance in all material respects with the laws of the State of Wisconsin and
any applicable state and federal securities laws.
2.8 The Fund and the Underwriter represent and warrant that all of their
directors, officers, employees, investment advisers, and other individuals or
entities dealing with the money and/or securities of the Fund are and shall
continue to be at all times covered by a blanket fidelity bond or similar
coverage for the benefit of the Fund in an amount not less than the minimum
coverage as required currently by Rule 17g-1 of the 1940 Act or related
provisions as may be promulgated from time to time. The aforesaid bond shall
include coverage for larceny and embezzlement and shall be issued by a reputable
bonding company.
<PAGE> 7
6
2.9 The Company represents and warrants that all of its directors,
officers, employees, and other individuals/entities employed or controlled by
the Company dealing with the money and/or securities of the Fund are covered by
a blanket fidelity bond or similar coverage in an amount not less than $5
million. The aforesaid bond includes coverage for larceny and embezzlement and
is issued by a reputable bonding company. The Company agrees that any amounts
received under such bond in connection with claims that arise from the
arrangements described in this Agreement will be held by the Company for the
benefit of the Fund. The Company agrees to make all reasonable efforts to see
that this bond or another bond containing these provisions is always in effect,
and agrees to notify the Fund and the Underwriter in the event that such
coverage no longer applies. The Company agrees to exercise its best efforts to
ensure that other individuals/entities not employed or controlled by the Company
and dealing with the money and/or securities of the Fund maintain a similar bond
or coverage in a reasonable amount.
ARTICLE III. Prospectuses, Statements of Additional Information, and Proxy
Statements; Voting
3.1 The Underwriter shall provide the Company (at the Company's
expense) with as many copies of the Fund's current prospectus (describing only
the Designated Portfolios listed on Schedule A) as the Company may reasonably
request. If requested by the Company in lieu thereof, the Fund shall provide
such documentation (including a final copy of the new prospectus as set in type
or on a diskette, at the Fund's expense) and other assistance as is reasonably
necessary in order for the Company (at the Company's expense) once each year (or
more frequently if the prospectus for the Fund is amended) to have the
prospectus for the Contracts and the Fund's prospectus printed together in one
document (such printing to be at the Company's expense).
3.2 The Fund's prospectus shall state that the current Statement of
Additional Information ("SAI") for the Fund is available from the Company (or,
in the fund's discretion, from the Fund), and the underwriter (or the fund), at
its expense, shall print, or otherwise reproduce, and provide sufficient copies
of such SAI free of charge to the Company for itself, and for any owner of a
Contract who requests such SAI. The Company shall send an SAI to any such
Contract owner within 3 business days of the receipt of a request,
3.3 The Fund, at its expense, shall provide the Company with copies of
its proxy material, reports to shareholders, and other communications to
shareholders in such quantity as the Company shall reasonably require for
distributing to Contract owners in the Fund. The Underwriter (at the Company's
expense) shall provide the Company with copies of the Fund's annual and
semi-annual reports to shareholders in such quantity as the Company shall
reasonably request for use in connection with offering the Variable Contracts
issued by the Company. If requested by the Company in lieu thereof, the
Underwriter shall provide such documentation (which may include a final copy of
the Fund's annual and semi-annual reports as set in type or on diskette) and
other assistance as is reasonably necessary in order for the Company (at the
Company's expense) to print such shareholder communications for distribution to
Contract owners. The Company shall send a copy of the Fund's annual or
semi-annual report within 3 business days of the receipt of a request by a
Contract owner.
<PAGE> 8
7
3.4 The Company shall:
(i) solicit voting instructions from Contract owners;
(ii) vote the Fund shares in accordance with instructions
received from Contract owners; and
(iii) vote Fund shares for which no instructions have been
received in the same proportion as Fund shares of such
Designated Portfolio for which instructions have been
received,
so long as and to the extent that the SEC continues to interpret the 1940 Act to
require passthrough voting privileges for variable contract owners or to the
extent otherwise required by law. The Company reserves the right to vote Fund
shares held in any segregated asset account in its own right, to the extent
permitted by law.
3.5 Participating Insurance Companies shall be responsible for assuring
that each of their separate accounts participating in a Designated Portfolio
calculates voting privileges as required by the Shared Funding Exemptive Order
and consistent with any reasonable standards that the Fund may adopt.
3.6 The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, and in particular the Fund will either provide for
annual meetings or comply with Section 16(c) of the 1940 Act (although the Fund
is not one of the trusts described in Section 16(c) of that Act) as well as with
Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will act in
accordance with the SEC's interpretation of the requirements of Section 16(a)
with respect to periodic elections of directors or trustees and with whatever
rules the SEC may promulgate with respect thereto.
ARTICLE IV. Sales Material and Information
4.1 The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee, each piece of sales literature or other promotional
material that the Company develops or uses and in which the Fund (or a Portfolio
thereof) or the Adviser or the Underwriter is named, at least ten calendar days
prior to its use. No such material shall be used if the Fund or its designee
reasonably object to such use within ten calendar days after receipt of such
material. The Fund or its designee reserves the right to reasonably object to
the continued use of such material, and no such material shall be used if the
Fund or its designee so object.
4.2 The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or prospectus or SAI for
the Fund shares, as such registration statement and Prospectus or SAI may be
amended or supplemented from time to time, or in reports or proxy statements for
the Fund, or in sales literature or other promotional material approved by the
Fund or its designee or by the Underwriter, except with the permission of the
Fund or the Underwriter or the designee of either.
<PAGE> 9
8
4.3 The Fund, Underwriter, or its designee shall furnish, or shall
cause to be furnished, to the Company, each piece of sales literature or other
promotional material in which the Company, and/or its Account, is named at
least ten calendar days prior to its use. No such material shall be used if the
Company reasonably objects to such use within ten calendar days after receipt of
such material. The Company reserves the right to reasonably object to the
continued use of such material and no such material shall be used if the Company
so objects.
4.4. The Fund and the Underwriter shall not give any information or make
any representations on behalf of the Company or concerning the Company, the
Account, or the Contracts other than the information or representations
contained in a registration statement, prospectus, or SAI for the Contracts, as
such registration statement, prospectus or SAI may be amended or supplemented
from time to time, or in published reports for the Account which are in the
public domain or approved by the Company for distribution to Contract owners, or
in sales literature or other promotional material approved by the Company or its
designee, except with the permission of the Company
4.5 The Fund will provide to the Company at least one complete copy of
all registration statements, prospectuses, SAIs, reports, proxy statements,
sales literature and other promotional materials, applications for exemptions,
requests for no-action letters, and all amendments to any of the above, that
relate to the Fund or its shares, within a reasonable time after the filing of
such document(s) with the SEC or other regulatory authorities.
4.6 The Company will provide to the Fund at least one complete copy of
all registration statements, prospectuses, SAIs, reports, solicitations for
voting instructions, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Contracts or the Account, within a
reasonable time after the filing of such document(s) with the SEC or other
regulatory authorities.
4.7 For purposes of this Article IV, the phrase "sales literature and
other promotional materials" includes, but is not limited to, any of the
following that refer to the Fund or any affiliate of the Fund: advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media), sales
literature (i.e., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, reports,
market letters, form letters, seminar texts, reprints or excerpts of any other
advertisement, sales literature, or published article), educational or training
materials or other communications distributed or made generally available to
some or all agents or employees, and registration statements, prospectuses,
SAIs, shareholder reports, proxy materials, and any other communications
distributed or made generally available with regard to the Funds.
ARTICLE V. Fees and Expenses
5.1 The Fund and the Underwriter shall pay no fee or other compensation
to the Company under this Agreement, except that if the Fund or any Portfolio
adopts and implements
<PAGE> 10
9
a plan pursuant to Rule 12b-1 to finance distribution expenses, then the
Underwriter may make payments to the Company or to the underwriter for the
Contracts if and in amounts agreed to by the Underwriter in writing, and such
payments will be made out of existing fees otherwise payable to the Underwriter,
past profits of the Underwriter, or other resources available to the
Underwriter. No such payments shall be made directly by the Fund. Currently, no
such payments are contemplated
5.2 All expenses incident to performance by the Fund under this
Agreement shall be paid by the Fund, except as otherwise provided herein. The
Fund shall see to it that all its shares are registered and authorized for
issuance in accordance with applicable federal law and, if and to the extent
deemed advisable by the Fund, in accordance with applicable state laws prior to
their sale. The Fund shall bear the expenses for the cost of registration and
qualification of the Fund's shares, preparation and filing of the Fund's
prospectus and registration statement, proxy materials and reports, setting the
prospectus in type, setting in type and printing the proxy materials and reports
to shareholders (including the costs of printing a prospectus that constitutes
an annual report), the preparation of all statements and notices required by any
federal or state law, and all taxes on the issuance or transfer of the Fund's
shares.
5.3 The Company shall bear the expenses of printing the Fund's
prospectus (in accordance with 3.1) and of distributing the Fund's prospectus,
proxy materials, and reports to Contract owners and prospective Contract owners.
ARTICLE VI. Diversification and Qualification
6.1 The Fund will invest the assets of each Designated Portfolio in
such a manner as to ensure that the Contracts will be treated as annuity,
endowment, or life insurance contracts, whichever is appropriate, under the
Internal Revenue Code of 1986, as amended (the "Code") and the regulations
issued thereunder (or any successor provisions). Without limiting the scope of
the foregoing, each Designated Portfolio of the Fund will comply with Section
817(h) of the Code and Treasury Regulation ss. 1.817-5, and any Treasury
interpretations thereof, relating to the diversification requirements for
variable annuity, endowment, or life insurance contracts, and any amendments or
other modifications or successor provisions to such Section or Regulations. In
the event of a breach of this Article VI by the Fund, it will take all
reasonable steps (a) to notify the Company of such breach and (b) to adequately
diversify the Fund so as to achieve compliance within the grace period afforded
by Regulation 817.5.
6.2 The Fund represents that each Designated Portfolio is or will be
qualified as a Regulated Investment Company under Subchapter M of the Code, and
that it will make every effort to maintain such qualification (under Subchapter
M or any successor or similar provisions) and that it will notify the Company
immediately upon having a reasonable basis for believing that it has ceased to
so qualify or that it might not so qualify in the future
6.3 The Company represents that the Contracts are currently, and at the
time of issuance shall be, treated as life insurance, endowment contracts, or
annuity insurance contracts, under applicable provisions of the Code, and that
it will make every effort to maintain such treatment, and that it will notify
the Fund and the Underwriter immediately upon having a reasonable basis for
believing the Contracts have ceased to be so treated or that they might not
<PAGE> 11
10
be so treated in the future. The Company agrees that any prospectus offering a
contract that is a "modified endowment contract" as that term is defined in
Section 7702A of the Code (or any successor or similar provision), shall
identify such contract as a modified endowment contract.
ARTICLE VII. Potential Conflicts
7.1 The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict may
arise for a variety of reasons, including: (a) an action by any state insurance
regulatory authority, (b) a change in applicable federal or state insurance,
tax, or securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretative letter, or any similar action by insurance,
tax, or securities regulatory authorities; (c) an administrative or judicial
decision in any relevant proceeding; (d) the manner in which the investments of
any Portfolio are being managed; (e) a difference in voting instructions given
by variable annuity contract and variable life insurance contract owners; or (f)
a decision by an insurer to disregard the voting instructions of contract
owners. The Board shall promptly inform the Company if it determines that an
irreconcilable material conflict exists and the implications thereof.
7.2 The Company will report any potential or existing conflicts of
which it is aware to the Board. The Company will assist the Board in carrying
out its responsibilities under the Shared Funding Exemptive Order, by providing
the Board with all information reasonably necessary for the Board to consider
any issues raised. This includes, but is not limited to, an obligation by the
Company to inform the Board whenever Contract owner voting instructions are
disregarded
7.3 If it is determined by a majority of the Board, or a majority of
its disinterested members, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense and
to the extent reasonably practicable (as determined by a majority of the
disinterested Board members), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1),
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a vote
of all affected contract owners and, as appropriate, segregating the assets of
any appropriate group (i.e., annuity contract owners, life insurance contract
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
contract owners the option of making such a change; and (2), establishing a new
registered management investment company or managed separate account.
7.4 If a material irreconcilable conflict arises because of a decision
by the Company to disregard contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's
investment in the Fund and terminate this Agreement with respect to such Account
provided, however, that such withdrawal and termination shall be limited to the
extent required by the foregoing material irreconcilable conflict as determined
by a
<PAGE> 12
11
majority of the disinterested members of the Board. Any such withdrawal and
termination must take place within six (6) months after the Fund gives written
notice that this provision is being implemented, and until the end of that six
month period the Fund shall continue to accept and implement orders by the
Company for the purchase (and redemption) of shares of the Fund.
7.5 If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's investment in the Fund and terminate this Agreement with
respect to such Account within six months after the Board informs the Company in
writing that it has determined that such decision has created an irreconcilable
material conflict-, provided, however, that such withdrawal and termination
shall be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested members of the Board.
Until the end of the foregoing six month period, the Fund shall continue to
accept and implement orders by the company for the purchase (and redemption) of
shares of the Fund.
7.6 For purposes of Section 7.3 through 7.6 of this Agreement, a
majority of the disinterested members of the Board shall determine whether any
proposed action adequately remedies any irreconcilable material conflict, but in
no event will the Fund be required to establish a new funding medium for the
Contracts. The Company shall not be required by Section 7.3 to establish a new
funding medium for the Contract if an offer to do so has been declined by vote
of a majority of Contract owners materially adversely affected by the
irreconcilable material conflict. In the event that the Board determines that
any proposed action does not adequately remedy any irreconcilable material
conflict, then the Company will withdraw the Account's investment in the Fund
and terminate this Agreement within six (6) months after the Board informs the
Company in writing of the foregoing determination; provided, however, that such
withdrawal and termination shall be limited to the extent required by any such
material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
7.7 If and to the extent Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940
Act or the rules promulgated thereunder with respect to mixed or shared funding
(as defined in the Shared Funding Exemptive Order) on terms and conditions
materially different from those contained in the Shared Funding Exemptive Order,
then (a) the Fund and/or the Participating Insurance Companies, as appropriate,
shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T),
as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable;
and (b) Sections 3.4, 3.5, 3.6, 7.1., 7.2, 7.3, 7.4, and 7.5 of this Agreement
shall continue in effect only to the extent that terms and conditions
substantially identical to such Sections are contained in such Rule(s) as so
amended or adopted.
ARTICLE VIII. Indemnification
8.1 Indemnification By the Company
8.1(a). The Company agrees to indemnify and hold harmless the Fund
and the Underwriter and each of their officers and directors and each person, if
any, who controls the
<PAGE> 13
12
Fund or the Underwriter within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.1)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Company) or litigation (including
legal and other expenses), to which the Indemnified Parties may become subject
under any statute or regulation, at common law or otherwise, insofar as such
losses, claims, damages, liabilities or expenses (or actions in respect thereof)
or settlements are related to the sale or acquisition of the Fund's shares or
the Contracts and:
(i) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in
the Registration Statement, prospectus, or statement of
additional information ("SAI") for the Contracts or
contained in the Contracts or sales literature or other
promotional material for the Contracts (or any amendment or
supplement to any of the foregoing), or arise out of or are
based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or
necessary to make the statements therein not misleading,
provided that this agreement to indemnify shall not apply as
to any Indemnified Party if such statement or omission or
such alleged statement or omission was made in reliance upon
and in conformity with information furnished to the Company
by or on behalf of the Fund for use in the Registration
Statement, prospectus or SAI for the Contracts or in the
Contracts or sales literature or other promotional material
(or any amendment or supplement) or otherwise for use in
connection with the sale of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
Registration Statement, prospectus or sales literature or
other promotional material of the Fund not supplied by the
Company or persons under its control) or wrongful conduct of
the Company or persons under its authorization or control,
with respect to the sale or distribution of the Contracts or
Fund Shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a Registration
Statement, prospectus, SAI, or sales literature or other
promotional material of the Fund or any amendment thereof or
supplement thereto or the omission or alleged omission to
state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading
if such a statement or omission was made in reliance upon
information furnished to the Fund by or on behalf of the
Company; or
(iv) arise as a result of any material failure by the Company to
provide the services and furnish the materials under the
terms of this Agreement (including a failure, whether
unintentional or in good faith or otherwise, to comply with
the qualification requirements specified in Article VI of
this Agreement); or
<PAGE> 14
13
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Company,
as limited by and in accordance with the provisions of Sections 8.1(b) and
8.1(c) hereof.
8.1(b). The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
to which an Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of its obligations or duties under this Agreement.
8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Company of any
such claim shall not relieve the Company from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against an Indemnified Party, the Company shall be entitled to participate, at
its own expense, in the defense of such action. The Company also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action and to settle the claim at its own expense; provided,
however, that no such settlement shall, without the Indemnified Parties' written
consent, include any factual stipulation referring to the Indemnified Parties or
their conduct. After notice from the Company to such party of the Company's
election to assume the defense thereof, the Indemnified Party shall bear the
fees and expenses of any additional counsel retained by it, and the Company will
not be liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation
8.1(d). The Indemnified Parties will promptly notify the Company
of the commencement of any litigation or proceedings against them in connection
with the issuance or sale of the Fund Shares or the Contracts or the operation
of the Fund
8.2 Indemnification by the Underwriter
8.2(a). The Underwriter agrees to indemnify and hold harmless the
Company and each of it directors and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.2)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Underwriter) or litigation
(including legal and other expenses) to which the Indemnified Parties may become
subject under any statute or regulation, at common law or otherwise, insofar as
such losses, claims, damages, liabilities or expenses (or actions in respect
thereof) or settlements are related to the sale or acquisition of the Fund's
shares or the Contracts; and
<PAGE> 15
14
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
the Registration Statement or prospectus or SAI or sales
literature or other promotional material of the Fund (or any
amendment or supplement to any of the foregoing), or arise
out of or are based upon the omission or the alleged
omission to state therein a material fact required to be
stated therein or necessary to make the statements therein
not misleading, provided that this agreement to indemnify
shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission
was made in reliance upon and in conformity with information
furnished to the Underwriter or Fund by or on behalf of the
Company for use in the Registration Statement or prospectus
for the Fund or in sales literature or other promotional
material (or any amendment or supplement) or otherwise for
use in connection with the sale of the Contracts or Fund
shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
Registration Statement, prospectus or sales literature or
other promotional material for the Contracts not supplied by
the Underwriter or persons under its control) or wrongful
conduct of the Fund or Underwriter or persons under their
control, with respect to the sale or distribution of the
Contracts or Fund shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a Registration
Statement, prospectus, SAI, or sales literature or other
promotional material of the Contracts, or any amendment
thereof or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be
stated therein or necessary to make the statement or
statements therein not misleading, if such statement or
omission was made in reliance upon information furnished to
the Company by or on behalf of the Fund; or
(iv) arise as a result of any material failure by the Fund to
provide the services and furnish the materials under the
terms of this Agreement (including a failure, whether
unintentional or in good faith or otherwise, to comply with
the diversification and other qualification requirements
specified in Article VI of this Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Underwriter in
this Agreement or arise out of or result from any other
material breach of this Agreement by the Underwriter;
<PAGE> 16
15
as limited by and in accordance with the provisions of Sections 8.2(b) and
8.2(c) hereof
8.2(b). The Underwriter shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation to which an Indemnified Party would otherwise be
subject by reason of such Indemnified Party's willful misfeasance, bad faith, or
gross negligence in the performance or such Indemnified Party's duties or by
reason of such Indemnified Party's reckless disregard of obligations and duties
under this Agreement or to the Company or the Account, whichever is applicable.
8.2(c). The Underwriter shall not be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless such Indemnified Party shall have notified the Underwriter in
writing within a reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Underwriter of
any such claim shall not relieve the Underwriter from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise than
on account of this indemnification provision. In case any such action is brought
against the Indemnified Party, the Underwriter will be entitled to participate,
at its own expense, in the defense thereof. The Underwriter also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action and to settle the claim at its own expense; provided,
however, that no such settlement shall, without the Indemnified Parties' written
consent, include any factual stipulation referring to the Indemnified Parties
or their conduct. After notice from the Underwriter to such party of the
Underwriter's election to assume the defense thereof, the Indemnified Party
shall bear the fees and expenses of any additional counsel retained by it, and
the Underwriter will not be liable to such party under this Agreement for any
legal or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
8.2(d). The Company agrees promptly to notify the Underwriter of
the commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issuance or sale of the Contracts
or the operation of the Account.
8.3 Indemnification By the Fund
8.3(a). The Fund agrees to indemnify and hold harmless the Company
and each of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.3) against any and all
losses, claims, expenses, damages, liabilities (including amounts paid in
settlement with the written consent of the Fund) or litigation (including legal
and other expenses) to which the Indemnified Parties may be required to pay or
may become subject under any statute or regulation, at common law or otherwise,
insofar as such losses, claims, expenses, damages, liabilities or expenses (or
actions in respect thereof) or settlements, are related to the operations of the
Fund and:
<PAGE> 17
16
(i) arise as a result of any material failure by the Fund to
provide the services and furnish the materials under the
terms of this Agreement (including a failure, whether
unintentional or in good faith or otherwise, to comply with
the diversification and other qualification requirements
specified in Article VI of this Agreement); or
(ii) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Fund;
as limited by and in accordance with the provisions of Sections 8.3(b) and
8.3(c) hereof.
8.3(b). The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
to which an Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
the Company, the Fund, the Underwriter or the Account, whichever is applicable.
8.3(c). The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Fund in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Fund of any
such claim shall not relieve the Fund from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Fund will be entitled to participate, at
its own expense, in the defense thereof. The Fund also shall be entitled to
assume the expense thereof, with counsel satisfactory to the party named in the
action and to settle the claim at its own expense; provided, however, that no
such settlement shall, without the Indemnified Parties' written consent, include
any factual stipulation referring to the Indemnified Parties or their conduct.
After notice from the Fund to such party of the Fund's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Fund will not be liable to such party
under this Agreement for any legal or other expenses subsequently incurred by
such party independently in connection with the defense thereof other than
reasonable costs of investigation.
8.3(d). The Company and the Underwriter agree promptly to notify
the Fund of the commencement of any litigation or proceeding against it or any
of its respective officers or directors in connection with the Agreement, the
issuance or sale of the Contracts, the operation of the Account, or the sale or
acquisition of shares of the Fund.
<PAGE> 18
17
ARTICLE IX. Applicable Law
9.1 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of Maryland.
9.2 This Agreement shall be subject to the provisions of the 1933,
1934 and 1940 Acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the SEC
may grant (including, but not limited to, any Shared Funding Exemptive Order)
and the terms hereof shall be interpreted and construed in accordance therewith.
ARTICLE X. Termination
10.1 This Agreement shall continue in full force and effect until the
first to occur of:
(a) termination by any party, for any reason with respect to
some or all Designated Portfolios, by six (6) months'
advance written notice delivered to the other parties;
however, this agreement shall remain in effect for such time
after the six-month period has expired as is necessary for
the Company to obtain regulatory approval for substitution
of the Designated Portfolios; or
(b) termination by the Company by written notice to the Fund and
the Underwriter with respect to any Designated Portfolio
based upon the Company's determination that shares of the
Fund are not reasonably available to meet the requirements
of the Contracts, provided that such termination shall apply
only to the Designated Portfolio not reasonably available;
or
(c) termination by the Company by written notice to the Fund and
the Underwriter in the event any of the Designated
Portfolio's shares are not registered, issued or sold in
accordance with applicable state and/or federal law or such
law precludes the use of such shares as the underlying
investment media of the Contracts issued or to be issued by
the Company; or
(d) termination by the Fund or Underwriter in the event that
formal administrative proceedings are instituted against the
Company by the NASD, the SEC, the Insurance Commissioner or
like official of any state or any other regulatory body
regarding the Company's duties under this Agreement or
related to the sale of the Contracts, the operation of any
Account, or the purchase of the Fund shares; provided,
however, that the Fund or Underwriter determines in its sole
judgment exercised in good faith, that any such
administrative proceedings will have a material adverse
effect upon the ability of the Company to perform its
obligations under this Agreement; or
<PAGE> 19
18
(e) termination by the Company in the event that formal
administrative proceedings are instituted against the Fund
or Underwriter by the NASD, the SEC, or any state securities
or insurance department or any other regulatory body,
provided, however, that the Company determines in its sole
judgment exercised in good faith, that any such
administrative proceedings will have a material adverse
effect upon the ability of the Fund or Underwriter to
perform its obligations under this Agreement; or
(f) termination by the Company by written notice to the Fund and
the Underwriter with respect to any Designated Portfolio in
the event that such Designated Portfolio ceases to qualify
as a Regulated Investment Company under Subchapter M or
fails to comply with the Section 817(h) diversification
requirements specified in Article VI hereof, or if the
Company reasonably believes that such Designated Portfolio
may fail to so qualify or comply; or
(g) termination by the Fund or Underwriter by written notice to
the Company in the event that the Contracts fail to meet the
qualifications specified in Section 6.3 hereof; or if the
Fund or Underwriter reasonably believes that such Contracts
may fail to so qualify; or
(h) termination by either the Fund or the Underwriter by written
notice to the Company, if either one or both of the Fund or
the Underwriter respectively, shall determine, in their sole
judgment exercised in good faith, that the Company has
suffered a material adverse change in its business,
operations, financial condition, or prospects since the date
of this Agreement or is the subject of material adverse
publicity; or
(i) termination by the Company by written notice to the Fund and
the Underwriter, if the Company shall determine, in its sole
judgment exercised in good faith, that the Fund or the
Underwriter has suffered a material adverse change in its
business, operations, financial condition or prospects since
the date of this Agreement or is the subject of material
adverse publicity.
10.2 Effect of Termination. Notwithstanding any termination of this
Agreement, the Fund and the Underwriter shall, at the option of the Company,
continue to make available additional shares of the Fund pursuant to the terms
and conditions of this Agreement, for all Contracts in effect on the effective
date of termination of this Agreement (hereinafter referred to as "Existing
Contracts"). Specifically, the owners of the Existing Contracts may be permitted
to reallocate investments in the Fund, redeem investments in the Fund and/or
invest in the Fund upon the making of additional purchase payments under the
Existing Contracts. The parties agree that this Section 10.2 shall not apply to
any termination under Article VII and the effect of such Article VII termination
shall be governed by Article VII of this Agreement. The parties further agree
that this Section 10.2 shall not apply to any termination under Section
10.1(g) of this Agreement.
<PAGE> 20
19
10.3 The Company shall not redeem Fund shares attributable to the
Contracts (as opposed to Fund shares attributable to the Company's assets held
in the Account) except (i) as necessary to implement Contract owner initiated or
approved transactions, (ii) as required by state and/or federal laws or
regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption"), or (iii) pursuant
to the terms of a substitution order issued by the SEC pursuant to Section 26(b)
of the 1940 Act. Upon request, the Company will promptly furnish to the Fund and
the Underwriter the opinion of counsel for the Company (which counsel shall be
reasonably satisfactory to the Fund and the Underwriter) to the effect that any
redemption pursuant to clause (ii) above is a Legally Required Redemption.
Furthermore, except in cases where permitted under the terms of the Contracts,
the Company shall not prevent Contract owners from allocating payments to a
Portfolio that was otherwise available under the Contracts without first giving
the Fund or the Underwriter 90 days notice of its intention to do so
10.4 Notwithstanding any termination of this Agreement, each party's
obligation under Article VIII to indemnify the other parties shall survive.
ARTICLE XI. Notices
Any notice shall be sufficiently given when sent by registered or certified
mail to the other party at the address of such party set forth below or at such
other address as such party may from time to time specify in writing to the
other party.
If to the Fund:
T. Rowe Price Associates, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
Attention: Henry H. Hopkins, Esq.
If to the Company:
Sentry Life Insurance Company
1800 North Point Drive
Stevens Point, Wisconsin 54481
Attention: Jerry Stanford
With a copy to:
Legal Department
Sentry Life Insurance Company
1800 North Point Drive
Stevens Point, Wisconsin 54481
Attention: Ken Erler
<PAGE> 21
20
If to Underwriter:
T. Rowe Price Investment Services
100 East Pratt Street
Baltimore, Maryland 21202
Attention: Henry H. Hopkins, Esq.
ARTICLE XII. Miscellaneous
12.1 All references herein to the Fund are to each of the undersigned
Funds as if this agreement were between such individual Fund and the Underwriter
and the Company. All references herein to the Adviser relate solely to the
Adviser of such individual Fund, as appropriate, All persons dealing with a Fund
must look solely to the property of such Fund, and in the case of a series
company, the respective Designated Portfolio listed on Schedule A hereto as
though such Designated Portfolio had separately contracted with the Company and
the Underwriter for the enforcement of any claims against the Fund. The parties
agree that neither the Board, officers, agents or shareholders assume any
personal liability or responsibility for obligations entered into by or on
behalf of the Fund.
12.2 Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information without the express written consent
of the affected party until such time as such information may come into the
public domain.
12.3 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof
or otherwise affect their construction or effect.
12.4 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5 If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
12.6 Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD, and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the Wisconsin Insurance Commissioner with any information or
reports in connection with services provided under this Agreement which such
Commissioner may request in order to ascertain whether the variable annuity
operations of the Company are being conducted in a manner consistent with
Wisconsin variable annuity laws and regulations and any other applicable law or
regulations.
<PAGE> 22
21
12.7 The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies, and
obligations, at law or in equity, which the parties hereto are entitled to under
state and federal laws.
12.8 This Agreement or any of the rights and obligations hereunder may
not be assigned by any party without the prior written consent of all parties
hereto.
12.9 The Company shall furnish or cause to be furnished, to the Fund or
its designee copies of the following reports:
(a) the Company's annual statement (prepared under statutory
accounting principles) and annual report (prepared under generally
accepted accounting principles ("GAAP"), if any), as soon as
practical and in any event within 90 days after the end of each
fiscal year.
(b) the Company's quarterly statements (statutory) (and GAAP, if any),
as soon as practical and in any event within 45 days after the end
of each quarterly period.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and on its behalf by its duly authorized representative
and its seal to be hereunder affixed hereto as of the date specified below.
COMPANY: SENTRY LIFE INSURANCE COMPANY
By its authorized officer
By: W. O'Reilly
--------------------------------------------
William M. O'Reilly
Title: Secretary
--------------------------------------------
Date: June 1, 1999
--------------------------------------------
FUND: T. ROWE PRICE EQUITY SERIES, INC,
By its authorized officer
By: (signature illegible)
-------------------------------------------
Title: Vice President
-------------------------------------------
Date: June 1, 1999
-------------------------------------------
<PAGE> 23
22
FUND: T. ROWE PRICE FIXED INCOME SERIES, INC.
By its authorized officer
By: (signature illegible)
----------------------------------------------
Title: Vice President
-------------------------------------------
Date: June 1, 1999
--------------------------------------------
FUND: T. ROWE PRICE INTERNATIONAL SERIES, INC.
By its authorized officer
By: (signature illegible)
----------------------------------------------
Title: Vice President
-------------------------------------------
Date: June 1, 1999
--------------------------------------------
UNDERWRITER: T. ROWE PRICE INVESTMENT SERVICES, INC.
By its authorized officer
By: (signature illegible)
----------------------------------------------
Title: Vice President
-------------------------------------------
Date: June 1, 1999
--------------------------------------------
<PAGE> 24
SCHEDULE A
<TABLE>
<CAPTION>
NAME OF SEPARATE ACCOUNT
AND DATE ESTABLISHED BY CONTRACTS FUNDED BY
BOARD OF DIRECTORS SEPARATE ACCOUNT DESIGNATED PORTFOLIOS
- ----------------------------------- -------------------------------- ----------------------------
<S> <C> <C>
Sentry Variable Account II Individual Flexible T. Rowe Price Equity Series, Inc.
Established August 2, 1983 Purchase Payment - T. Rowe Price Equity Income Portfolio
Deferred Variable Annuity - T. Rowe Price Personal Strategy Balanced
Portfolio
T. Rowe Price Fixed Income Series, Inc.
- T. Rowe Price Limited-Term Bond
Portfolio
- T. Rowe Price Prime Reserve Portfolio
T. Rowe Price International Series, Inc.
- T. Rowe Price International Stock
Portfolio
Sentry Variable Life Account I Flexible Premium Variable T. Rowe Price Equity Series, Inc.
Established February 12, 1985 Life Insurance - T. Rowe Price Equity Income Portfolio
- T. Rowe Price Personal Strategy Balanced
Portfolio
T. Rowe Price Fixed Income Series, Inc.
- T. Rowe Price Limited-Term Bond
Portfolio
- T. Rowe Price Prime Reserve Portfolio
T. Rowe Price International Series, Inc.
- T. Rowe Price International Stock
Portfolio
</TABLE>
<PAGE> 1
EXHIBIT 8(ii)
<PAGE> 2
JANUS ASPEN SERIES
FUND PARTICIPATION AGREEMENT
THIS AGREEMENT is made this 1st day of June, 1999, between JANUS ASPEN
SERIES, an open-end management investment company organized as a Delaware
business trust (the "Trust"), and Sentry Life Insurance Company, a life
insurance company organized under the laws of the State of Wisconsin (the
"Company"), on its own behalf and on behalf of each segregated asset account of
the Company set forth on Schedule A, as may be amended from time to time, the
"Accounts").
WITNESSETH:
WHEREAS, the Trust has registered with the Securities and Exchange
Commission as an open-end management investment company under the Investment
Company Act of 1940, as amended (the "1940 Act"), and has registered the offer
and sale of its shares under the Securities Act of 1933, as amended (the "1933
Act"); and
WHEREAS, the Trust desires to act as an investment vehicle for separate
accounts established for variable life insurance policies and variable annuity
contracts to be offered by insurance companies that have entered into
participation agreements with the Trust (the "Participating Insurance
Companies"); and
WHEREAS, the beneficial interest in the Trust is divided into several
series of shares, each series representing an interest in a particular managed
portfolio of securities and other assets (the "Portfolios"); and
WHEREAS, the Trust has received an order from the Securities and Exchange
Commission granting Participating Insurance Companies and their separate
accounts exemptions from the provisions of Section 9(a), 13(a), 15(a) and 15(b)
of the 1940 Act, and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the
extent necessary to permit shares of the Trust to be sold to and held by
variable annuity and variable life insurance separate accounts of both
affiliated and unaffiliated life insurance companies and certain qualified
pension and retirement plans (the "Exemptive Order"); and
WHEREAS, the Company has registered certain variable life insurance
policies and/or variable annuity contracts under the 1933 Act (the "Contracts")
and
WHEREAS, the Company has registered each Account as a unit investment trust
under the 1940 Act; and
WHEREAS, said Accounts presently utilize as their investment vehicle
another investment company (the "Predecessor Investment Company"), but Company
has indicated its intention to secure necessary regulatory approvals to
terminate the agreements with the Predecessor Investment Company, and
WHEREAS, the Company desires to utilize shares of one or more Portfolios as
an investment vehicle of the Accounts upon completion of the termination of the
present arrangement with the Predecessor Investment Company.
1
<PAGE> 3
NOW, THEREFORE, in consideration of their mutual promises, The parties
agree as follows upon the termination of the arrangements with the Predecessor
Investment Company:
ARTICLE I
Sale of Trust Shares
1.1 The Trust shall make shares of its Portfolios available to the
Accounts at the net asset value next computed after receipt of such purchase
order by the Trust (or its agent), as established in accordance with the
provisions of the then current prospectus of the Trust. Shares of a particular
Portfolio of the Trust shall be ordered in such quantities and at such times as
determined by the Company to be necessary to meet the requirements of the
Contracts. The Trustees of the Trust (the "Trustees") may refuse to sell shares
of any Portfolio to any person, or suspend or terminate the offering of shares
of any Portfolio if such action is required by law or by regulatory authorities
having jurisdiction or is, in the sole discretion of the Trustees acting in good
faith and in light of their fiduciary duties under federal and any applicable
state laws, necessary in the best interests of the shareholders of such
Portfolio.
1.2 The Trust will redeem any full or fractional shares of any Portfolio
when requested by the Company on behalf of an Account at the net asset value
next computed after receipt of the Trust (or its agent) of the request for
redemption, as established in accordance with the provisions of the then current
prospectus of the Trust. The Trust shall make payment for such shares in the
manner established from time to time by the Trust, but in no event shall payment
be delayed for a greater period than is permitted by the 1940 Act.
1.3 For the purposes of Sections 1.1 and 1.2, the Trust hereby appoints
the Company as its agent for the limited purpose of receiving and accepting
purchase and redemption orders resulting from investment in and payments under
the Contracts. Receipt by the Company shall constitute receipt by the Trust
provided that i) such orders are received by the Company in good order prior to
the time the net asset value of each Portfolio is priced in accordance with its
prospectus and ii) the Trust receives notice of such orders by 10:00 a.m. New
York time on the next following Business Day. "Business Day" shall mean any day
on which the New York Stock Exchange is open for trading and on which the Trust
calculates its net asset value pursuant to the rules of the Securities and
Exchange Commission.
1.4 Purchase orders that are transmitted to the Trust in accordance with
Section 1.3 shall be paid for no later than 12:00 noon New York time on the same
Business Day that the Trust receives notice of the order. Payments shall be made
in federal funds transmitted by wire.
1.5 Issuance and transfer of the Trust's shares will be by book entry
only. Stock certificates will not be issued to the Company or the Account.
Shares ordered from the Trust will be recorded in the appropriate title for each
Account or the appropriate subaccount of each Account.
1.6 The Trust shall furnish prompt notice to the Company of any income
dividends or capital gain distributions payable on the Trust's shares. The
Company hereby elects to receive all such income dividends and capital gain
distributions as are payable on a Portfolio's shares in additional shares of
that Portfolio. The Trust shall notify the Company of the number of shares so
issued as payment of such dividends and distributions.
2
<PAGE> 4
1.7 The Trust shall make the net asset value per share for each Portfolio
available to the Company on a daily basis as soon as reasonably practical after
the net asset value per share is calculated and shall use its best efforts to
make such net asset value per share available by 6 p.m. New York time.
1.8 The Trust agrees that its shares will be sold only to Participating
Insurance Companies and their separate accounts and to certain qualified pension
and retirement plans to the extent permitted by the Exemptive Order. No shares
of any Portfolio will be sold directly to the general public. The Company agrees
that Trust shares will be used only for the purposes of funding the Contracts
and Accounts listed in Schedule A, as amended from time to time.
1.9 The Trust agrees that all Participating Insurance Companies shall have
the obligations and responsibilities regarding pass-through voting and conflicts
of interest corresponding to those contained in Section 2.8 and Article IV of
this Agreement.
ARTICLE II
Obligations of the Parties
2.1 The Trust shall prepare and be responsible for filing with the
Securities and Exchange Commission and any state regulators requiring such
filing all shareholder reports, notices, proxy materials (or similar materials
such as voting instruction solicitation materials), prospectuses and statements
of additional information of the Trust. The Trust shall bear the costs of
registration and qualification of its shares, preparation and filing of the
documents listed in this Section 2.1 and all taxes to which an issuer is subject
on the issuance and transfer of its shares.
2.2 At the option of the Company, the Trust shall either (a) provide the
Company (at the Company's expense) with as many copies of the Trust's current
prospectus, annual report, semi-annual report and other shareholder
communications, including any amendments or supplements to any of the foregoing,
as the Company shall reasonably request; or (b) provide the Company with a
camera ready copy of such documents in a form suitable for printing. The Trust
shall provide the Company with a copy of its statement of additional information
in a form suitable for duplication by the Company. The Trust (at its expense)
shall provide the Company with copies of any Trust-sponsored proxy materials in
such quantity as the Company shall reasonably require for distribution to
Contract owners.
2.3 (a) The Company shall bear the costs of printing and distributing the
Trust's prospectus, statement of additional information, shareholder reports and
other shareholder communications to owners of and applicants for policies for
which the Trust is serving or is to serve as an investment vehicle. The Company
shall bear the costs of distributing proxy materials (or similar materials such
as voting solicitation instructions) to Contract owners. The Company assumes
sole responsibility for ensuring that such materials are delivered to Contract
owners in accordance with applicable federal and state securities laws.
(b) If the Company elects to include any materials provided by the
Trust, specifically prospectuses, SAIs, shareholder reports and proxy materials,
on its web site or in any other computer or electronic format, the Company
assumes sole responsibility for maintaining such materials in the form provided
by the Trust and for promptly replacing such materials with all updates provided
by the Trust.
3
<PAGE> 5
2.4 The Company agrees and acknowledges that the Trust's adviser, Janus
Capital Corporation ("Janus Capital"), is the sole owner of the name and mark
"Janus" and that all use of any designation comprised in whole or part of Janus
(a "Janus Mark") under this Agreement shall inure to the benefit of Janus
Capital. Except as provided in Section 2.5, the Company shall not use any Janus
Mark on its own behalf or on behalf of the Accounts or Contracts in any
registration statement, advertisement, sales literature or other materials
relating to the Accounts or Contracts without the prior written consent of Janus
Capital. Upon termination of this Agreement for any reason, the Company shall
cease all use of any Janus Mark(s) as soon as reasonably practicable.
2.5 The Company shall furnish, or cause to be furnished, to the Trust or
its designee, a copy of each Contract prospectus or statement of additional
information in which the Trust or its investment adviser is named prior to the
filing of such document with the Securities and Exchange Commission. The Company
shall furnish, or shall cause to be furnished, to the Trust or its designee,
each piece of sales literature or other promotional material in which the Trust
or its investment adviser is named, at least fifteen Business Days prior to its
use. No such material shall be used if the Trust or its designee reasonably
objects to such use within fifteen Business Days after receipt of such material.
2.6 The Company shall not give any information or make any representations
or statements on behalf of the Trust or concerning the Trust or its investment
adviser in connection with the sale of the Contracts other than information or
representations contained in and accurately derived from the registration
statement or prospectus for the Trust shares (as such registration statement and
prospectus may be amended or supplemented from time to time), reports of the
Trust, Trust-sponsored proxy statements, or in sales literature or other
promotional material approved by the Trust or its designee, except as required
by legal process or regulatory authorities or with the written permission of the
Trust or its designee.
2.7 The Trust shall not give any information or make any representations
or statements on behalf of the Company or concerning the Company, the Accounts
or the Contracts other than information or representations contained in and
accurately derived from the registration statement or prospectus for the
Contracts (as such registration statement and prospectus may be amended or
supplemented from time to time), or in materials approved by the Company for
distribution including sales literature or other promotional materials, except
as required by legal process or regulatory authorities or with the written
permission of the Company.
2.8 So long as, and to the extent that the Securities and Exchange
Commission interprets the 1940 Act to require pass-through voting privileges for
variable policyowners, the Company will provide pass-through voting privileges
to owners of policies whose cash values are invested, through the Accounts, in
shares of the Trust. The Trust shall require all Participating Insurance
Companies to calculate voting privileges in the same manner and the Company
shall be responsible for assuring that the Accounts calculate voting privileges
in the manner established by the Trust. With respect to each Account, the
Company will vote shares of the Trust held by the Account and for which no
timely voting instructions from policyowners are received as well as shares it
owns that are held by that Account, in the same proportion as those shares for
which voting instructions are received. The Company and its agents will in no
way recommend or oppose or interfere with the solicitation of proxies for Trust
shares held by Contract owners without the prior written consent of the Trust,
which consent may be withheld in the Trust's sole discretion.
4
<PAGE> 6
2.9 The Company shall notify the Trust of any applicable state insurance
laws that restrict the Portfolios' investments or otherwise affect the operation
of the Trust and shall notify the Trust of any changes in such laws.
ARTICLE III
Representations and Warranties
3.1 The Company represents and warrants that it is an insurance company
duly organized and in good standing under the laws of the State of Wisconsin and
that it has legally and validly established each Account as a segregated asset
account under such law on the date set forth in Schedule A.
3.2 The Company represents and warrants that each Account has been
registered or, prior to any issuance or sale of the Contracts, will be
registered as a unit investment trust in accordance with the provisions of the
1940 Act.
3.3 The Company represents and warrants that the Contracts or interests in
the Accounts (1) are or, prior to issuance, will be registered as securities
under the 1933 Act or, alternatively (2) are not registered because they are
properly exempt from registration under the 1933 Act or will be offered
exclusively in transactions that are properly exempt from registration under the
1933 Act. The Company further represents and warrants that the Contracts will be
issued and sold in compliance in all material respects with all applicable
federal and state laws; and the sale of the Contracts shall comply in all
material respects with state insurance suitability requirements.
3.4 The Company represents and warrants that any of Company's trading
systems that interact with the Trust via any form of automated feed prior to,
during and after the calendar year 2000 will recognize accurate century data,
and user interfaces and operation environments will comply with Year 2000
application standards,
3.5 The Trust represents and warrants that it is duly organized and
validly existing under the laws of the State of Delaware.
3.6 The Trust represents and warrants that the Trust shares offered and
sold pursuant to this Agreement will be registered under the 1933 Act and the
Trust shall be registered under the 1940 Act prior to any issuance or sale of
such shares. The Trust shall amend its registration statement under the 1933 Act
and the 1940 Act from time to time as required in order to effect the continuous
offering of its shares. The Trust shall register and qualify its shares for sale
in accordance with the laws of the various states only if and to the extent
deemed advisable by the Trust,
3.7 The Trust represents and warrants that the investments of each
Portfolio will comply with the diversification requirements set forth in Section
817(h) of the Internal Revenue Code of 1986, as amended, and the rules and
regulations thereunder.
5
<PAGE> 7
ARTICLE IV
Potential Conflicts
4.1 The parties acknowledge that the Trust's shares may be made available
for investment to other Participating Insurance Companies. In such event, the
Trustees will monitor the Trust for the existence of any material irreconcilable
conflict between the interests of the contract owners of all Participating
Insurance Companies. An irreconcilable material conflict may arise for a variety
of reasons, including: (a) an action by any state insurance regulatory
authority; (b) a change in applicable federal or state insurance, tax, or
securities laws or regulations, or a public ruling, private letter ruling,
no-action or interpretative letter, or any similar action by insurance, tax, or
securities regulatory authorities; (c) an administrative or judicial decision in
any relevant proceeding; (d) the manner in which the investments of any
Portfolio are being managed; (e) a difference in voting instructions given by
variable annuity contract and variable life insurance contract owners; or (f) a
decision by an insurer to disregard the voting instructions of contract owners.
The Trustees shall promptly inform the Company if they determine that an
irreconcilable material conflict exists and the implications thereof.
4.2 The Company agrees to promptly report any potential or existing
conflicts of which it is aware to the Trustees. The Company will assist the
Trustees in carrying out their responsibilities under the Exemptive Order by
providing the Trustees with all information reasonably necessary for the
Trustees to consider any issues raised including, but not limited to,
information as to a decision by the Company to disregard Contract owner voting
instructions.
4.3 If it is determined by a majority of the Trustees, or a majority of
its disinterested Trustees, that a material irreconcilable conflict exists that
affects the interests of Contract owners, the Company shall, in cooperation with
other Participating Insurance Companies whose contract owners are also
affected, at its expense and to the extent reasonably practicable (as determined
by the Trustees) take whatever steps are necessary to remedy or eliminate the
irreconcilable material conflict, which steps could include: (a) withdrawing the
assets allocable to some or all of the Accounts from the Trust or any Portfolio
and reinvesting such assets in a different investment medium, including (but not
limited to) another Portfolio of the Trust, or submitting the question of
whether or not such segregation should be implemented to a vote of all affected
Contract owners and, as appropriate, segregating the assets of any appropriate
group (i.e., annuity contract owners, life insurance contract owners, or
variable contract owners of one or more Participating Insurance Companies) that
votes in favor of such segregation, or offering to the affected Contract owners
the option of making such a change; and (b) establishing a new registered
management investment company or managed separate account.
4.4 If a material irreconcilable conflict arises because of a decision by
the Company to disregard Contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Trust's election, to withdraw the affected Account's
investment in the Trust and terminate this Agreement with respect to such
Account; provided, however, that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable conflict
as determined by a majority of the disinterested Trustees. Any such withdrawal
and termination must take place within six (6) months after the Trust gives
written notice that this provision is being implemented. Until the end of such
six (6) month period, the Trust shall continue to accept and implement orders by
the Company for the purchase and redemption of shares of the Trust
6
<PAGE> 8
4.5 If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's investment in the Trust and terminate this Agreement with
respect to such Account within six (6) months after the Trustees inform the
Company in writing that it has determined that such decision has created an
irreconcilable material conflict; provided, however, that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested
Trustees. Until the end of such six (6) month period, the Trust shall continue
to accept and implement orders by the Company for the purchase and redemption of
shares of the Trust.
4.6 For purposes of Sections 4.3 through 4.6 of this Agreement, a majority
of the disinterested Trustees shall determine whether any proposed action
adequately remedies any irreconcilable material conflict, but in no event will
the Company be required to establish a new funding medium for the Contracts if
an offer to do so has been declined by vote of a majority of Contract owners
materially adversely affected by the irreconcilable material conflict. In the
event that the Trustees determine that any proposed action does not adequately
remedy any irreconcilable material conflict, then the Company will withdraw the
Account's investment in the Trust and terminate this Agreement within six (6)
months after the Trustees inform the Company in writing of the foregoing
determination; provided, however, that such withdrawal and termination shall be
limited to the extent required by any such material irreconcilable conflict as
determined by a majority of the disinterested Trustees.
4.7 The Company shall at least annually submit to the Trustees such
reports, materials or data as the Trustees may reasonably request so that the
Trustees may fully carry out the duties imposed upon them by the Exemptive
Order, and said reports, materials and data shall be submitted more frequently
if deemed appropriate by the Trustees.
4.8 If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940
Act or the rules promulgated thereunder with respect to mixed or shared funding
(as defined in the Exemptive Order) on terms and conditions materially different
from those contained in the Exemptive Order, then the Trust and/or the
Participating Insurance Companies, as appropriate, shall take such steps as may
be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3,
as adopted, to the extent such rules are applicable.
ARTICLE V
Indemnification
5.1 Indemnification By the Company. The Company agrees to indemnify and
hold harmless the Trust and each of its Trustees, officers, employees and agents
and each person, if any, who controls the Trust within the meaning of Section 15
of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this
Article V) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Company) or expenses
(including the reasonable costs of investigating or defending the alleged loss,
claim, damage, liability or expense and reasonable legal counsel fees incurred
in connection therewith) (collectively, "Losses"), to which the Indemnified
Parties may become subject under any statute or regulation, or at common law or
otherwise, insofar as such Losses:
7
<PAGE> 9
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in a registration
statement or prospectus for the Contracts or in the Contracts themselves or
in sales literature generated or approved by the Company on behalf of the
Contracts or Accounts (or any amendment or supplement to any of the
foregoing) (collectively, "Company Documents" for the purposes of this
Article V), or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided that this
indemnity shall not apply as to any Indemnified Party if such statement or
omission or such alleged statement or omission was made in reliance upon
and was accurately derived from written information furnished to the
Company by or on behalf of the Trust for use in Company Documents or
otherwise for use in connection with the sale of the Contracts or Trust
shares; or
(b) arise out of or result from statements or representations (other
than statements or representations contained in and accurately derived from
Trust Documents as defined in Section 5.2(a)) or wrongful conduct of the
Company or persons under its control, with respect to the sale or
acquisition of the Contracts or Trust shares; or
(c) arise out of or result from any untrue statement or alleged untrue
statement of a material fact contained in Trust Documents as defined in
Section 5.2(a) or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading if such statement or omission was made in
reliance upon and accurately derived from written information furnished to
the Trust by or on behalf of the Company; or
(d) arise out of or result from any failure by the Company to provide
the services or furnish the materials required under the terms of this
Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this Agreement or
arise out of or result from any other material breach of this Agreement by
the Company.
5.2 Indemnification By the Trust. The Trust agrees to indemnify and hold
harmless the Company and each of its directors, officers, employees and agents
and each person, if any, who controls the Company within the meaning of Section
15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this
Article V) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Trust) or expenses
(including the reasonable costs of investigating or defending any alleged loss,
claim, damage, liability or expense and reasonable legal counsel fees incurred
in connection therewith) (collectively, "Losses"), to which the Indemnified
Parties may become subject under any statute or regulation, or at common law or
otherwise, insofar as such Losses:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the registration
statement or prospectus for the Trust (or any amendment or supplement
thereto), (collectively, "Trust Documents" for the purposes of this Article
V), or arise out of or are based upon the omission or the alleged omission
to state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, provided that this indemnity
shall not apply as to any Indemnified Party if such statement or omission
or such alleged statement or omission was made in reliance upon and was
accurately derived from written information furnished to the Trust by or on
behalf of the Company for use in Trust Documents or otherwise for use in
connection with the sale of the Contracts or Trust shares; or
8
<PAGE> 10
(b) arise out of or result from statements or representations (other
than statements or representations contained in and accurately derived from
Company Documents) or wrongful conduct of the Trust or persons under its
control, with respect to the sale or acquisition of the Contracts or Trust
shares; or
(c) arise out of or result from any untrue statement or alleged untrue
statement of a material fact contained in Company Documents or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading if such
statement or omission was made in reliance upon and accurately derived from
written information furnished to the Company by or on behalf of the Trust;
or
(d) arise out of or result from any failure by the Trust to provide
the services or furnish the materials required under the terms of this
Agreement, or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Trust in this Agreement or arise
out of or result from any other material breach of this Agreement by the
Trust.
5.3 Neither the Company nor the Trust shall be liable under the
indemnification provisions of Sections 5.1 or 5.2, as applicable, with respect
to any Losses incurred or assessed against an Indemnified Party that arise from
such Indemnified Party's willful misfeasance, bad faith or negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this Agreement.
5.4 Neither the Company nor the Trust shall be liable under the
indemnification provisions of Section 5.1 or 5.2, as applicable, with respect to
any claim made against an Indemnified Party unless such Indemnified Party shall
have notified the other party in writing within a reasonable time after the
summons, or other first written notification, giving information of the nature
of the claim shall have been served upon or otherwise received by such
Indemnified Party (or after such Indemnified Party shall have received notice of
service upon or other notification to any designated agent), but failure to
notify the party against whom indemnification is sought of any such claim shall
not relieve that party from any liability which it may have to the Indemnified
Party in the absence of Section 5.1 and 5.2
5.5 In case any such action is brought against the Indemnified Parties,
the indemnifying party shall be entitled to participate, at its own expense, in
the defense of such action. The indemnifying party also shall be entitled to
assume the defense thereof, with counsel reasonably satisfactory to the party
named in the action. After notice from the indemnifying party to the Indemnified
Party of an election to assume such defense, the Indemnified Party shall bear
the fees and expenses of any additional counsel retained by it, and the
indemnifying party will not be liable to the Indemnified Party under this
Agreement for any legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than reasonable costs
of investigation.
9
<PAGE> 11
ARTICLE VI
Termination
6.1 This Agreement may be terminated by either party for any reason by
ninety (90) days advance written notice delivered to the other party. However,
this agreement shall remain in effect for such time after the 90 day period has
expired as is necessary for the Company to obtain regulatory approval for
substitution of the Trust Separate Accounts as listed in Schedule A, provided
the Company takes reasonably prompt action to obtain the approval.)
6.2 Notwithstanding any termination of this Agreement, the Trust shall, at
the option of the Company, continue to make available additional shares of the
Trust (or any Portfolio) pursuant to the terms and conditions of this Agreement
for all Contracts in effect on the effective date of termination of this
Agreement, provided that the Company continues to pay the costs set forth in
Section 2.3
6.3 The provisions of Article V shall survive the termination of this
Agreement, and the provisions of Article IV and Section 2.8 shall survive the
termination of this Agreement as long as shares of the Trust are held on behalf
of Contract owners in accordance with Section 6.2.
10
<PAGE> 12
ARTICLE VII
Notices
Any notice shall be sufficiently given when sent by registered or certified
mail to the other party at the address of such party set forth below or at such
other address as such party may from time to time specify in writing to the
other party.
If to the Trust:
Janus Aspen Series
100 Fillmore Street
Denver, Colorado 80206
Attention: General Counsel
If to the Company:
Sentry Life Insurance Company
1800 North Point Drive
Stevens Point, Wisconsin 54481
Attention: Jerry E. Stanford
With a copy to:
Legal Department
Sentry Life Insurance Company
1800 North Point Drive
Stevens Point, Wisconsin 54481
Attention: Ken Erler
ARTICLE VIII
MISCELLANEOUS
8.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
8.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
8.3 If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement shall
not be affected thereby.
8.4 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of State of Colorado.
11
<PAGE> 13
8.5 The parties to this Agreement acknowledge and agree that all
liabilities of the Trust arising, directly or indirectly, under this Agreement,
of any and every nature whatsoever, shall be satisfied solely out of the assets
of the Trust and that no Trustee, officer, agent or holder of shares of
beneficial interest of the Trust shall be personally liable for any such
liabilities.
8.6 Each party shall cooperate with each other party and all appropriate
governmental authorities (including without limitation the Securities and
Exchange Commission, the National Association of Securities Dealers, Inc., and
state insurance regulators) and shall permit such authorities reasonable access
to its book and records in connection with any investigation or inquiry relating
to this Agreement or the transactions contemplated hereby.
8.7 The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
8.8 The parties to this Agreement acknowledge and agree that this
Agreement shall not be exclusive in any respect.
8.9 Neither this Agreement nor any rights or obligations hereunder may be
assigned by either party without the prior written approval of the other party.
8.10 No provisions of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by both
parties.
IN WITNESS WHEREOF, the parties have caused their duly authorized officers
to execute this Participation Agreement as of the date and year first above
written.
JANUS ASPEN SERIES
By: Bonnie Howe
-------------------------------------
Name: Bonnie Howe
-----------------------------------
Title: Assistant V.P.
----------------------------------
SENTRY LIFE INSURANCE COMPANY
By: W. O'Reilly
-------------------------------------
Name: William M. O'Reilly
-----------------------------------
Title: Secretary
----------------------------------
12
<PAGE> 14
Schedule A
Separate Accounts and Associated Contracts
<TABLE>
<CAPTION>
NAME OF SEPARATE ACCOUNT
DATE ESTABLISHED BY CONTRACTS FUNDED
BOARD OF DIRECTORS BY SEPARATE ACCOUNT DESIGNATED PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sentry Variable Life Account II Individual Flexible Janus Aspen Series
Established August 2, 1983 Purchase Payment Growth
Deferred Variable Annuity Aggressive Growth
Capital Appreciation
Worldwide Growth
Balanced
Sentry Variable Life Account Flexible Premium Janus Aspen Series
Established February 12, 1985 Variable Life Insurance Growth
Aggressive Growth
Capital Appreciation
Worldwide Growth
Balanced
</TABLE>
13
<PAGE> 15
June 1, 1999
SENTRY LIFE INSURANCE COMPANY
1800 NORTH POINT DR
STEVENS POINT WI 54481
Dear Jerry,
This letter sets forth the agreement between Sentry Life Insurance Company
(the "Company"), and Janus Capital Corporation (the "Adviser"), concerning
certain administrative services.
1. Administrative Services and Expenses. Administrative services for the
separate accounts of the Company (the "Accounts") which invests in one or
more portfolios (collectively, the "Portfolios") of Janus Aspen Series (the
"Trust") pursuant to the Participation Agreement between the Company and
the Trust dated June 1, 1999, (the "Participation Agreement"), and for
purchasers of variable annuity or life insurance contracts (the
"Contracts") issued through the Accounts are the responsibility of the
Company. Administrative services for the Portfolios, in which the Accounts
invest, and for purchasers of shares of the Portfolios, are the
responsibility of the Trust. The administrative services the Company
intends to provide to the Trust and its Portfolios are set forth in
Schedule A attached to this letter agreement, which may be amended from
time to time.
2. Service Fee. In consideration of the anticipated administrative expense
savings resulting to the Trust from the Company's services, the Adviser
agrees to pay the Company a fee ("Service Fee"), computed daily and paid
monthly in arrears, at an annual rate equal to fifteen (15) basis points
(0.15%) of the average monthly value of the shares of the Portfolios held
in the Accounts, such payments to commence following the month in which the
average monthly value of investments by the Accounts reaches $50 million.
The Service Fee will be correspondingly suspended if the average monthly
value of such investments drops below $50 million in any month.
For purposes of this Paragraph 2, the average monthly value of the shares
of the Portfolios will be based on the sum of the daily net asset values of
the Portfolios (as calculated by the Portfolios) on each calendar day in a
month divided by the number of calendar days in the month.
3. Nature of Payments. The parties to this letter agreement recognize and
agree that the Adviser's payments to the Company relate to administrative
services to the Trust only and do not constitute payment in any manner for
administrative services provided by the Company to the Account or to the
Contracts, for investment advisory services or for costs of distribution of
Contracts or of shares of the Portfolios, and that these payments are not
otherwise related to investment advisory or distribution services or
expenses.
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<PAGE> 16
4. Representations and Warranties.
a. The Adviser represents and warrants that in the event the Trustees of
the Trust approve the payment of all or any portion of the Service Fee
by the Trust, the Trust will calculate in the same manner the Service
Fee to all insurance companies that have entered into Service Fee
arrangements with the Adviser and/or the Trust (the "Participating
Insurance Companies").
b. The Company represents and warrants that: (1) it and its employees and
agents meet the requirements of applicable law, including but not
limited to federal and state securities law and state insurance law,
for the performance of services contemplated herein; and (2) it will
not purchase Trust shares of the Portfolios with Account assets
derived from tax-qualified retirement plans except indirectly, through
Contracts purchased in connection with such plans and that the Service
Fee does not include any payment to the Company that is prohibited
under the Employee Retirement Income Securities Act of 1974 ("ERISA")
with respect to any assets of a Contract owner invested in a Contract
using the Portfolios as investment vehicles.
c. The Company represents, warrants and agrees that: (1) the payment of
the Service Fee by the Adviser is designed to reimburse the Company
for providing administrative services to the Trust that the Trust
would customarily pay and does not represent reimbursement to the
Company for providing administrative services to the Contract or
Account as described in Section 26 of the Investment Company Act of
1940 (the "1940 Act") and the rules and regulations thereunder; (2) no
portion of the Service Fee will be rebated by the Company to any
Contract owner; and (3) if required by applicable law, the Company
will disclose to each Contract owner the existence of the Service Fee
received by the Company pursuant to this letter agreement in a form
consistent with the requirements of applicable law and will disclose
the amount of the Service Fee, if any, that is paid by the Trust.
5. Indemnification
a. The Company agrees to indemnify and hold harmless the Adviser and its
directors, officers, and employees from any and all loss, liability
and expense resulting from any gross negligence or willful wrongful
act of the Company in performing its services under this letter
agreement, from the inaccuracy or breach of any representation made in
this letter agreement, or from a breach of a material provision of
this letter agreement, except to the extent such loss, liability or
expense is the result of the Adviser's willful misfeasance, bad faith
or gross negligence in the performance of its duties.
b. The Advisor agrees to indemnify and hold harmless the Company and its
directors, officers, agents and employees from any and all loss,
liability and expense resulting from any gross negligence or willful
wrongful act of the Adviser in performing its services under this
letter agreement, from the inaccuracy or breach of any representation
made in this letter agreement, or from a breach of a material
provision of this letter agreement, except to the extent such loss,
liability or expense is the result of the Company's willful
misfeasance, bad faith or gross negligence in the performance of its
duties.
15
<PAGE> 17
6. Termination.
a. Either party may terminate this letter agreement, without penalty, on
sixty (60) days' written notice to the other party.
b. This letter agreement will terminate at the option of either party in
the event of the termination of the Participation Agreement.
c. This letter agreement will terminate immediately upon the
determination of either party, with the advice of counsel, that the
payment of the Service Fee is in conflict with applicable law.
7. Amendment. This letter agreement may be amended only upon mutual agreement
of the parties hereto in writing.
8. Confidentiality. The terms of this letter agreement will be treated as
confidential and will not be disclosed to the public or any outside party
except with each party's prior written consent, as required by law or
judicial process or as provided in paragraph 4c herein.
9. Assignment. This letter agreement may not be assigned (as that term is
defined in the 1940 Act) by either party without the prior written approval
of the other party, which approval will not be unreasonably withheld,
except that the Adviser may assign its obligations under this letter
agreement, including the payment of all or any portion of the Service Fee,
to the Trust upon thirty (30) days' written notice to the Company.
10. Governing Law. This letter agreement will be construed and the provisions
hereof interpreted under and in accordance with the laws of the State of
Colorado.
11. Counterparts. This letter agreement may be executed in counterparts, each
of which will be deemed an original but all of which will together
constitute one and the same instrument.
If this letter agreement is consistent with your understanding of the matters we
discussed concerning administrative expense payments, kindly sign below and
return a signed copy to us.
Very truly yours,
JANUS CAPITAL CORPORATION
By: David W. Agostine
--------------------------------
Name: David W. Agostine
------------------------------
Title: Vice President
-----------------------------
SENTRY LIFE INSURANCE COMPANY
By: W. O'Reilly
--------------------------------
Name: William M. O'Reilly
------------------------------
Title: Secretary
-----------------------------
Attachment: Schedule A
16
<PAGE> 18
Schedule A
Pursuant to the letter agreement to which this Schedule is attached, the Company
will perform administrative services including, but not limited to, the
following:
1. Print and mail to Contract owners copies of the Portfolios'
prospectuses, proxy materials, periodic fund reports to shareholders and other
materials that the Trust is required by law or otherwise to provide to its
shareholders.
2. Provide Contract owner services including, but not limited to,
financial consultants' advice with respect to inquiries related to the
Portfolios (not including information about performance or related to sales) and
communicating with Contract owners about Portfolio (and subaccount) performance.
3. Provide other administrative support for the Trust as mutually agreed
to by the Company and the Adviser and relieve the Trust of other usual or
incidental administrative services provided to individual Contract owners.
17
<PAGE> 1
EXHIBIT 9
<PAGE> 2
[BLAZZARD, GRODD & HASENAUER, P.C. LETTERHEAD]
December 30, 1999
Board of Directors
Sentry Life Insurance Company
1800 North Point Drive
Stevens Point, WI 54481
Re: Opinion of Counsel - Sentry Variable Account II
Gentlemen:
You have requested our Opinion of counsel in connection with the filing with the
Securities and Exchange Commission of a Post-Effective Amendment to a
Registration Statement on form N-4 for the Individual Deferred Variable Annuity
Contracts (the "Contracts") to be issued by Sentry Life Insurance Company and
its separate account, Sentry Variable Account II.
We have made such examination of the law and have examined such records and
documents as in our judgment are necessary or appropriate to enable us to render
the opinions expressed below.
We are of the following opinions:
1. Sentry Variable Account II is a Unit Investment Trust as that term is
defined in Section 4(2) of the Investment Company Act of 1940 (the "Act"),
and is currently registered with the Securities and Exchange Commission,
pursuant to Section 8(a) of the Act.
2. Upon the acceptance of purchase payments made by an Owner pursuant to a
Contract issued in accordance with the Prospectus contained in the
Registration Statement and upon compliance with applicable law, such an
Owner will have a legally-issued, fully paid, non-assessable contractual
interest under such Contract.
You may use this opinion letter, or a copy thereof, as an exhibit to the
Registration Statement.
We consent to the reference to our Firm under the caption "Legal Opinions"
contained in the Statement of Additional Information which forms a part of the
Registration Statement.
Sincerely,
BLAZZARD, GRODD & HASENAUER, P.C.
By: s/Lynn Korman Stone
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Lynn Korman Stone
<PAGE> 1
EXHIBIT 10
<PAGE> 2
[PRICEWATERHOUSECOOPERS LETTERHEAD]
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CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in Post-Effective Amendment No. 4 to the
Registration Statement of Sentry Variable Account II (the "Account") on Form N-4
(File No. 33-85204) in the Statement of Additional Information of:
(1) Our report dated February 11, 1999, on our audits of the financial
statements of the Account; and
(2) Our report dated February 12, 1999, on our audits of the
statutory-basis financial statements of Sentry Life Insurance Company.
We also consent to the reference to our Firm under the caption "Independent
Accountant" in the Statement of Additional Information.
s/ PricewaterhouseCoopers LLP
December 30, 1999
