<PAGE>
Prospectus
==========
Flexible Premium Variable Annuity
issued by National Integrity Life Insurance Company
This prospectus describes a flexible premium variable annuity offered by
National Integrity Life Insurance Company, an indirect wholly owned subsidiary
of ARM Financial Group, Inc. The individual contracts and group certificates
(contracts) offered by this prospectus provide several types of benefits, some
of which have tax-favored status under the Internal Revenue Code of 1986, as
amended. Contributions under the contracts may be allocated to the various
investment divisions of our Separate Account I (Variable Account Options, or
individually, Option) or to our Fixed Accounts, or both.
Contributions to the Variable Account Options are invested in shares of
corresponding portfolios of the Variable Insurance Products Fund, Variable
Insurance Products Fund II, and Variable Insurance Products Fund III (the Funds
or Fund).The Funds are part of the Fidelity Investments(R) group of companies.
The values allocated to the Options reflect the investment performance of the
Funds' portfolios. The prospectus for the Funds describes the investment
objectives, policies and risks of each of the Funds' portfolios. There are
thirteen Variable Account Options available:
Money Market Investment Grade Bond
High Income Asset Manager
Equity-Income Index 500
Growth Contrafund
Overseas Asset Manager: Growth
Balanced Growth Opportunities
Growth & Income
We currently offer Guaranteed Rate Options ("GRO" and also referred to as Fixed
Accounts). Your allocation to a Guaranteed Rate Option accumulates at a fixed
interest rate we declare at the beginning of the duration you select. A market
value adjustment (Market Value Adjustment) will be made for withdrawals,
surrenders, transfers and certain other transactions before the expiration of
your GRO Account, but your value under a GRO Account may not be decreased below
an amount equal to your allocation plus interest compounded at an annual
effective rate of 3% (Minimum Value), less previous withdrawals and any
applicable contingent withdrawal charges.
This prospectus contains information about the contracts that you should know
before investing. You should read this prospectus and any supplements, and
retain them for future reference. This prospectus is not valid unless provided
with the current prospectus for the Funds, which you should also read.
For further information and assistance, you should contact our Administrative
Office at National Integrity Life Insurance Company, 200 Park Avenue, 20th
Floor, New York, New York 10166. You may also call the following toll-free
number: 1-800-433-1778.
A registration statement relating to the contracts, which includes a Statement
of Additional Information (SAI) dated December 31, 1996, has been filed with the
Securities and Exchange Commission. The SAI is incorporated by reference into
this prospectus. A copy of the SAI is available free of charge by writing to or
calling our Administrative Office. A table of contents for the SAI follows the
table of contents for this prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is December 31, 1996.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part 1 - Summary Page
<S> <C>
Your Variable Annuity Contract.................................. 1
Your Benefits................................................... 1
How Your Contract is Taxed...................................... 1
Your Contributions.............................................. 1
Your Investment Options......................................... 1
Variable Account Options........................................ 1
Account Value, Adjusted Account Value and Cash Value............ 2
Transfers....................................................... 2
Charges and Fees................................................ 2
Withdrawals..................................................... 3
Your Initial Right to Revoke.................................... 3
Table of Annual Fees and Expenses............................... 4
Financial Information........................................... 8
Part 2 - National Integrity And The Separate Account
National Integrity Life Insurance Company....................... 9
The Separate Account and the Variable Account Options........... 9
Assets of Our Separate Account.................................. 9
Changes In How We Operate....................................... 9
Part 3 - Your Investment Options
The Funds....................................................... 10
The Funds' Investment Adviser............................... 11
Investment Objectives of the Portfolios..................... 12
Fixed Accounts.................................................. 14
Guaranteed Rate Options..................................... 14
Renewals of GRO Accounts.................................. 15
Market Value Adjustments.................................. 15
Part 4 - Deductions and Charges
Separate Account Charges........................................ 16
Annual Administrative Charge.................................... 16
Fund Charges.................................................... 16
State Premium Tax Deduction..................................... 17
Contingent Withdrawal Charge.................................... 17
Transfer Charge................................................. 18
Hardship Waiver................................................. 18
Tax Reserve..................................................... 18
Part 5 - Terms of Your Variable Annuity
Contributions Under Your Contract............................... 18
Your Account Value.............................................. 19
Your Purchase of Units in Our Separate Account.................. 19
How We Determine Unit Value..................................... 19
Transfers....................................................... 20
Withdrawals..................................................... 21
Assignments..................................................... 21
Death Benefits and Similar Benefit Distributions................ 21
</TABLE>
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<TABLE>
Page
<S> <C>
Annuity Benefits................................................ 22
Annuities....................................................... 22
Annuity Payments................................................ 23
Timing of Payment............................................... 23
How You Make Requests and Give Instructions..................... 23
Part 6 - Voting Rights
Fund Voting Rights.............................................. 23
How We Determine Your Voting Shares............................. 24
How Fund Shares Are Voted....................................... 24
Separate Account Voting Rights.................................. 24
Part 7 - Tax Aspects of the Contracts
Introduction.................................................... 24
Your Contract is an Annuity..................................... 25
Taxation of Annuities Generally................................. 25
Distribution-at-Death Rules..................................... 26
Diversification Standards....................................... 26
Tax-Favored Retirement Programs................................. 27
Individual Retirement Annuities............................. 27
Tax Sheltered Annuities..................................... 27
Simplified Employee Pensions................................ 27
Corporate and Self-Employed (H.R. 10 and Keogh) Pension
and Profit Sharing Plans................................... 28
Deferred Compensation Plans of State and Local Governments
and Tax-Exempt Organizations................................ 28
Distributions Under Tax-Favored Retirement Programs............. 28
Federal and State Income Tax Withholding........................ 29
Impact of Taxes to National Integrity........................... 29
Transfers Among Investment Options.............................. 29
Part 8 - Additional Information
Systematic Withdrawals.......................................... 29
Dollar Cost Averaging........................................... 30
Asset Rebalancing............................................... 30
Systematic Contributions........................................ 30
Performance Information......................................... 30
</TABLE>
Appendix A - Illustration of a Market Value Adjustment
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS.
<PAGE>
SAI Table of Contents
Part 1 - National Integrity and Custodian
Part 2 - Distribution of the Contracts
Part 3 - Performance Information
Part 4 - Determination of Annuity Unit Values
Part 5 - Financial Statements
If you would like to receive a copy of the Statement of Additional Information,
please complete the form below and send it to:
Administrative Office
National Integrity Life Insurance Company
200 Park Avenue, 20th Floor
New York, New York 10166
ATTN: Request for SAI of Separate Account I
Name:_____________________________________________________________________
Address:__________________________________________________________________
City:________________________________ State:_________ Zip:________________
<PAGE>
PART 1 -- SUMMARY
Your Variable Annuity Contract
In this prospectus, we, our and us mean National Integrity Life Insurance
Company (National Integrity), a subsidiary of Integrity Life Insurance Company
(Integrity) and an indirect wholly owned subsidiary of ARM Financial Group, Inc.
(ARM). We offer individual variable annuity contracts. In certain states, we
offer certificates under a group variable annuity contract instead of contracts.
When we use the words contract or certificate, we are referring to both the
individual contracts and the group certificates.
You can invest for retirement by purchasing a contract if you properly complete
a Customer Profile form (an application or enrollment form may be required in
some states) and make a minimum initial contribution. In this prospectus, you
and your mean the Annuitant, the person upon whose life the Annuity Benefit and
the Death Benefit are based, usually the Owner of the contract. If the Annuitant
does not own the contract, all of the rights under the contract belong to the
Owner until annuity payments begin.
Your retirement or endowment date (Retirement Date) will be the date you
specify, but no later than your 90th birthday or earlier, if required by law.
Your Benefits
Your contract provides an Account Value, an annuity benefit, and a death
benefit. See "Your Account Value," "Death Benefits and Similar Benefit
Distributions" and "Annuity Benefits" in Part 5.
Your benefits may be received under a contract subject to the usual rules for
taxation of annuities, including the tax-deferral of earnings until withdrawal.
The contract also can provide your benefits under certain tax-favored retirement
programs, which are subject to special rules covering such matters as
eligibility and contribution amounts. See Part 7, "Tax Aspects of the
Contracts" for detailed information.
How Your Contract is Taxed
Under current law, any increases in the value of your contributions to your
contract are tax deferred and will not be included in your taxable income until
withdrawn. See Part 7, "Tax Aspects of the Contracts."
Your Contributions
The minimum initial contribution in most states is currently $1,000. Subsequent
contributions of at least $100 can be made. Special rules for lower minimum
initial and subsequent contributions apply for certain tax-favored retirement
plans. See "Contributions Under Your Contract" in Part 5.
Your Investment Options
You may allocate contributions to the Variable Account Options or to the Fixed
Accounts, or both. The Variable Account Options and the Fixed Accounts are
together referred to as the Investment Options. Contributions may be allocated
to up to nine Investment Options. See "Contributions Under Your Contract" in
Part 5. To select Investment Options most suitable for you, see Part 3, "Your
Investment Options."
Variable Account Options
The Variable Account Options invest in shares of corresponding investment
portfolios of the Funds, each a "series" type of mutual fund. Each investment
portfolio is referred to as a Portfolio. The investment
1
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objective of each Variable Account Option and its corresponding Portfolio is the
same. Your value in a Variable Account Option will vary depending on the
performance of the corresponding Portfolio. For a full description of the Funds,
see the Funds' prospectus and the Funds' Statement of Additional Information.
Account Value, Adjusted Account Value and Cash Value
The sum of your values under the Fixed Accounts plus your values in the Variable
Account Options is referred to as the Account Value. Your Adjusted Account Value
is your Account Value, as increased or decreased (but not below the Minimum
Value) by any Market Value Adjustments. Your Cash Value is equal to your
Adjusted Account Value, reduced by any applicable contingent withdrawal charge
and will be reduced by the pro rata portion of the annual administrative charge,
if applicable. See "Charges and Fees" below.
Transfers
You may transfer all or portions of your Account Value among the Investment
Options, subject to the conditions described under "Transfers" in Part 5.
Transfers from any Investment Option must be for at least $250. Transfers may be
arranged through our telephone transfer service. See Part 5, "Transfers."
Transfers may also be made under special services we offer to dollar cost
average or rebalance your investment in the Variable Account Options. See Part
8, "Dollar Cost Averaging," and "Asset Rebalancing."
Charges and Fees
If your Account Value is less than $50,000 as of the last day of any contract
year prior to your Retirement Date, an annual administrative expense charge of
$30 is deducted from your contract. See Part 4, "Deductions and Charges."
A charge at an effective annual rate of 1.35% of the Account Value in the
Variable Account Options is made daily. We make this charge to cover mortality
and expense risks (1.20%) and certain administrative expenses (.15%). The charge
will never be greater than an effective annual rate of 1.35% of the Account
Value in the Variable Account Options. See Part 4, "Deductions and Charges."
Investment advisory fees and other expenses are deducted from amounts invested
by the Separate Account in the Funds. For providing investment management
services to the Portfolios of the Funds, Fidelity Management and Research
Company (Fidelity Management) receives fees from the Portfolios based on the
average net assets of each Portfolio. The highest annual rate at which any of
the Portfolios paid advisory fees in 1995 was .76% of average net assets.
Advisory fees cannot be increased without the consent of Fund shareholders. See
"Table of Annual Fees and Expenses" below and "The Funds' Investment Adviser" in
Part 3.
If you frequently transfer funds from one Investment Option to another, certain
transfers may become subject to a charge. We will not, however, charge more than
$20 per transfer. See "Transfer Charge" in Part 4.
When you make withdrawals from your contract, a contingent withdrawal charge may
be deducted from your Account Value. This sales charge will be in addition to
the Market Value Adjustment applicable to early withdrawals from GRO Accounts.
Under certain circumstances, the contingent withdrawal charge and market value
adjustment may be waived. See "Withdrawals" below and "Guaranteed Rate Options"
in Part 3.
2
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Withdrawals
You may make an unlimited number of withdrawals from your contract as frequently
as you wish. Each withdrawal must be for at least $300. A sales charge of up to
6.5% of the contribution amount withdrawn, in excess of any free withdrawal
amount (defined below), will be deducted from your Account Value, unless one of
the exceptions applies. This charge defrays marketing expenses. See "Contingent
Withdrawal Charge" in Part 4. Most withdrawals made by you prior to age 59-1/2
are also subject to a 10% federal tax penalty. In addition, some tax-favored
retirement programs limit withdrawals. See Part 7, "Tax Aspects of the
Contracts." For partial withdrawals, the total amount deducted from your
Account Value will include the withdrawal amount requested, any applicable
Market Value Adjustment, and any applicable withdrawal charge, so that the net
amount you receive will be the amount requested.
The free withdrawal amount is a non-cumulative amount which you may take as a
partial withdrawal each contract year without being subject to the contingent
withdrawal charge or any Market Value Adjustment. It is equal to 10% of the
Account Value, minus cumulative prior withdrawals in the current contract year.
Your Initial Right to Revoke
Within ten days after you receive your contract, you may cancel it by returning
it to our Administrative Office. The 10-day period may be extended if required
by state law. We will refund all your contributions with an adjustment for any
investment gain or loss on the contributions put into each Variable Account
Option from the date units were purchased until the date your contract is
received by us, including any charges deducted. If state law instead requires a
refund of your contributions without any adjustment, we will return that amount
to you. For allocations to Fixed Accounts, we will refund to you the amount of
your contributions.
3
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Table of Annual Fees and Expenses
Contract Owner Transaction Expenses
- -----------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Sales Load on Purchases...................... $0
Deferred Sales Load (1)...................... 7% Maximum
Exchange Fee (2)............................. $0
Annual Administrative Charge (3)............. $30
Separate Account Annual Expenses (as a
percentage of average account value) (4)
- ---------------------------------------------
Mortality and Expense Risk Fees.............. 1.20%
Administrative Expenses...................... .15%
----------
Total Separate Account Annual Expenses....... 1.35%
==========
Fund Annual Expenses After Reimbursement
(as a percentage of average net assets) (5)
- ---------------------------------------------
Other Total Annual
Expenses Expensersement
Management After Expense After Expense
Fees(6) Reimbursement Reimbursement
---------- ------------- -------------
- ---------------------------------------------------------------------------------------------
Money Market Portfolio .24% .09% .33%
- ---------------------------------------------------------------------------------------------
High Income Portfolio .60% .11% .71%(8)
- ---------------------------------------------------------------------------------------------
Equity-Income Portfolio .51% .10% .61%
- ---------------------------------------------------------------------------------------------
Growth Portfolio .61% .09% .70%
- ---------------------------------------------------------------------------------------------
Overseas Portfolio .76% .15% .91%
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Investment Grade Bond Portfolio .45% .14% .59%
- ---------------------------------------------------------------------------------------------
Asset Manager Portfolio .56% .10% .66%(7)(8)(9)
- ---------------------------------------------------------------------------------------------
Index 500 Portfolio .09% .19% .28%(9)
- ---------------------------------------------------------------------------------------------
Contrafund Portfolio .61% .11% .72%(8)
- ---------------------------------------------------------------------------------------------
Asset Manager: Growth Portfolio .49% .41% .90%(7)(8)(9)
- ---------------------------------------------------------------------------------------------
Balanced Portfolio .51% .91% 1.42%(8)
- ---------------------------------------------------------------------------------------------
Growth & Income Portfolio .51% .49% 1.00%(8)
- ---------------------------------------------------------------------------------------------
Growth Opportunities Portfolio .61% .24% .85%(8)(10)
- ---------------------------------------------------------------------------------------------
</TABLE>
- -------------------------
(1) See "Deductions and Charges - Contingent Withdrawal Charge" in Part 4. You
may make a partial withdrawal of up to 10% of the Account Value in any contract
year less withdrawals during the current contract year, without assessment of
any withdrawal charge.
(2) After the first twelve transfers during a contract year, National Integrity
has the right to impose a transfer charge of $20 per transfer. This charge would
not apply to transfers made for dollar cost averaging or asset rebalancing. See
"Deductions and Charges - Transfer Charge" in Part 4.
(3) The annual administrative charge is $30. This charge applies only if the
Account Value is less than $50,000 at the end of any contract year prior to your
Retirement Date. See "Deductions and Charges -Annual Administrative Charge" in
Part 4.
4
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(4) See "Deductions and Charges - Separate Account Charges" in Part 4.
(5) In the Funds' prospectus, see "Management, Distribution and Service Fees."
(6) Management fees for all Portfolios, other than Index 500 Portfolio, are
calculated by adding a group fee rate to an individual fund fee rate, and
multiplying the result by the Portfolio's average net assets. The individual
fund fee rate ranges from .03% to .45% and is shown by Portfolio on Page 10. The
group fee rate is based on the average net assets of all mutual funds advised by
Fidelity Management, and it drops as total assets under management increase.
This rate cannot rise above .52% for Equity-Income, Growth, Overseas, Asset
Manager, Asset Manager: Growth, Contrafund, Balanced, Growth & Income, and
Growth Opportunities Portfolios. It cannot rise above .37% for Money Market,
High Income, and Investment Grade Bond Portfolios. The Money Market fee also
includes an income based component. The income based component is 6% of that
portion of the portfolio's gross yield which exceeds a 5% return (but capped at
a maximum of .24%). The 1995 aggregate rates, comprised of the individual and
group fee rates, is shown on page 10. Absent reimbursement, Index 500 Portfolio
would have paid a monthly management fee at the annual rate of .28% of the
Portfolio's average net assets. The management fees in the above table reflect
management fees paid in 1995, except for the Growth & Income Portfolio.
(7) Effective August 1, 1996, the individual fund fee rates for both Asset
Manager and Asset Manager: Growth dropped from .40% to .25% and .40% to .30%,
respectively. The table has been restated to reflect the reduction in
management fees for these Portfolios.
(8) A portion of the brokerage commissions the Portfolio paid was used to
reduce its expenses; total fund annual expenses actually were .83% for Growth
Opportunities, and would have been .64% for Asset Manager Portfolio on a
restated basis as explained above. The reduction in expenses for the High
Income, Contrafund, Asset Manager: Growth, and Balanced Portfolios did not
impact the total fund annual expense percentage, and is estimated not to impact
the total fund annual expense percentage for Growth & Income Portfolio.
(9) The Portfolio's expenses were voluntarily reduced by the fund's investment
adviser. Absent such reimbursement, management fees, other expenses, and total
fund annual expenses would have been .28%, .19% and .47%, respectively for Index
500 Portfolio, and would have been .71%, .42% and 1.13%, respectively for Asset
Manager: Growth Portfolio for the year ended December 31, 1995.
(10) The fund's investment adviser has agreed to reimburse the Portfolio to the
extent that total operating expenses exceed 1.00%. Even without this
reimbursement, total operating expenses are estimated not to exceed 1.00% of
average net assets.
5
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Examples
The examples below show the expenses that would be borne by the Annuitant per
$1,000 investment, assuming a $40,000 average contract value and a 5% annual
rate of return on assets.
Expenses per $1,000 investment if you surrender your contract at the end of the
- -------------------------------------------------------------------------------
applicable period:
- -----------------
<TABLE>
<CAPTION>
Portfolio 1 year 3 years 5 years 10 years
- ----------------------- ------- ------- ------- --------
<S> <C> <C> <C> <C>
Money Market........... $87.96 $105.54 $125.44 $206.36
High Income............ $91.86 $117.34 $145.29 $246.89
Equity-Income.......... $90.83 $114.25 $140.10 $236.37
Growth................. $91.76 $117.03 $144.77 $245.84
Overseas............... $93.91 $123.51 $155.60 $267.61
Investment Grade Bond.. $90.63 $113.63 $139.06 $234.26
Asset Manager.......... $91.35 $115.79 $142.69 $241.65
Index 500.............. $87.45 $103.98 $122.81 $200.91
Contrafund............. $91.96 $117.65 $145.81 $247.94
Asset Manager: Growth.. $93.81 $123.20 $155.09 $266.58
Balanced............... $99.13 $139.13 $181.51 $318.56
Growth & Income........ $94.83 $126.28 $160.22 $276.79
Growth Opportunities... $93.29 $121.66 $152.52 $261.44
</TABLE>
6
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Expenses per $1,000 investment if you do not surrender your contract at the end
- -------------------------------------------------------------------------------
of the applicable period:
- ------------------------
Portfolio 1 year 3 years 5 years 10 years
- --------- ------ ------- ------- --------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Money Market........... $17.96 $55.54 $ 95.44 $206.36
High Income............ $21.86 $67.34 $115.29 $246.89
Equity-Income.......... $20.83 $64.25 $110.10 $236.37
Growth................. $21.76 $67.03 $114.77 $245.84
Overseas............... $23.91 $73.51 $125.60 $267.61
Investment Grade Bond.. $20.63 $63.63 $109.06 $234.26
Asset Manager.......... $21.35 $65.79 $112.69 $241.65
Index 500.............. $17.45 $53.98 $ 92.81 $200.91
Contrafund............. $21.96 $67.65 $115.81 $247.94
Asset Manager: Growth.. $23.81 $73.20 $125.09 $266.58
Balanced............... $29.13 $89.13 $151.51 $318.56
Growth & Income........ $24.83 $76.28 $130.20 $276.79
Growth Opportunities... $23.29 $71.66 $122.52 $261.44
</TABLE>
Expenses per $1,000 investment if you elect the normal form of annuity at the
- -----------------------------------------------------------------------------
end of the applicable period:
- ----------------------------
Same expenses per $1,000 investment as shown in table immediately above.
These examples assume a continuation of the fixed charges that are borne by the
Separate Account and of the investment advisory fees and other expenses of the
Funds as they were for the year ended December 31, 1995, except for Growth &
Income Portfolio, which were based on estimated current expenses. Actual Fund
expenses may be greater or less than those on which these examples were based.
The annual rate of return assumed in the examples is not an estimate or
guarantee of future investment performance. The table also assumes an estimated
$40,000 average contract value, so that the administrative charge per $1,000 of
net asset value in the Separate Account is $0.75. Such per $1,000 charge would
be higher for smaller Account Values and lower for higher values.
The above table and examples are intended to assist your understanding of the
various costs and expenses that apply to your contract, directly or indirectly.
These tables reflect expenses of the Separate Account as well as those of the
Portfolios. Premium taxes upon annuitization also may be applicable.
7
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Financial Information
The table below shows the unit value for each Variable Account Option at
inception, the number of units outstanding at December 31 of each year since
inception, and the unit value at the end of each period. The unit value at the
beginning of each period is the unit value as of the end of the previous period.
UNIT VALUES AND UNITS OUTSTANDING
---------------------------------
<TABLE>
<CAPTION>
Investment Asset
Money High Equity- Grade Asset Index Contra- Manager:
Market Income Income Growth Overseas Bond Manager 500 fund Growth
Division Division Division Division Division Division Division Division Division Division
---------- ---------- --------- -------- -------- --------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Date of Inception* $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
December 31, 1987 - - - - - - $ 7.92 - - -
Number of units - - - - - - 15,626 - - -
December 31, 1988 - - - - $ 9.79 $ 10.05 $ 8.89 - - -
Number of units - - - - 1,646 1,287 23,806 - - -
December 31, 1989 - - $ 10.99 $ 11.13 $ 12.08 $ 11.48 $ 11.05 - - -
Number of units - - 12,808 91 1,646 1,286 26,296 - - -
December 31, 1990 $ 10.17 - $ 9.54 $ 11.76 $ 11.13 $ 12.06 $ 10.90 - - -
Number of units 2,001 - 10,281 90 1,697 1,283 33,770 - - -
December 31, 1991 $ 10.64 - $ 13.63 $ 19.12 $ 13.63 $ 12.25 $ 13.45 - - -
Number of units 3.961 - 12,059 927 2,789 - 28,066 - - -
December 31, 1992 $ 10.90 - $ 15.72 $ 20.62 $ 12.01 $ 13.44 $ 14.85 - - -
Number of units 2,744 - 32,842 30,140 3,816 5,995 57,934 - - -
December 31, 1994 $ 11.10 $ 11.22 $ 18.33 $ 24.29 $ 16.25 $ 14.72 $ 17.73 $ 10.65 - -
Number of units 109,685 120,243 192,745 136,418 97,667 52,787 744,402 16,821 - -
December 31, 1994 $ 11.42 $ 10.90 $ 19.37 $ 23.95 $ 16.31 $ 13.98 $ 16.43 $ 10.62 - -
Number of units 782,370 512,098 503,403 372,307 432,518 97,548 1,706,592 99,982 - -
December 31, 1995 $ 11.93 $ 12.97 $ 25.81 $ 31.99 $ 17.65 $ 16.18 $ 18.95 $ 14.37 $ 13.31 $ 12.02
Number of units 1,692,564 1,131,907 1,316,163 657,586 426,045 264,608 1,460,833 293,436 954,037 85,146
</TABLE>
*Inception dates for the High Income Option and the Index 500 Option were
February 19, 1993 and March 4, 1993, respectively. The inception date for the
Balanced Option, Growth Opportunities Option, and Growth & Income Option was
December 31, 1996. The Inception date for the Contrafund Option and the Asset
Manager: Growth Option was February 6, 1995. Inception dates for the remaining
Options all were in the third quarter of 1987. Prior to September 3, 1991, the
Variable Account Options invested in shares of corresponding portfolios of Prism
Investment Trust, and the Money Market, Equity-Income, Growth, Overseas,
Investment Grade Bond and Asset Manager Options were known as the Money Market,
Common Stock, Aggressive Stock, Global, Bond and Balanced Options,
respectively.
8
<PAGE>
PART 2 - NATIONAL INTEGRITY AND THE SEPARATE ACCOUNT
National Integrity Life Insurance Company
National Integrity is a stock life insurance company organized under the laws of
New York. Our home office is located in New York, New York. We are authorized to
sell life insurance and annuities in eight states and the District of Columbia.
In addition to the contracts, we sell flexible premium annuity contracts with an
underlying investment medium other than the Funds, and fixed single premium
annuity contracts. We are currently licensed to sell variable contracts in five
states and the District of Columbia. In addition to issuing annuity products, we
have entered into agreements with other insurance companies to provide
administrative and investment support for products to be designed, underwritten
and sold by these companies.
National Integrity is an indirect wholly owned subsidiary of ARM. ARM is a
financial services company providing retail and institutional products and
services to the long-term savings and retirement market. At December 31, 1995,
ARM had $5.4 billion of assets under management.
The Separate Account and the Variable Account Options
The Separate Account is established and maintained under the insurance laws of
the State of New York. It is a unit investment trust registered with the
Securities and Exchange Commission (the SEC) under the Investment Company Act of
1940 (1940 Act). A unit investment trust is a type of investment company. SEC
registration does not involve any supervision by the SEC of the management or
investment policies of the Separate Account. Each Variable Account Option
invests in shares of a corresponding Portfolio of the Funds. We may establish
additional Options, some of which may not be available for your allocations. The
Variable Account Options currently available to you are listed on the cover page
of this prospectus. Prior to September 3, 1991, the Portfolios then offered
invested in shares of corresponding portfolios of Prism Investment Trust.
Assets of Our Separate Account
Under New York law, we own the assets of our Separate Account and use them to
support the variable portion of your contract and other variable annuity
contracts. Annuitants under other variable annuity contracts will participate in
the Separate Account in proportion to the amounts relating to their contracts.
The Separate Account's assets supporting the variable portion of these variable
contracts may not be used to satisfy liabilities arising out of any other
business of ours. Under certain unlikely circumstances, one Variable Account
Option may be liable for claims relating to the operations of another Option.
Income, gains and losses, whether or not realized, from assets allocated to the
Separate Account are credited to or charged against the Separate Account without
regard to our other income, gains or losses. We may permit charges owed to us to
stay in the Separate Account, and thus may participate proportionately in the
Separate Account. Amounts in the Separate Account in excess of reserves and
other liabilities belong to us, and we may transfer them to our general account
(General Account).
Changes In How We Operate
We may modify how we or our Separate Account operate, subject to your approval
when required by the 1940 Act or other applicable law or regulation. You will be
notified if any changes result in a material change in the underlying
investments of a Variable Account Option. We may:
- add Options to, or remove Options from, our Separate Account, combine two
or more Options within our Separate Account, or withdraw assets relating to
your contract from one Option and put them into another;
9
<PAGE>
- register or end the registration of the Separate Account under the 1940 Act;
- operate our Separate Account under the direction of a committee or discharge
such a committee at any time (the committee may be composed of a majority of
persons who are "interested persons" of National Integrity under
the 1940 Act);
- restrict or eliminate any voting rights of Owners or others who have voting
rights that affect our Separate Account;
- cause one or more Options to invest in a mutual fund other than or in
addition to the Funds;
- operate our Separate Account or one or more of the Options in any other form
the law allows, including a form that allows us to make direct investments.
We may make any legal investments we wish. In choosing these investments, we
will rely on our own or outside counsel for advice.
PART 3 - YOUR INVESTMENT OPTIONS
The Funds
Each of the Funds is an open-end diversified management investment company
registered under the 1940 Act. Such registration does not involve supervision by
the SEC of the investments or investment policies of the Funds. The Funds are
each a "series" type of investment company with diversified portfolios. The
Funds do not impose a sales charge or "load" for buying and selling their
shares. The shares of the Portfolios of the Funds are bought and sold by the
Separate Account at their respective net asset values.
The Funds are designed to serve as investment vehicle for variable annuity and
variable life contracts of insurance companies. Shares of the Portfolios of the
Funds currently are available to the separate accounts of a number of insurance
companies, both affiliated and unaffiliated with Fidelity Management or National
Integrity. The Board of Trustees of each of the Funds is responsible for
monitoring the Fund for the existence of any material irreconcilable conflict
between the interests of the policyowners of all separate accounts investing in
the Fund and determining what action, if any, should be taken in response. If we
believe that a Fund's response to any of those events insufficiently protects
our contract owners, we will see to it that appropriate and available action is
taken to protect our contract owners. See "The Fund and the Fidelity
Organization" in the Funds' prospectus for a further discussion of the risks
associated with the offering of Fund shares to our Separate Account and the
separate accounts of other insurance companies.
Shares of Portfolios of the Funds are made available to the Separate Account
under three essentially identical Participation Agreements (Participation
Agreement or Agreements). The Participation Agreements are among the applicable
Fund, Fidelity Distributors Corporation which is the principal underwriter for
shares of the Funds (Distributor), and National Integrity. If state or federal
law precludes the sale of the Funds' or any Portfolio's shares to the Separate
Account, or in certain other circumstances, sales of shares to the Separate
Account may be suspended and/or the Participation Agreements may be terminated
as to the Funds or the affected Portfolio. Also, the Participation Agreements
may be terminated by any party thereto with one year's written notice.
Notwithstanding termination of the Participation Agreement, the Fund and the
Distributor are obligated to continue to make the Funds' shares available for
contracts outstanding on the date the Participation Agreement terminates, unless
the Participation Agreement was terminated due to an irreconcilable conflict
among contractowners of different separate accounts. If for any reason the
shares of any Portfolio are no longer available for purchase by the Separate
Account for outstanding contracts, the parties to the Participation Agreements
have agreed to cooperate to comply with the 1940 Act in arranging for the
substitution of another funding medium as soon as reasonably practicable and
without disruption of sales of shares to the Separate Account or any Variable
Account Option.
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<PAGE>
The Funds' Investment Adviser. Fidelity Management & Research Company (Fidelity
Management), a registered investment adviser under the Investment Advisers
Act of 1940, serves as the investment adviser to each Fund. Fidelity Management,
whose principal address is 82 Devonshire Street, Boston, Massachusetts, is a
wholly owned subsidiary of FMR Corp. and is part of Fidelity Investments(R), one
of the largest investment management organizations in the United States.
Fidelity Investments(R) includes a number of different companies, which provide
a variety of financial services and products to individuals and corporations.
Fidelity Management provides investment research and portfolio management
services to mutual funds and other clients. At December 31, 1995, Fidelity
Management advised funds having more than 23 million shareholder accounts with a
total value of more than $354 billion. For certain of the Portfolios, Fidelity
Management has entered into sub-advisory agreements with affiliated companies
that are part of the Fidelity Investments(R) organization. Fidelity Management,
not the Portfolios, pays the sub-advisers for their services to the Portfolios.
The Portfolios of the Funds pay monthly advisory fees to Fidelity Management.
The advisory fee payable by each of the Portfolios, other than the Money Market
Portfolio and the Index 500 Portfolio, is composed of a group fee rate and an
individual fund fee rate. The group fee rate is based on the average monthly net
assets of all mutual funds advised by Fidelity Management. For the Equity-
Income, Growth, Overseas, Asset Manager, Contrafund, and Asset Manager: Growth
Portfolios, the group fee rate cannot rise above .52%. For the High Income and
Investment Grade Bond Portfolios, the group fee rate cannot rise above .37%. The
group fee rate drops as total assets under management increase.
The Money Market Portfolio's advisory fee is made up of two components: a basic
fee rate and an income-based component. The basic fee rate is the sum of a group
fee rate as described above (but capped at a maximum of .37%) and an individual
fund fee rate of .03%. The income based component is 6% of that portion of the
fund's gross yield which exceeds a 5% return (but capped at a maximum of .24%).
The Index 500 Portfolio pays a monthly fee at the annual rate of .28% of the
Portfolio's average net assets.
Set forth in the table below is the individual fund fee rate for the portfolios
and their 1995 aggregate advisory rate, comprised of the individual and group
rates, as a percentage of average net assets, and the Index 500 Portfolio's 1995
advisory rate as a percentage of average net assets.
1995
Portfolio Individual Rate Aggregate Rate
- --------- --------------- --------------
Money Market .03% .24%
High Income .45% .60%
Equity-Income .20% .51%
Growth .30% .61%
Overseas .45% .76%
Investment Grade Bond .30% .45%
Asset Manager .25% .56%
Index 500 N/A .09%
Contrafund .30% .61%
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Asset Manager: Growth .30% .49%
Balanced .20% .51%
Growth & Income .20% .51%
Growth Opportunities .30% .61%
Investment Objectives of the Portfolios. Set forth below is a summary of the
investment objectives of the Portfolios of the Funds. There can be no assurance
that these objectives will be achieved. You should read the Funds' prospectus
carefully before investing.
Money Market Portfolio
----------------------
Money Market Portfolio seeks to obtain as high a level of current income as is
consistent with preserving capital and providing liquidity. It invests only in
high-quality, U.S. dollar denominated money market securities of domestic and
foreign issuers, such as certificates of deposit, obligations of governments and
their agencies, and commercial paper and notes.
High Income Portfolio
---------------------
High Income Portfolio seeks to obtain a high level of current income by
investing primarily in high-yielding, lower rated, fixed-income securities,
while also considering growth of capital. It normally invests at least 65% of
its total assets in income-producing debt securities and preferred stocks,
including convertible securities, and up to 20% in common stocks and other
equity securities. In view of the types of securities in which this Portfolio
invests, you should read the complete risk disclosure for this Portfolio in the
Funds' prospectus before investing in it.
Equity-Income Portfolio
-----------------------
Equity-Income Portfolio seeks reasonable income by investing primarily in income
producing equity securities, with the potential for capital appreciation as a
consideration. It normally invests at least 65% of its assets in income-
producing common or preferred stock and the remainder in debt securities.
Growth Portfolio
----------------
Growth Portfolio seeks to achieve capital appreciation, normally by purchase of
common stocks, although investments are not restricted to any one type of
security. Capital appreciation may also be found in other types of securities,
including bonds and preferred stocks.
Overseas Portfolio
------------------
Overseas Portfolio seeks long-term growth of capital primarily through
investments in foreign securities. It normally invests at least 65% of its
assets in securities from at least three countries outside North America.
Investment Grade Bond Portfolio
-------------------------------
Investment Grade Bond Portfolio seeks as high a level of current income as is
consistent with the preservation of capital by investing in a broad range of
investment-grade fixed-income securities. It will maintain a dollar-weighted
average portfolio maturity of ten years or less. For 80% of its assets, the
Investment Grade Bond Portfolio purchases only securities rated A or better by
Moody's Investors Service, Inc. or Standard & Poor's Corporation or unrated
securities judged by Fidelity Management to be of equivalent quality.
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<PAGE>
Asset Manager Portfolio
-----------------------
Asset Manager Portfolio seeks high total return with reduced risk over the long-
term by allocating its assets among stocks, bonds and short-term money market
fixed-income instruments. The expected "neutral" mix of assets, which will occur
when the investment adviser concludes there is minimal relative difference in
value between the three asset classes, is 50% in equities, 40% in intermediate
to long-term bonds and 10% in short-term money market fixed income instruments.
Index 500 Portfolio
-------------------
Index 500 Portfolio seeks to provide investment results that correspond to the
total return (i.e., the combination of capital changes and income) of common
stocks publicly traded in the United States. In seeking this objective, the
Portfolio attempts to duplicate the composition and total return of the Standard
& Poor's 500 Composite Stock Price Index while keeping transaction costs and
other expenses low.
Contrafund Portfolio
--------------------
Contrafund Portfolio is a growth fund which seeks to increase the value of your
investment over the long term by investing in equity securities of companies
that are undervalued or out of favor. This approach focuses on companies that
are currently out of public favor but show potential for capital appreciation.
Contrafund Portfolio invests primarily in common stock and securities
convertible into common stock, but it has the flexibility to invest in any type
of security that may produce capital appreciation.
Asset Manager: Growth Portfolio
-------------------------------
Asset Manager: Growth Portfolio is an asset allocation fund which seeks to
maximize total return over the long term through investments in stocks, bonds,
and short-term money market instruments. The fund has a neutral mix which
represents the way the fund's investments will generally be allocated over the
long term. The range and approximate neutral mix for each asset class are shown
below:
Range Neutral Mix
----- -----------
Stock Class 0-100% 70%
Bond Class 0-100% 25%
Short-Term/
Money Market Class 0-100% 5%
Growth Opportunities Portfolio
------------------------------
Growth Opportunities Portfolio seeks to provide capital growth by investing
primarily in common stocks and securities convertible into common stock. It has
the flexibility to adjust to investment mix between growth, cyclical and value
stocks as market conditions change. The portfolio seeks growth through either
appreciation of the security itself or an increase in the company's earning or
gross sales.
Balanced Portfolio
------------------
Balanced Portfolio seeks both income and growth of capital by investing in a
diversified portfolio of equity and fixed-income securities. It uses a balanced
approach to provide the best possible total return from investments in foreign
and domestic equity securities, convertible securities, preferred and common
stocks paying any combination of dividends and capital gains, and fixed income
securities.
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<PAGE>
Growth & Income Portfolio
-------------------------
Growth & Income Portfolio seeks long-term growth of capital with some current
income. It invests primarily in stocks of companies that offer potential for
growth in earnings while paying dividends, but offer the potential for capital
appreciation on future income. Investments may include common and preferred
stocks, convertible securities, fixed-income securities and foreign securities.
Fixed Accounts
Because of applicable exemptive and exclusionary provisions, interests in
contracts attributable to Fixed Accounts have not been registered under the
Securities Act of 1933 ("1933 Act"), nor under the Investment Company Act of
1940 ("1940 Act"). Thus, neither such contracts nor our General Account, which
guarantees the values and benefits under those contracts, are generally subject
to regulation under the provisions of the 1933 Act or the 1940 Act. Accordingly,
we have been advised that the staff of the Securities and Exchange Commission
has not reviewed the disclosure in this prospectus relating to the Fixed
Accounts or the General Account. Disclosures regarding the Fixed Accounts or the
General Account may, however, be subject to certain generally applicable
provisions of the Federal securities laws relating to the accuracy and
completeness of statements made in prospectuses.
Guaranteed Rate Options
We offer Guaranteed Rate Options (GROs) with durations of three, five, seven and
ten years. We may from time to time change the durations available. Each
allocation to a Guaranteed Rate Option locks in a fixed effective annual
interest rate declared by us (Guaranteed Interest Rate) for the duration you
select (your GRO Account). Each contribution or transfer to a Guaranteed Rate
Option establishes a new GRO Account at the then-current Guaranteed Interest
Rate declared by us. We will not declare an interest rate less than 3%. Each GRO
Account expires at the end of the duration you have selected. See "Renewals of
GRO Accounts" below. Values and benefits under your contract attributable to
Guaranteed Rate Options are guaranteed by the reserves in our GRO separate
account as well as by our General Account.
The value of each of your GRO Accounts is referred to as a GRO Value. The GRO
Value at the expiration of the GRO Account, assuming you have not transferred or
withdrawn any amounts, will be the amount allocated plus interest at the
Guaranteed Interest Rate. We credit interest daily at an effective annual rate
equal to the Guaranteed Interest Rate. We allocate interest at the end of each
contract year and at the time of any transfer, full or partial withdrawal,
payment of a death benefit or purchase of any annuity benefit.
We may declare a higher rate of interest in the first year for any Contribution
allocated to a Guaranteed Rate Option which will exceed the Guaranteed Interest
Rate credited during the remaining years of the Guarantee Period ("Enhanced
Rate"). This Enhanced Rate will be guaranteed for the Guaranteed Period's first
year and declared at the time of purchase. We reserve the right to declare and
credit additional interest based on Contribution, Account Value, withdrawal
dates, economic conditions or on any other lawful, nondiscriminatory basis
("Additional Interest"). Any Enhanced Rate and Additional Interest credited to
your GRO Account will be separate from the Guaranteed Interest Rate and not used
in the Market Value Adjustment formula. The Enhanced Rate or Additional Interest
may not be made applicable under contracts issued in certain states.
Each group of GRO Accounts of the same duration is referred to as a Guaranteed
Rate Option, i.e. all of your three-year GRO Accounts are one Guaranteed Rate
Option while all of your five-year GRO Accounts are another Guaranteed Rate
Option.
You may obtain information about our current Guaranteed Interest Rates by
calling our Administrative Office.
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<PAGE>
Allocations to Guaranteed Rate Options may not be made under contracts issued in
certain states.
Renewals of GRO Accounts. When a GRO Account expires, a new GRO Account of the
same duration, at the then-current Guaranteed Interest Rate, will be established
unless you withdraw your GRO Value or transfer it to another Investment Option.
We will notify you in writing before the expiration of your GRO Accounts. You
must notify us prior to the expiration of your GRO Accounts of any changes you
desire to make. See "Transfers" in Part 5.
Any renewal of a GRO Account will be implemented on the expiration date of the
GRO Account. You will receive the current Guaranteed Interest Rate applicable on
the expiration date. If a GRO Account expires and it cannot be renewed for the
same duration, it will be renewed for the next shortest available duration,
unless you instruct us otherwise within 30 days prior to expiration of the GRO
Account. You may not choose, and we will not renew a GRO Account that expires
after your Retirement Date.
Market Value Adjustments. A Market Value Adjustment is an adjustment, either up
or down, in your GRO Value prior to the expiration of your GRO Account. A Market
Value Adjustment will be made for each transfer, partial withdrawal in excess of
the free withdrawal amount, surrender, or purchase of an annuity benefit from a
GRO Account that occurs other than within 30 days prior to the expiration of the
GRO Account. There will be no Market Value Adjustment made for a death benefit.
The market adjusted value may be higher or lower than the GRO Value. In no
event, however, may the market adjusted value in each GRO Account be less than
the Minimum Value, an amount equal to your allocation to such GRO Account plus
3% interest, compounded annually, less previous withdrawals from such GRO
Account and less any applicable contingent withdrawal charges. The Minimum Value
for partial withdrawals or transfers will be calculated on a pro-rata basis.
The Market Value Adjustment applicable to a GRO Account prior to its expiration
reflects the relationship between the Guaranteed Interest Rate for such GRO
Account and the then-current Guaranteed Interest Rate applicable to a newly
elected GRO Account of a duration equal to the time remaining in your GRO
Account. The Market Value Adjustment will reduce the GRO Value (but not below
the Minimum Value) if the current Guaranteed Interest Rate is higher than the
Guaranteed Interest Rate being credited to amounts under your GRO Account.
Conversely, the Market Value Adjustment will increase the GRO Value if the
current Guaranteed Interest Rate is lower than the Guaranteed Interest Rate
being credited to amounts under your GRO Account.
The Market Value Adjustment for a GRO Account is determined under the following
formula:
MVA = GRO Value x [(1 + A)/N/12/ / (1 + B + .0025)/N/12/ - 1], where
A is the Guaranteed Interest Rate being credited to the GRO Account
subject to the Market Value Adjustment,
B is the current Guaranteed Interest Rate, as of the effective date of the
application of the Market Value Adjustment, for current allocations to a
GRO Account, the length of which is equal to the number of whole months
remaining in your GRO Account. Subject to certain adjustments, if such
remaining period is not equal to an exact period for which we have declared
a new Guaranteed Interest Rate, B will be determined by interpolating
between the Guaranteed Interest Rates for GRO Accounts of durations closest
to (next higher and next lower) the remaining period described above.
N is the number of whole months remaining in your GRO Account.
For contracts issued in certain states, the formula above will be adjusted to
comply with applicable state requirements.
If the remaining term of your GRO Account is 30 days or less, the Market Value
Adjustment for your GRO Account shall be zero. If for any reason we are no
longer declaring current Guaranteed Interest Rates, then for purposes of
determining J we will use the yield to maturity of United States Treasury
15
<PAGE>
Notes with the same remaining term as your GRO Account, interpolating when
necessary, in place of the current Guaranteed Interest Rate or Rates.
For illustrations of the application of the Market Value Adjustment formula, see
Appendix A.
PART 4 -- DEDUCTIONS AND CHARGES
Separate Account Charges
National Integrity deducts from the unit value every calendar day an amount
equal to an effective annual rate of 1.35% of the Account Value in the Variable
Account Options. This daily expense rate cannot be increased without your
consent. Various portions of this total charge, as described below, pay for
certain services to the Separate Account and the contracts.
A daily charge equal to an effective annual rate of .15% of the value of each
Variable Account Option is deducted for administrative expenses not covered by
the annual administrative charge described below. The daily administrative
charge, like the annual administrative charge, is designed to reimburse National
Integrity for expenses actually incurred, without profit.
A daily charge equal to an effective annual rate of 1.20% of the value of each
Variable Account Option is deducted for National Integrity's assuming the
expense risk (.85%) and the mortality risk (.35%) under the contract. The
expense risk is the risk that our actual expenses of administering the contracts
will exceed the annual administrative expense charge. In this context, mortality
risk refers to the cost of insuring the risk National Integrity takes that
annuitants, as a class of persons, will live longer than estimated and therefore
require National Integrity to pay out more annuity benefits than anticipated.
The relative proportion of the mortality and expense risk charges may be
modified, but the total effective annual risk charge of 1.20% of the value of
the Variable Account Options may not be increased on your Contract.
National Integrity may realize a gain from these daily charges to the extent
they are not needed to meet the actual expenses incurred.
Annual Administrative Charge
If your Account Value is less than $50,000 on the last day of any contract year
prior to the your Retirement Date, National Integrity charges an annual
administrative charge of $30. This charge is deducted from your Account Value in
each Investment Option on a pro-rata basis. The portion of the charge applicable
to the Variable Account Options will reduce the number of units credited to you.
The portion of the charge applicable to Fixed Accounts is withdrawn in dollars.
The annual administrative charge will be pro-rated based on the number of days
that have elapsed in the contract year in the event of the Annuitant's
retirement, death, or termination of a contract during a contract year. The
annual administrative charge is waived for employees of National Integrity or
Integrity, the parent of National Integrity, who purchase contracts under the
salary allotment program of either company.
Fund Charges
Our Separate Account purchases shares of the Funds at net asset value. That
price reflects investment advisory fees and other direct expenses that have
already been deducted from the assets of the Funds. The amount charged for
investment management may not be increased without the prior approval of the
Funds' respective shareholders. See "The Funds" in Part 3.
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<PAGE>
State Premium Tax Deduction
National Integrity will not deduct state premium taxes from your contributions
before applying the contributions to the Investment Options, unless required to
pay such taxes under applicable state law. If the Annuitant elects an annuity
benefit, National Integrity will deduct any applicable state premium taxes from
the amount otherwise available for an annuity benefit. State premium taxes, if
applicable, currently range up to 4%.
Contingent Withdrawal Charge
No sales charges are applied when you make a contribution to the contract.
Contributions withdrawn will be subject to a withdrawal charge of up to 7%. As
shown below, the percentage charge varies, depending upon the "age" of the
contributions included in the withdrawal--that is, the contract year in which
each contribution was made. The maximum percentage of 7% would apply if the
entire amount of the withdrawal consisted of contributions made during your
current contract year. No withdrawal charge applies when you withdraw
contributions made earlier than your sixth prior contract year. For purposes of
calculating the withdrawal charge, (1) the oldest contributions will be treated
as the first withdrawn and more recent contributions next, and (2) partial
withdrawals up to the free withdrawal amount will not be considered a withdrawal
of any contributions. For partial withdrawals, the total amount deducted from
your Account Value will include the withdrawal amount requested, any applicable
Market Value Adjustment, and any applicable withdrawal charge, so that the net
amount you receive will be the amount requested.
During any contract year, no charge will be applied to your partial withdrawals
that do not exceed the free withdrawal amount. On any Business Day, the free
withdrawal amount is 10% of your Account Value less withdrawals during the
current contract year. If any partial withdrawal exceeds the free withdrawal
amount, we will deduct the applicable contingent withdrawal charge with respect
to such excess amount. The contingent withdrawal charge is a sales charge to
defray our costs of selling and promoting the contracts. We do not expect that
revenues from contingent withdrawal charges will cover all of such costs. Any
shortfall will be made up from our General Account assets, including any profits
from other charges under the contracts.
<TABLE>
<CAPTION>
Contract Year in Which Charge as a % of the
Withdrawn Contribution Was Made Contribution Withdrawn
------------------------------- ----------------------
<S> <C>
Current .................... 7%
First Prior ................ 6
Second Prior ............... 5
Third Prior ................ 4
Fourth Prior ............... 3
Fifth Prior ................ 2
Sixth Prior ................ 1
Seventh Prior and Earlier .. 0
</TABLE>
No contingent withdrawal charge will be applied to any amount withdrawn if the
Annuitant uses the withdrawal either to purchase from National Integrity an
immediate annuity benefit with life contingencies or an immediate annuity
without life contingencies which provides for level payments over five or more
years, with a restricted prepayment option. Similarly, no charge will be applied
if the Annuitant dies and the withdrawal is made by the Annuitant's beneficiary.
See "Death Benefits and Similar Benefit Distributions" in Part 5.
Unless specifically instructed otherwise, National Integrity will make
withdrawals (including any applicable charges) from the Investment Options in
the same ratio the Annuitant's Account Value in each Investment Option bears to
the Annuitant's total Account Value. The minimum withdrawal permitted is $300.
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<PAGE>
Transfer Charge
No charge is made for your first twelve transfers (excluding dollar cost
averaging and asset rebalancing transfers) among the Variable Account Options or
the Guaranteed Rate Options during a contract year. We are, however, permitted
to charge up to $20 for each additional transfer during that contract year. See
"Transfers" in Part 5. Transfers from a Guaranteed Rate Option may be subject to
a Market Value Adjustment. See "Guaranteed Rate Options" in Part 3.
Hardship Waiver
Withdrawal Charges may also be waived on full or partial withdrawal requests of
$1,000 or more under a Hardship circumstance. The Market Value Adjustment may
also be waived on any amounts withdrawn from the GRO Accounts. Such Hardship
circumstances include the Owner's (1) confinement to a nursing home, hospital
and long term care facility, (2) diagnosis of terminal illness with any medical
condition which would result in death or total disability, and (3) unemployment.
We reserve the right to obtain reasonable notice and documentation including,
but not limited to, a physician's certification and Determination Letter from a
State Department of Labor. Some of the hardship circumstances listed above may
not be applicable in some states and, in other states, may not be available at
all.
Tax Reserve
We have the right to make a charge in the future for taxes or for reserves set
aside for taxes, which will reduce the investment experience of the Variable
Account Options.
PART 5 -- TERMS OF YOUR VARIABLE ANNUITY
Contributions Under Your Contract
You can make contributions of at least $100 at any time up to the Annuitant's
Retirement Date. Your first contribution, however, cannot be less than $1,000.
We will accept contributions of at least $50 for salary allotment programs. We
have special rules for minimum contribution amounts for tax-favored retirement
programs. See "Special Rules for Tax-Favored Retirement Programs" in Part 7.
We may limit the total contributions under one contract to $1,000,000 if you are
under age 76 or to $250,000 if you are 76 to 83 years of age. Once you reach
eight years before your Retirement Date, we may refuse to accept any
contribution made for you. Contributions may also be limited by various laws or
prohibited by National Integrity for all Annuitants under the contract. If your
contributions are made under a tax-favored retirement program, we will not
measure them against the maximum limits set by law.
Contributions are applied to the various Investment Options selected by you and
are used to pay annuity and death benefits.
Each contribution is credited as of the date we have received (as defined below)
at our Administrative Office both the contribution and instructions for
allocation among the Investment Options. At any time you may have amounts in not
more than nine Investment Options. For purposes of calculating the nine
Investment Options, each of your GRO Accounts counts as one Investment Option.
Wire transfers of federal funds are deemed received on the day of transmittal if
credited to our account by 3 p.m. Eastern Time, otherwise they are deemed
received on the next Business Day. Contributions by check or mail are deemed
received not later than the second Business Day after they are delivered to our
Administrative Office. A Business Day is any day other than a weekend or a
national bank holiday.
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<PAGE>
You can change your choice of Investment Options at any time by writing to the
Administrative Office. The request should indicate your contract number and the
specific change, and you should sign the request. When it is received by the
Administrative Office, the change will be effective for any contribution which
accompanies it and for all future contributions.
Your Account Value
Your Account Value reflects various charges. See Part 4, "Deductions and
Charges." Annual deductions are made as of the last day of each contract year.
Withdrawal charges and Market Value Adjustments, if applicable, are made as of
the effective date of the transaction. Charges against our Separate Account are
reflected daily. Any amount allocated to a Variable Account Option will go up or
down in value depending on the investment experience of that Option. For
contributions allocated to the Variable Account Options, there are no guaranteed
values. The value of your contributions allocated to Fixed Accounts is
guaranteed, subject to any applicable Market Value Adjustments. See "Guaranteed
Rate Options" in Part 3.
Your Purchase of Units in Our Separate Account
Allocations to the Variable Account Options are used to purchase units. On any
given day, the value you have in a Variable Account Option is the unit value
multiplied by the number of units credited to you in that Option. The units of
each Variable Account Option have different unit values.
The number of units purchased or redeemed (sold) in any Variable Account Option
is calculated by dividing the dollar amount of the transaction by the Option's
unit value, calculated after the close of business that day. The number of units
for a Variable Account Option at any time is the number of units purchased less
the number of units redeemed. The value of units fluctuates with the investment
performance of the corresponding Portfolios of the Funds which in turn reflects
the investment income and realized and unrealized capital gains and losses of
the Portfolios, as well as the Funds' expenses. The unit values also change
because of deductions and charges we make to our Separate Account. The number of
units credited to you, however, will not vary because of changes in unit values.
Units of a Variable Account Option are purchased when you allocate new
contributions or transfer prior contributions to that Option. Units are redeemed
when you make withdrawals or transfer amounts from a Variable Account Option. We
also redeem units to pay the death benefit when the Annuitant dies and to pay
the annual administrative charge.
How We Determine Unit Value
We determine unit values for each Variable Account Option at the end of each day
we are open for business and changes in the value of Fund shares have a material
effect on unit values. We are closed on national business holidays and also on
Martin Luther King, Jr. Day and the Friday after Thanksgiving. The end of a day
for purposes of determining unit values is 4 pm Eastern Time.
The unit value of each Variable Account Option for any day on which we determine
unit values is equal to the unit value for the last day on which a unit value
was determined multiplied by the net investment factor for that Option on the
current day. We determine a net investment factor for each Option as follows:
- First, we take the value of the shares belonging to the Option in the
corresponding Portfolio at the close of business that day (before giving
effect to any transactions for that day, such as contributions or
withdrawals). For this purpose, we use the share value reported to us by
the Funds.
- Next, we add any dividends or capital gains distributions by the Funds on
that day.
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- Then, we divide this amount by the value of the amounts in the Option at
the close of business on the last day on which a unit value was determined
(after giving effect to any transactions on that day).
- Then, we subtract a daily asset charge for each calendar day since the last
day on which a unit value was determined (for example, a Monday calculation
will include charges for Saturday and Sunday). The daily charge is
.00003721, which is an effective annual rate of 1.35%. This charge is for
the mortality risk, administrative expenses and expense risk assumed by us
under the contract.
- Finally, we subtract any daily charge for taxes or amounts set aside as a
reserve for taxes.
Generally, this means that we adjust unit values to reflect what happens to the
Funds, and also for the mortality and expense risk charge and any charge for
administrative expenses or taxes.
Transfers
You may transfer your Account Value among the Variable Account Options and the
Guaranteed Rate Options, subject to National Integrity's then current transfer
restrictions. Transfers to a Guaranteed Rate Option must be to a newly elected
Guaranteed Rate Option (i.e. to a Guaranteed Rate Option that you have not
elected before) at the then-current Guaranteed Interest Rate, unless National
Integrity otherwise consents. Transfers from a Guaranteed Rate Option other than
within 30 days prior to the expiration date of a GRO Account are subject to a
Market Value Adjustment. See "Guaranteed Rate Options" in Part 3. For amounts in
Guaranteed Rate Options, transfers will be made according to the order in which
monies were originally allocated to any Guaranteed Rate Option.
The amount transferred must be at least $250 or, if less, the entire amount in
the Investment Option. After twelve transfers have been made by you during a
contract year, a charge of up to $20 may apply to each additional transfer
during that contract year, except that no charge will be made for transfers
under our dollar cost averaging or asset rebalancing programs, described in Part
8. Once annuity payments begin, transfers are no longer permitted.
Written transfer requests must be sent directly to the Administrative Office.
Each Annuitant's request for a transfer must specify the contract number, the
amounts to be transferred and the Investment Options to and from which the
amounts are to be transferred. Transfers may also be arranged through our
telephone transfer service provided you have established a Personal
Identification Number (PIN Code). We will honor telephone transfer instructions
from any person who provides correct identifying information, and we are not
responsible in the event of a fraudulent telephone transfer which is believed to
be genuine in accordance with these procedures. Accordingly, you bear the risk
of loss if unauthorized persons make transfers on your behalf.
A transfer request will be effective as of the Business Day it is received by
our Administrative Office. A transfer request does not change the allocation of
current or future contributions among the Investment Options. Telephone
transfers may be requested from 8:30 am - 5:00 pm, Eastern Time, on any day we
are open for business. You will receive the Variable Account Options' unit
values as of the close of business on the day you call. Accordingly, transfer
requests received after 4:00 pm Eastern Time will be processed using unit values
as of the close of business on the next Business Day after the day you call. All
transfers will be confirmed in writing.
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Withdrawals
You may make an unlimited number of withdrawals from your contract as frequently
as you wish. Each withdrawal must be for at least $300. A withdrawal charge of
up to 7% of the contribution amount withdrawn, as adjusted for any applicable
Market Value Adjustment and the withdrawal charge itself will be deducted from
your Account Value, unless one of the exceptions applies. See "Guaranteed Rate
Options" in Part 3 and "Contingent Withdrawal Charge" in Part 4. Most
withdrawals made by you prior to age 59-1/2 are also subject to a 10% federal
tax penalty. In addition, some tax-favored retirement programs limit
withdrawals. See Part 7, "Tax Aspects of the Contracts" for further information
regarding various tax consequences associated with the contracts.
Assignments
You may not assign the contract as collateral or security for a loan, but an
Owner whose contract is not related to a tax-favored program may otherwise
assign the contract before the Annuitant's Retirement Date. An assignment of
the contract as a gift may, however, have adverse tax consequences. See Part 7,
"Tax Aspects of the Contracts." National Integrity will not be bound by an
assignment unless it is in writing and we have received it at the Administrative
Office.
Death Benefits and Similar Benefit Distributions
A death benefit is available to a beneficiary if the Annuitant dies prior to the
Retirement Date.
If the Annuitant is under the age of 80 at the time of death, the amount of the
death benefit is the greatest of:
. your Account Value
. the highest Account Value at the beginning of any contract year,
plus subsequent contributions and minus subsequent withdrawals
. your total contributions less the sum of withdrawals
"Subsequent withdrawals" for purposes of calculation of a death benefit reflect
any market value adjustments applicable to such withdrawals.
If the Annuitant is 80 or older at the time of death, the amount of the death
benefit will be your Account Value.
The death benefit amount is determined as of the date proof of death and
instructions for payment of proceeds are received by the Administrative Office.
Death benefits (and benefit distributions required because of a separate Owner's
death) can be paid in a lump sum or as an annuity. If no benefit option is
selected for the beneficiary at the Annuitant's death, the beneficiary can
select an option.
The beneficiary of the death benefit under a contract is selected by the Owner.
An Owner may change beneficiaries by submitting the appropriate form to the
Administrative Office. If no Annuitant's beneficiary survives the Annuitant,
then the death benefit is generally paid to the Annuitant's estate. No death
benefit will be paid after the Annuitant's death if there is a contingent
Annuitant. In that case, the contingent Annuitant becomes the new Annuitant
under the contract.
Generally, the Owner also may select his or her own beneficiary. If the Owner
dies before the Annuitant's Retirement Date, an Owner's beneficiary will become
the Owner of the contract and may be required to receive benefit distributions.
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Annuity Benefits
All annuity benefits under your contract are calculated as of the Retirement
Date selected by you. The Retirement Date can be changed by written notice to
the Administrative Office any time prior to the Retirement Date. The Retirement
Date may be no later than your 90th birthday or earlier, if required by law. The
terms of the contracts applicable to the various retirement programs, along with
the federal tax laws, establish certain minimum and maximum retirement ages.
Annuity benefits may take the form of a lump sum payment or an annuity. A lump
sum payment will provide the Annuitant with the Cash Value under the contract,
shortly after the Retirement Date. The amount applied for the purchase of an
annuity benefit will be the Adjusted Account Value, except that the Cash Value
will be the amount applied if the annuity benefit does not have a life
contingency and either the term is less than five years or the annuity can be
commuted to a lump sum payment without a withdrawal charge applying.
Annuities
Alternate forms of annuity benefits can provide for fixed or variable payments
which may be made monthly, quarterly, semi-annually or annually. Variable
payments will be funded through one or more Separate Account Divisions. For any
annuity, the minimum amount applied to the annuity must be $2,000 and the
minimum initial payment must be at least $20.
If you have not already selected a form of annuity, we will send you, within six
months prior to your Retirement Date, an appropriate notice form on which you
may indicate the type of annuity you desire or confirm to us that the normal
form of annuity, as defined below, is to be provided. However, if we do not
receive a completed form from you on or before your Retirement Date, we will
deem the Retirement Date to have been extended until we receive your written
instructions at our Administrative Office. During such extension, the values
under your contract in the various Investment Options will remain invested in
such options and amounts remaining in Variable Account Options will continue to
be subject to the investment risks associated with those Options. However, your
Retirement Date cannot be extended beyond your 90th birthday or earlier, if
required by law. You will receive a lump sum benefit if you do not make an
election by such date.
We currently offer the following types of annuities:
A period certain annuity provides for fixed payments to the Annuitant or the
Annuitant's beneficiary (the payee) for a fixed period. The amount is determined
by the period selected. The Annuitant, or if the payee dies before the end of
the period selected, the payee's beneficiary, may elect to receive the total
present value of future payments in cash.
A period certain life annuity provides for fixed or variable payments, or both,
for at least the period selected and thereafter for the life of the payee or the
payee and another annuitant under a joint and survivor annuity. You may not
change or redeem the annuity once payments have begun. If the payee (or the
payee and the other annuitant under a joint and survivor annuity) dies before
the period selected ends, the remaining payments will go to another named payee
who may have the right to redeem the annuity and secure the present value of
future guaranteed payments in a lump sum. The normal form of annuity is a fixed
life income annuity with 10 years of payments guaranteed, funded through our
General Account.
A life income annuity provides fixed payments for the life of the payee or the
payee and another annuitant under a joint and survivor annuity. Once a life
income annuity is selected, the form of annuity cannot be changed or redeemed
for a lump sum payment by the Annuitant or any payee.
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Annuity Payments
Fixed annuity payments will not change and are based upon annuity rates provided
in your contract. The size of payments will depend on the form of annuity that
was chosen and, in the case of a life income annuity, on the payee's age (or
payee and a joint annuitant in the case of a joint and survivor annuity) and sex
(except under most tax-favored retirement programs). If National Integrity's
current annuity rates then in effect would yield a larger payment, those current
rates will apply instead of the tables.
Variable annuity payments are funded only in the Separate Account Divisions
through the purchase of annuity units. The Variable Account Option or Options
selected cannot be changed after annuity payments begin. The SAI provides
further information concerning the determination of annuity payments. The
number of units purchased is equal to the amount of the first annuity payment
divided by the new annuity unit value for the valuation period which includes
the due date of the first annuity payment. The amount of the first annuity
payment is determined in the same manner for a variable annuity as it is for a
fixed annuity. The number of annuity units stays the same for the annuity
payment period but the new annuity unit value changes to reflect the investment
income and the realized and unrealized capital gains and losses of the Variable
Account Option or Options selected, after charges made against it. Annuity unit
values assume a base rate of net investment return of 5%, except in states which
require a lower rate in which case 3.5% will be used. The annuity unit value
will rise or fall depending on whether the actual rate of net investment return
is higher or lower than the assumed base rate. In the SAI, see "Determination of
Annuity Unit Values."
If the age or sex of an annuitant has been misstated, any benefits will be those
which would have been purchased at the correct age and sex. Any overpayments or
underpayments made by us will be charged or credited with interest at the rate
of 6% per year. If we have made overpayments because of incorrect information
about age or sex, we will deduct the overpayment from the next payment or
payments due. We add underpayments to the next payment.
Timing of Payment
We normally make payments from the Variable Account Options, or apply your
Adjusted Account Value to the purchase of an annuity within seven days after
receipt of the required form at our Administrative Office. Our action can be
deferred, however, for any period during which (1) the New York Stock Exchange
has been closed or trading on it is restricted; (2) sales of securities or
determination of the fair value of Separate Account assets is not reasonably
practicable because of an emergency; or (3) the SEC, by order, permits National
Integrity to defer action in order to protect persons with interests in the
Separate Account. National Integrity can defer payment of your Fixed Accounts
for up to six months, and interest will be paid on any such payment delayed for
30 days or more.
How You Make Requests and Give Instructions
When you communicate in writing with our Administrative Office, use the address
on the first page of this prospectus. Your request or instruction cannot be
honored unless it is in proper and complete form. Whenever possible, use one of
our printed forms, which may be obtained from our Administrative Office.
PART 6 - VOTING RIGHTS
Fund Voting Rights
National Integrity is the legal owner of the shares of the Funds held by the
Separate Account and, as such, has the right to vote on certain matters. Among
other things, we may vote to elect the Funds' Board of Directors, to ratify the
selection of independent auditors for the Funds, and on any
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other matters described in the Funds' current prospectus or requiring a vote by
shareholders under the 1940 Act.
Whenever a shareholder vote is taken, we give you the opportunity to tell us how
to vote the number of shares purchased as a result of contributions to your
contract. We will send you Fund proxy materials and a form for giving us voting
instructions.
If we do not receive instructions in time from all Owners, we will vote shares
in a Portfolio for which no instructions have been received in the same
proportion as we vote shares for which we have received instructions. Under
eligible deferred compensation plans and certain Qualified Plans, your voting
instructions must be communicated to us indirectly, through your employer, but
we are not responsible for any failure by your employer to solicit your
instructions or to communicate your instructions to us. We will vote any Fund
shares that we are entitled to vote directly, because of amounts we have
accumulated in our Separate Account, in the same proportions that other Owners
vote. If the federal securities laws or regulations or interpretations of them
change so that we are permitted to vote shares of the Funds in our own right or
to restrict Owner voting, we may do so.
How We Determine Your Voting Shares
You may participate in voting only on matters concerning the Portfolios in which
your contributions have been invested. We determine the number of Fund shares in
each Variable Account Option that are attributable to your contract by dividing
the amount of your Account Value allocated to that Option by the net asset value
of one share of the corresponding Portfolio as of the record date set by the
Funds' Board for the Funds' shareholders' meeting. The record date for this
purpose must be no more than 60 days before the meeting of the Funds. We count
fractional shares. After annuity payments have commenced, voting rights are
calculated in a similar manner based on the actuarially determined value of your
interest in each Variable Account Option.
How Fund Shares Are Voted
All Fund shares are entitled to one vote; fractional shares have fractional
votes. Voting is on a Portfolio-by-Portfolio basis, except for certain matters
(for example, election of Directors) which require collective approval. On
matters on which the interests of the individual Portfolios differ, the approval
of the shareholders in one Portfolio is not needed in order to make a decision
in another Portfolio. To the extent shares of the Funds are sold to separate
accounts of other insurance companies, the shares voted by such companies in
accordance with instructions received from their contract holders will dilute
the effect of voting instructions received by National Integrity from its
Owners.
Separate Account Voting Rights
Under the 1940 Act, certain actions (such as some of those described under
"Changes in How We Operate" in Part 2) may require Owner approval. In that case,
you will be entitled to a number of votes based on the value you have in the
Variable Account Options, as described above under "How We Determine Your Voting
Shares." We will cast votes attributable to amounts we have in the Variable
Account Options in the same proportions as votes cast by Owners.
PART 7 - TAX ASPECTS OF THE CONTRACTS
Introduction
The effect of federal income taxes on the amounts held under a contract, on
annuity payments, and on the economic benefits to the Owner, Annuitant, and the
beneficiary or other payee may depend on National Integrity's tax status, on the
type of retirement plan, if any, for which the contract is purchased, and upon
the tax and employment status of the individuals concerned.
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The following discussion of the federal income tax treatment of the contract is
not exhaustive, does not purport to cover all situations and is not intended to
be tax advice. It is based upon understanding of the present federal income tax
laws as currently interpreted by the Internal Revenue Service (IRS). No
representation is made regarding the likelihood of continuation of the present
federal income tax laws or of the current interpretations by the IRS or the
courts. Future legislation may affect annuity contracts adversely. Moreover, no
attempt has been made to consider any applicable state or other laws. Because of
the inherent complexity of such laws and the fact that tax results will vary
according to the particular circumstances of the individual involved and, if
applicable, the qualified plan, any person contemplating the purchase of a
contract, contemplating selection of annuity payments under the contract, or
receiving annuity payments under a contract should consult a qualified tax
adviser. NATIONAL INTEGRITY DOES NOT MAKE ANY GUARANTEE REGARDING THE TAX
STATUS, FEDERAL, STATE, OR LOCAL, OF ANY CONTRACT OR ANY TRANSACTION INVOLVING
THE CONTRACTS.
Your Contract is an Annuity
Under the federal tax law, any individual can purchase an annuity with after-tax
dollars and exclude any annuity earnings in taxable income until an actual
distribution is taken from the annuity. Alternatively, the individual (or
employer) may purchase the annuity to fund a tax-favored retirement program
(contributions are with pre-tax dollars), such as an IRA or qualified plan.
This prospectus covers the basic tax rules that apply to an annuity purchased
directly with after-tax dollars, (nonqualified annuity), and some of the special
tax rules which apply to an annuity purchased to fund a tax-favored retirement
program, (qualified annuity). A qualified annuity may restrict your rights and
benefits in order to qualify for its special treatment under the federal tax
law.
Taxation of Annuities Generally
Section 72 of the Internal Revenue Code of 1986, as amended (the Code), governs
the taxation of annuities. In general, an Owner is not taxed on increases in
value under a contract until some form of withdrawal or distribution is made
under the contract. However, under certain circumstances, the increase in value
may be subject to current federal income tax. For example, corporations,
partnerships, trusts and other non-natural persons cannot defer the taxation of
current income credited to the contract unless an exception applies. In
addition, if an Owner transfers an annuity as a gift to someone other than a
spouse (or divorced spouse), any increase in its value will be taxed at the time
of transfer. The assignment or pledge of any portion of the value of a contract
will be treated as a distribution of that portion of the value of the contract.
Section 72 provides that the proceeds of a full or partial withdrawal from a
contract prior to the date on which annuity payments begin are treated first as
taxable income to the extent that the Account Value exceeds the "investment" or
"basis" in the contract and then as non-taxable recovery of the investment or
basis in the contract. Generally, the investment or basis in the contract
equals the contributions made by or on your behalf, less any amounts previously
withdrawn which were not treated as taxable income. Special rules may apply if
the contract includes contributions made prior to August 14, 1982 which were
rolled over to the contract in a tax-free exchange.
Once annuity payments begin, the Annuitant recovers a portion of the investment
tax-free from each payment. The non-taxable portion of each payment is based on
the ratio of the Annuitant's investment to his or her expected return under the
contract (exclusion Ratio). The remainder of each payment will be ordinary
income.
After you have recovered your total investment, future payments are fully
included in income. If the Annuitant dies prior to recovering the total
investment, a deduction for the remaining basis will generally be allowed on the
Annuitant's final federal income tax return.
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Withholding of federal income taxes on all distributions may be required unless
the recipient who is eligible elects not to have any amounts withheld and
properly notifies National Integrity of that election.
The taxable portion of a distribution is treated as ordinary income and is taxed
at ordinary income tax rates. In addition, a tax penalty of 10% applies to the
taxable portion of a distribution unless the distribution is: (1) on or after
the date on which the taxpayer attains age 59-1/2; (2) as a result of the death
of the Owner; (3) attributable to the taxpayer becoming disabled within the
meaning of Code Section 72(m)(7); (4) from certain qualified plans (note,
however, other penalties may apply); (5) under a qualified funding asset (as
defined in Section 130(d) of the Code); (6) purchased by an employer on
termination of certain types of qualified plans and held by the employer until
the employee separates from service; or (7) under an immediate annuity as
defined in Code Section 72(u)(4).
All annuity contracts issued by National Integrity or its affiliates to one
Annuitant during any calendar year are treated as a single contract in measuring
the taxable income that results from surrenders and withdrawals under any one of
the contracts.
Distribution-at-Death Rules
Under section 72(s) of the Code, in order to be treated as an annuity, a
contract must provide the following distribution rules: (a) if any Owner dies
on or after the Retirement Date and before the entire interest in the contract
has been distributed, then the remaining portion of such interest must be
distributed at least as quickly as the method in effect on the date of the
Owner's death; and (b) if any Owner dies before the Retirement Date, the entire
interest in the contract must be distributed within five years after the date of
the Owner's death. To the extent such interest is payable to a beneficiary,
however, such interest may be annuitized over the life of that beneficiary or
over a period not extending beyond the life expectancy of that beneficiary, so
long as distributions commence within one year after the Owner's death. If the
beneficiary is the spouse of the Owner, the contract (along with the deferred
tax status) may be continued in the name of the spouse as the Owner.
If the Owner is not an individual, the "primary annuitant," as defined in the
Code, is considered the Owner. The primary annuitant is the individual who is of
primary importance in affecting the timing of the amount of payout under a
contract. In addition, when the Owner is not an individual, a change in the
primary annuitant is treated as the death of the Owner. Finally, in the case of
joint owners, the distribution-at-death rules will be applied at the death of
the first Owner.
Diversification Standards
Each Portfolio of the Fund will be required to adhere to regulations adopted by
the Treasury Department pursuant to Section 817(h) of the Code prescribing asset
diversification requirements for investment companies whose shares are sold to
insurance company separate accounts funding variable contracts. The investment
manager for the Funds monitors the investments in order to comply with the
regulations to assure that the contracts continue to be treated as annuities for
federal income tax purposes.
The IRS has stated in published rulings that a variable contract owner will be
considered the owner of separate account assets if the contract owner possesses
incidents of ownership in those assets, such as the ability to exercise
investment control over the assets. In those circumstances, income and gains
from the separate account assets would be includable in the variable contract
owner's gross income. The Treasury Department also announced, in connection
with the issuance of regulations concerning diversification, that those
regulations "do not provide guidance concerning the circumstances in which
investor control of the investments of a segregated asset account may cause the
investor (i.e., the Owner), rather than the insurance company, to be treated as
the owner of the assets in the account." This announcement also stated that
guidance would be issued by way of regulations or rulings on the "extent to
which policyholders may direct their investments to particular
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subaccounts without being treated as owners of the underlying assets." As of the
date of this prospectus, no such guidance has been issued.
Tax Favored Retirement Programs
The contract is designed for use in connection with certain types of retirement
plans which receive favorable treatment under the Code. Numerous special tax
rules apply to the participants in such qualified plans and to the contracts
used in connection with such qualified plans. These tax rules vary according to
the type of plan and the terms and conditions of the plan itself. Owners,
Annuitants, and beneficiaries are cautioned that the rights of any person to any
benefits under qualified plans may be subject to the terms and conditions of the
plans themselves, regardless of the terms and conditions of the contract. In
addition, loans from qualified contracts, where allowed, are subject to a
variety of limitations, including restrictions as to the amount that may be
borrowed, the duration of the loan, and the manner in which the loans must be
repaid. (Owners should always consult their tax advisors and retirement plan
fiduciaries prior to exercising their loan privileges.) Also, special rules
apply to the time at which distributions must commence and the form in which the
distributions must be paid. Therefore, no attempt is made to provide more than
general information about the use of contracts with the various types of
qualified plans.
National Integrity reserves the right to change its administrative rules, such
as minimum contribution amounts, as needed to comply with the Code as to tax-
favored retirement programs.
Following are brief descriptions of various types of qualified plans in
connection with which National Integrity may issue a contract.
Individual Retirement Annuities
Code Section 408 permits eligible individuals to contribute to an individual
retirement program known as an IRA. An individual who receives compensation and
who has not reached age 70-1/2 by the end of the tax year may establish an IRA
and make contributions up to the deadline for filing his or her federal income
tax return for that year (without extensions). IRAs are subject to limitations
on the amount that may be contributed, the persons who may be eligible, and on
the time when distributions may commence. An individual may also rollover
amounts distributed from another IRA or another tax-favored retirement program
to an IRA contract. Your IRA contract will be issued with a rider outlining the
special terms of your contract which apply to IRAs.
Tax Sheltered Annuities
Section 403(b) of the Code permits the purchase of tax-sheltered annuities (TSA)
by public schools and certain charitable, educational and scientific
organizations described in Section 501(c)(3) of the Code. The contract is not
intended to accept other than employee contributions. Such contributions are not
includible in the gross income of the employee until the employee receives
distributions from the contract. The amount of contributions to the TSA is
limited to certain maximums imposed by Code sections 403(b), 415 and 402(g).
Furthermore, the Code sets forth additional restrictions governing such items as
transferability, distributions and withdrawals. Any employee should obtain
competent tax advice as to the tax treatment and suitability of such an
investment. Your contract will be issued with a rider outlining the special
terms which apply to a TSA.
Simplified Employee Pensions
Section 408(k) of the Code allows employers to establish simplified employee
pension plans (SEP-IRAs) for their employees, using the employees' IRAs for such
purposes, if certain criteria are met. Under these plans the employer may,
within specified limits, make deductible contributions on behalf of the
employees to IRAs. Employers intending to use the contract in connection with
such plans should seek competent advice. The SEP-IRA will be issued with a rider
outlining the special terms of the contract.
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Corporate and Self-Employed (H.R. 10 and Keogh) Pension and Profit Sharing Plans
Sections 401(a) and 403(a) of the Code permit corporate employers to establish
various types of tax-favored retirement plans for employees. The Self-Employed
Individuals' Tax Retirement Act of 1962, as amended, commonly referred to as
"H.R. 10" or "Keogh," permits self-employed individuals also to establish such
tax-favored retirement plans for themselves and their employees. Such
retirement plans may permit the purchase of the contract in order to provide
benefits under the plans. Employers intending to use the contract in connection
with such plans should seek competent advice. The Company reserves the right to
request documentation to substantiate that a qualified plan exists and is being
properly administered. National Integrity does not administer such plans.
Deferred Compensation Plans of State and Local Governments and Tax-Exempt
Organizations
Section 457 of the Code permits employees of state and local governments and
tax-exempt organizations to defer a portion of their compensation without paying
current taxes. The employees must be participants in an eligible deferred
compensation plan. To the extent the contracts are used in connection with an
eligible plan, employees are considered general creditors of the employer and
the employer as Owner of the contract has the sole right to the proceeds of the
contract. Loans to employees are not permitted under such plans. Contributions
to a contract in connection with an eligible government plan are subject to
limitations. Those who intend to use the contracts in connection with such plans
should seek competent advice. The Company reserves the right to request
documentation to substantiate that a qualified plan exists and is being properly
administered. National Integrity does not administer such plans.
Distributions Under Tax Favored Retirement Programs
Distributions from tax favored plans are subject to certain restrictions.
Distributions of minimum amounts specified by the Code must commence by April 1
of the calendar year following the calendar year in which the participant
reaches age 70-1/2. Additional distribution rules apply after the participant's
death. Failure to make mandatory distributions may result in the imposition of a
50% penalty tax on any difference between the required distribution amount and
the amount distributed. Distributions to a participant from all plans (other
than 457 plans) in a calendar year that exceed a specific limit under the Code
are generally subject to a 15% penalty tax (in addition to any ordinary income
tax) on the excess portion of the distributions.
Distributions from a tax favored plan (not including an IRA subject to Code
Section 408) to an employee, surviving spouse, or former spouse who is an
alternate payee under a qualified domestic relations order, in the form of a
lump sum settlement or periodic annuity payments for a fixed period of fewer
than 10 years are subject to mandatory income tax withholding of 20% of the
taxable amount of the distribution, unless (1) the distributee directs the
transfer of such amounts in cash to another plan or an IRA; or (2) the payment
is a minimum distribution required under the Code. The taxable amount is the
amount of the distribution less the amount allocable to after-tax contributions.
All other types of taxable distributions are subject to withholding unless the
distributee elects not to have withholding apply.
We are not permitted to make distributions from a contract unless a request has
been made. It is therefore your responsibility to comply with the minimum
distribution rules. You should consult your tax adviser regarding these rules
and their proper application.
The above description of the federal income tax consequences of the different
types of tax favored retirement plans which may be funded by the contract is
only a brief summary and is not intended as tax advice. The rules governing the
provisions of plans are extremely complex and often difficult to comprehend.
Anything less than full compliance with all applicable rules, all of which are
subject to change, may have adverse tax consequences. A prospective Owner
considering adoption of a plan and purchase of a contract in connection
therewith should first consult a qualified and competent tax adviser, with
regard to the suitability of the contract as an investment vehicle for the plan.
28
<PAGE>
Federal and State Income Tax Withholding
National Integrity will withhold and remit to the U.S. government a part of the
taxable portion of each distribution made under a contract unless the
distributee notifies National Integrity at or before the time of the
distribution of an election not to have any amounts withheld. In certain
circumstances, National Integrity may be required to withhold tax, as explained
above. The withholding rates applicable to the taxable portion of periodic
annuity payments (other than eligible rollover distributions) are the same as
the withholding rates generally applicable to payments of wages. In addition,
the withholding rate applicable to the taxable portion of non-periodic payments
(including withdrawals prior to the maturity date) is 10%. As discussed above,
the withholding rate applicable to eligible rollover distributions is 20%.
Certain states have indicated that pension and annuity withholding will apply to
payments made to residents. Generally, an election out of federal withholding
will also be considered an election out of state withholding. For more
information concerning a particular state, call our Administrative Office at the
toll-free number.
Impact of Taxes to National Integrity
The contracts provide that National Integrity may charge the Separate Account
for taxes. National Integrity can also set up reserves for taxes.
Transfers Among Investment Options
There will not be any tax liability if you transfer any part of the Account
Value among the Investment Options of your contract.
PART 8 - ADDITIONAL INFORMATION
Systematic Withdrawals
We offer a program for systematic withdrawals that allows you to pre-authorize
periodic withdrawals from your contract prior to your Retirement Date. You may
choose to have withdrawals made monthly, quarterly, semi-annually or annually
and may specify the day of the month (other than the 29th, 30th or 31st) on
which the withdrawal is to be made. You may specify a dollar amount for each
withdrawal or an annual percentage to be withdrawn. The minimum systematic
withdrawal currently is $100. You may also specify an account for direct
deposit of your systematic withdrawals. To enroll under our systematic
withdrawal program, you must deliver the appropriate administrative form to our
Administrative Office. Withdrawals may begin not less than one business day
after our receipt of the form. You or we may terminate your participation in the
program upon one day's prior written notice, and we may terminate or amend the
systematic withdrawal program at any time. If on any withdrawal date you do not
have sufficient values to make all of the withdrawals you have specified, no
withdrawals will be made and your enrollment in the program will be ended.
Amounts withdrawn by you under the systematic withdrawal program may be within
the free withdrawal amount in which case neither a contingent withdrawal charge
nor a Market Value Adjustment will be made. See "Contingent Withdrawal Charge"
in Part 4. Amounts withdrawn under the systematic withdrawal program in excess
of the free withdrawal amount will be subject to a contingent withdrawal charge
and a Market Value Adjustment if applicable. Withdrawals also may be subject to
the 10% federal tax penalty for early withdrawals under the contracts and to
income taxation. See Part 7, "Tax Aspects of the Contracts."
29
<PAGE>
Dollar Cost Averaging
We offer a dollar cost averaging program under which allocations to the Money
Market Option are automatically transferred on a monthly or, quarterly, semi-
annual or annual basis to one or more other Variable Account Options. You must
specify a dollar amount to be transferred into each Variable Account Option, and
the current minimum transfer to each Option is $250. No transfer charge will
apply to transfers under our dollar cost averaging program, and such transfers
will not count towards the twelve transfers you may make in a contract year
before we may impose a transfer charge.
To enroll under our dollar cost averaging program, you must deliver the
appropriate administrative form to our Administrative Office. You or we may
terminate your participation in the program upon one day's prior written notice,
and we may terminate or amend the dollar cost averaging program at any time. If
you do not have sufficient funds in the Money Market Option to transfer to each
Variable Account Option specified, no transfer will be made and your enrollment
in the program will be ended.
Asset Rebalancing
We offer an asset rebalancing program. You can select the frequency for
rebalancing. Frequencies available include rebalancing monthly, quarterly, semi-
annually or annually. The value in the Variable Account Options will be
automatically rebalanced by transfers among such Variable Account Options, and
you will receive a confirmation notice after each rebalancing. Transfers will
occur only to and from those Variable Account Options where you have current
contribution allocations. No transfer charge will apply to transfers under our
asset rebalancing program, and such transfers will not count towards the twelve
transfers you may make in a contract year before we may impose a transfer
charge.
Fixed Accounts are not eligible for the asset rebalancing program.
To enroll under our asset rebalancing program, you must deliver the appropriate
administrative form to our Administrative Office. You should be aware that other
allocation programs, such as dollar cost averaging, as well as transfers and
withdrawals that you make, may not work in concert with the asset rebalancing
program. You should, therefore, monitor your use of such other programs,
transfers, and withdrawals while the asset rebalancing program is in effect. You
or we may terminate your participation in the program upon one day's prior
written notice, and we may terminate or amend the asset rebalancing program at
any time.
Systematic Contributions
We offer a program for systematic contributions that allows you to pre-authorize
monthly withdrawals from your checking account for payment to us. To enroll
under our program, you must deliver the appropriate administrative form to our
Administrative Office. You or we may terminate your participation in the program
upon 30 days' prior written notice. Your participation may be terminated by us
if your bank declines to make any payment. The minimum amount for systematic
contributions is $100 per month.
Performance Information
Performance data for the Variable Account Options, including the yield and
effective yield of the Money Market Option, the yield of the other Options, and
the total return of all of the Options may appear in advertisements or sales
literature. Performance data for any Option reflects only the performance of a
hypothetical investment in the Option during the particular time period on which
the calculations are based. Performance information should be considered in
light of the investment objectives and policies of the Portfolio in which the
Option invests and the market conditions during the given time period, and it
should not be considered as a representation of performance to be achieved in
the future.
30
<PAGE>
Total returns are based on the overall dollar or percentage change in value of a
hypothetical investment in an Option. Total return quotations reflect changes in
Fund share price, the automatic reinvestment by the Option of all distributions
and the deduction of applicable contract charges and expenses, including any
contingent withdrawal charge that would apply if an Owner surrendered the
contract at the end of the period indicated. Total returns also may be shown
that do not take into account the contingent withdrawal charge or the annual
administrative charge applicable where the Account Value is less than $50,000 at
the end of a contract year.
A cumulative total return reflects an Option's performance over a stated period
of time. An average annual total return reflects the hypothetical annually
compounded return that would have produced the same cumulative total return if
the Option's performance had been constant over the entire period. Because
average annual total returns tend to smooth out variations in an Option's
returns, you should recognize that they are not the same as actual year-by-year
results.
Some Options may also advertise yield. These measures reflect the income
generated by an investment in the Option over a specified period of time. This
income is annualized and shown as a percentage. Yields do not take into account
capital gains or losses or the contingent withdrawal charge.
The Money Market Option may advertise its current and effective yield. Current
yield reflects the income generated by an investment in the Option over a
specified 7-day period. Effective yield is calculated in a similar manner except
that income earned is assumed to be reinvested. The Investment Grade Bond and
High Income Option may advertise a 30-day yield which reflects the income
generated by an investment in such Option over a specified 30-day period.
For a detailed description of the methods used to determine yield and total
return for the Variable Account Options, see the SAI.
31
<PAGE>
APPENDIX A
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
Contribution:..................$50,000.00
GRO Account duration:..........7 Years
Guaranteed Interest Rate:......5% Annual Effective Rate
The following examples illustrate how the Market Value Adjustment and the
contingent withdrawal charge may affect the values of a contract upon a
withdrawal. The 5% assumed Guaranteed Interest Rate is the same rate used in the
Example under "Table of Annual Fees and Expenses" in this Prospectus. In these
examples, the withdrawal occurs three years after the initial contribution. The
Market Value Adjustment operates in a similar manner for transfers. No
contingent withdrawal charge applies to transfers.
The GRO Value for this $50,000 contribution is $70,355.02 at the expiration of
the GRO Account. After three years, the GRO Value is $57,881.25. It is also
assumed, for the purposes of these examples, that no prior partial withdrawals
or transfers have occurred.
The Market Value Adjustment will be based on the rate we are then crediting (at
the time of the withdrawal) on new contributions to GRO Accounts of the same
duration as the time remaining in your GRO Account, rounded to the next higher
number of complete months. If we do not declare a rate for the exact time
remaining, we will interpolate between the Guaranteed Interest Rates for GRO
Accounts of durations closest to (next higher and next lower) the remaining
period described above. Three years after the initial contribution, there would
have been four years remaining in your GRO Account. These examples also show the
withdrawal charge which would be calculated separately.
Example of a Downward Market Value Adjustment:
A downward Market Value Adjustment results from a full or partial withdrawal
that occurs when interest rates have increased. Assume interest rates have
increased three years after the initial contribution and we are then crediting
6.5% for a four-year GRO Account. Upon a full withdrawal, the Market Value
Adjustment, applying the above formula would be:
-0.0639789 = [(1 + .05)/48/12/ / (1 + .065 + .0025)/48/12/] - 1
The Market Value Adjustment is a reduction of $3,703.18 from the GRO Value:
-$3,703.18 = -0.0639789 X $57,881.25
The Market Adjusted Value would be:
$54,178.07 = $57,881.25 - $3,703.18
A withdrawal charge of 4% would be assessed against the $50,000 original
contribution:
$2,000.00 = $50,000.00 X .04
Thus, the amount payable on a full withdrawal would be:
$52,178.07 = $57,881.25 - $3,703.18 - $2,000.00
32
<PAGE>
If instead of a full withdrawal, $20,000 was requested, we would first determine
the free withdrawal amount:
Greater of:
a) $5,788.13 = $57,881.25 X .10
or
b) $2,756.25 = gain in prior contract year
Free Amount = $5,788.13
The non-free amount would be:
$14,211.87 = $20,000.00 - $5,788.13
The Market Value Adjustment, which is only applicable to the non-free amount,
would be
- $909.26 = - .0639789 X $14,211.87
The withdrawal charge would be:
$630.05 = [($14,211.87+ $909.26)/(1 - .04)] - ($14,211.87+ 909.26)
Thus, the total amount needed to provide $20,000 after the Market Value
Adjustment and withdrawal charge would be:
$21,539.31 = $20,000.00 + $909.26 + $630.05
Example of an Upward Market Value Adjustment:
An upward Market Value Adjustment results from a full or partial withdrawal that
occurs when interest rates have decreased. Assume interest rates have decreased
three years after the initial contribution and we are then crediting 4% for a
four-year GRO Account. Upon a full withdrawal, the Market Value Adjustment,
applying the formula set forth in the prospectus, would be:
0.0290890 = [(1 + .05)/48/12/ / (1 + .04 + .0025)/48/12/ ]- 1
The Market Value Adjustment is an increase of $1,683.71 to the GRO Value:
$1,683.71 = 0.0290890 X $57,881.25
The Market Adjusted Value would be:
$59,564.96 = $57,881.25 + $1,683.71
A withdrawal charge of 4% would be assessed against the $50,000 original
contribution:
$2,000.00 = $50,000.00 X .04
Thus, the amount payable on a full withdrawal would be:
$57,564.96 = $57,881.25 + $1,683.71 - $2,000.00
33
<PAGE>
If instead of a full withdrawal, $20,000 was requested, the free withdrawal
amount and non-free amount would first be determined as above:
Free Amount = $ 5,788.13
Non-Free Amount = $14,211.87
The Market Value Adjustment would be:
$413.41 = .0290890 X $14,211.87
The withdrawal charge would be:
$574.94 = [($14,211.87 - $413.41)/(1 - .04)] - ($14,211.87 - $413.41)
Thus, the total amount needed to provide $20,000 after the Market Value
Adjustment and withdrawal charge would be:
$20,161.53 = $20,000.00 - $413.41 + $574.94
Actual Market Value Adjustments may have a greater or lesser impact than shown
in the examples, depending on the actual change in interest crediting rate and
the timing of the withdrawal or transfer in relation to the time remaining in
the GRO Account. Also account values less than $50,000 will be subject to a $30
annual charge.
34
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 31, 1996
FOR
FLEXIBLE PREMIUM VARIABLE ANNUITY
ISSUED BY
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
AND
FUNDED THROUGH ITS SEPARATE ACCOUNT I
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Part 1 - National Integrity and Custodian.......... 2
Part 2 - Distribution of the Contracts............. 2
Part 3 - Performance Information................... 3
Part 4 - Determination of Annuity Unit Values...... 9
Part 5 - Financial Statements...................... 10
</TABLE>
This Statement of Additional Information (SAI) is not a prospectus. It should
be read in conjunction with the prospectus for the contracts, dated December 31,
1996. For definitions of special terms used in the SAI, please refer to the
prospectus.
A copy of the prospectus to which this SAI relates is available at no charge by
writing the Administrative Office at National Integrity Life Insurance Company
("National Integrity"), 200 Park Avenue, 20th Floor, New York, New York 10166,
or by calling 1-800-325-8583.
<PAGE>
PART 1 - NATIONAL INTEGRITY AND CUSTODIAN
National Integrity is a New York stock life insurance company that sells life
insurance and annuities. Its offices are located at 200 Park Avenue, 20th Floor,
New York, New York 10166. National Integrity, the depositor of Separate Account
I, is a wholly owned subsidiary of Integrity Life Insurance Company. Integrity
Life Insurance Company is a wholly owned subsidiary of Integrity Holdings, Inc.,
a Delaware corporation which is a holding company engaged in no active business.
All outstanding shares of Integrity Holdings, Inc. are owned by ARM Financial
Group, Inc. (ARM), a Delaware corporation which is a financial services company
focusing on the long-term savings and retirement marketplace by providing retail
and institutional products and services throughout the United States. ARM owns
100% of the stock of (i) ARM Securities Corporation (ARM Securities), a
Minnesota corporation, registered with the SEC as a broker-dealer and a member
of the National Association of Securities Dealers, Inc., (ii) ARM Capital
Advisors, Inc., a New York corporation registered with the SEC as an investment
adviser, (iii) SBM Certificate Company, a Minnesota corporation registered with
the SEC as an issuer of face-amount certificates, and (iv) ARM Transfer Agency,
Inc., a Delaware corporation registered with the SEC as a transfer and dividend
disbursing agency. Approximately 91% of the outstanding voting stock of ARM is
owned by The Morgan Stanley Leveraged Equity Fund II, L.P., Morgan Stanley
Capital Partners III, L.P., Morgan Stanley Capital Investors, L.P., and MSCP III
892 Investors, L.P., each of which is a Delaware limited partnership
(collectively, the MSCP Funds). The MSCP Funds are private equity funds
sponsored by Morgan Stanley Group, Inc., a Delaware corporation that, through
its subsidiaries, provides a wide range of financial services on a global basis
(Morgan Stanley). The general partner of each of the MSCP Funds is a wholly
owned subsidiary of Morgan Stanley. Oldarm Limited Partnership, a Kentucky
limited partnership, New ARM, LLC, a Kentucky limited liability company, and
certain current and former employees and management of ARM own in the aggregate
approximately 9% of the voting stock of ARM.
No person has the direct or indirect power to control Morgan Stanley except
insofar as he or she may have such power by virtue of his or her capacity as a
director or executive officer thereof. Morgan Stanley is publicly held; no
individual beneficially owns more than 5% of the common shares; however,
approximately 31% of such shares are subject to a stockholders' agreement or
voting agreement among certain current and former principals and employees of
Morgan Stanley and its predecessor.
Beginning in 1994, ARM provided substantially all of the services required to be
performed on behalf of the Separate Account. Total fees paid to ARM by National
Integrity for management services in 1994 and 1995, including services
applicable to the Registrant, were $5,647,647 and $5,640,827, respectively.
National Integrity is the custodian for the shares of the Funds owned by the
Separate Account. The Funds' shares are held in book-entry form.
Reports and marketing materials, from time to time, may include information
concerning the rating of National Integrity, as determined by A.M. Best Company,
Moody's Investor Service, Standard & Poor's Corporation, Duff & Phelps
Corporation, or other recognized rating services. National Integrity is
currently rated "A" (Excellent) by A.M. Best Company, and has received claims
paying ability ratings of "A" (Good) from Standard & Poor's Corporation, Baa1
from Moody's Investors Service, Inc., and "A+" (High) from Duff and Phelps
Credit Rating Company. However, National Integrity does not guarantee the
investment performance of the portfolios, and these ratings do not reflect
protection against investment risk.
PART 2 - DISTRIBUTION OF THE CONTRACTS
ARM Securities, a wholly-owned subsidiary of ARM, is the principal underwriter
of the contracts. ARM Securities is registered with the SEC as a broker-dealer
and is a member in good standing of the National Association of Securities
Dealers, Inc. ARM Securities' address is 515 West Market Street, Louisville,
Kentucky 40202. The contracts are offered through ARM Securities on a
continuous basis.
2
<PAGE>
We generally pay a maximum distribution allowance of 6.5% of initial
contributions. The amount of distribution allowances paid was $2,217,123,
$912,740 and $781,431 for the years ended December 31, 1995, 1994, and 1993,
respectively. No distribution allowances were retained by ARM Securities during
these years. National Integrity may from time to time pay or allow additional
promotional incentives, in the form of cash or other compensation, to broker-
dealers that sell contracts. In some instances, such other incentives may be
offered only to certain broker-dealers that sell or are expected to sell during
specified time periods certain minimum amounts of the contracts.
PART 3 - PERFORMANCE INFORMATION
Each Variable Account Option may from time to time include the Average Annual
Total Return, the Cumulative Total Return, and Yield of its shares in
advertisements or in information furnished to shareholders. The Money Market
Option may also from time to time include the Yield and Effective Yield of its
shares in information furnished to shareholders. Performance information is
computed separately for each Option in accordance with the formulas described
below. At any time in the future, total return and yields may be higher or
lower than in the past and there can be no assurance that any historical results
will continue.
Total Returns
Total returns reflect all aspects of an Option's return, including the automatic
reinvestment by the Option of all distributions and the deduction of all
applicable charges to the Option on an annual basis, including mortality risk
and expense charges, the annual administrative charge and other charges against
contract values. For purposes of charges not based upon a percentage of
contract values, an average account value of $40,000 has been used. Quotations
also will assume a termination (surrender) at the end of the particular period
and reflect the deductions of the contingent withdrawal charge, if applicable.
Any such total return calculation will be based upon the assumption that the
Option corresponding to the investment portfolio was in existence throughout the
stated period and that the applicable contractual charges and expenses of the
Option during the stated period were equal to those currently applicable under
the contract. Total returns may be shown simultaneously that do not take into
account deduction of the contingent withdrawal charge, and/or the annual
administrative charge.
Average annual total returns are calculated by determining the growth or decline
in value of a hypothetical historical investment in the Option over certain
periods, including 1, 3, 5, and 10 years (up to the life of the Option), and
then calculating the annually compounded percentage rate that would have
produced the same result if the rate of growth or decline in value had been
constant over the period. Investors should realize that the Option's
performance is not constant over time, but changes from year to year, and that
the average annual returns represent the averages of historical figures as
opposed to the actual historical performance of an Option during any portion of
the period illustrated. Average annual returns are calculated pursuant to the
following formula: P(1+T)/n/ = ERV, where P is a hypothetical initial payment
of $1,000, T is the average annual total return, n is the number of years, and
ERV is the withdrawal value at the end of the period.
Cumulative total returns are unaveraged and reflect the simple percentage change
in the value of a hypothetical investment in the Option over a stated period of
time. In addition to the period since inception, cumulative total returns may be
calculated on a year-to-date basis at the end of each calendar month in the
current calendar year. The last day of the period for year-to-date returns is
the last day of the most recent calendar month at the time of publication.
Yields
Some Options may advertise yields. Yields quoted in advertising reflect the
change in value of a hypothetical investment in the Option over a stated period
of time, not taking into account capital gains or losses or the imposition of
any contingent withdrawal charge. Yields are annualized and stated as a
percentage.
3
<PAGE>
Current yield and effective yield are calculated for the Money Market Option.
Current Yield is based on the change in the value of a hypothetical investment
(exclusive of capital changes) over a particular 7-day period, less a
hypothetical charge reflecting deductions from contract values during the period
(the base period), and stated as a percentage of the investment at the start of
the base period (the base period return). The base period return is then
annualized by multiplying by 365/7, with the resulting yield figure carried to
at least the nearest hundredth of one percent. Effective yield assumes that all
dividends received during an annual period have been reinvested. This
compounding effect causes effective yield to be higher than current yield.
Calculation of effective yield begins with the same base period return used in
the calculation of current yield, which is then annualized to reflect weekly
compounding pursuant to the following formula:
Effective Yield = {(Base Period Return) + 1)/365/7/} - 1
The table below provides average annual total returns for each Option for the
one and three year periods ending September 30, 1996 and from inception through
September 30, 1996. The "contract continues" columns show returns if the
contract continues and is not terminated, and the "contract surrendered" columns
show returns if the contract is surrendered at the end of the period, in which
case contingent withdrawal charges may apply. The performance information is
based on the historical investment experience of the Options and does not
indicate or represent future experience.
<TABLE>
<CAPTION>
Average Annual Total Returns for One and Three Year Periods Ending 9/30/96 and Since Inception*
Period Since Inception One Year Period Three Year Period
---------------------- --------------- -----------------
Contract Contract
Contract Surrendered Contract Surrendered
Option Continues 9/30/96 Continues 9/30/96 Contract Continues
- -------- --------- ---------- --------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
Equity-Income 15.67% 15.37% 12.20% 6.13% 14.71%
Asset Manager 9.14% 8.79% 10.63% 4.56% 6.72%
Growth 15.49% 15.19% 6.24% 0.16% 13.56%
Overseas 7.30% 6.93% 8.87% 2.80% 6.95%
Investment Grade
Bond 5.38% 4.74% 3.09% -2.99% 3.01%
Index 500 14.70% 13.80% 18.49% 12.41% 15.57%
High Income 10.65% 9.69% 13.05% 6.98% 10.15%
Asset Manager:
Growth 18.85% 15.47% 10.40% 4.32% n/a
Contrafund 26.88% 23.59% 10.37% 4.29% n/a
Balanced n/a n/a n/a n/a n/a
Growth & Income n/a n/a n/a n/a n/a
Growth
Opportunities n/a n/a n/a n/a n/a
</TABLE>
*The inception date for each Option is set forth in the table below.
4
<PAGE>
The table below provides cumulative total returns for each Option from inception
through September 30, 1996, Year-To-Date from January 1, 1996 through September
30, 1996, and for the Three Year Period ending September 30, 1996. The "contract
continues" columns show returns if the contract continues and is not terminated,
and the "contract surrendered" column shows returns if the contract is
surrendered at the end of the period, in which case contingent withdrawal
charges apply. The performance information is based on the historical investment
experience of the Options and does not indicate or represent future experience.
Cumulative Total Returns for Period Since Inception to 9/30/96, Year-To-Date
Period from 1/1/96 through 9/30/96, and for the Three Year Period ending 9/30/96
<TABLE>
<CAPTION>
Year-To-Date
Period Since Inception Through 9/30/96 Three-Year
------------------------ --------------- ----------
Contract
Contract Surrendered Contract Contract Inception
Option Continues 9/30/96 Continues Continues Date*
- ------ --------- ----------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Equity-Income 109.43% 107.05% 6.07% 50.94% 09/03/91
Asset Manager 55.93% 53.55% 6.93% 21.55% 09/03/91
Growth 107.79% 105.41% 11.23% 46.45% 09/03/91
Overseas 43.05% 40.67% 7.00% 22.34% 09/03/91
Investment Grade Bond 26.56% 23.22% -0.79% 9.29% 04/02/92
Index 500 61.33% 57.07% 12.26% 54.35% 04/06/93
High Income 43.29% 39.03% 10.52% 33.63% 03/12/93
Asset Manager:
Growth 32.70% 26.58% 10.39% n/a 02/10/95
Contrafund 47.12% 41.00% 10.57% n/a 02/16/95
Balanced n/a n/a n/a n/a 12/31/96
Growth & Income n/a n/a n/a n/a 12/31/96
Growth Opportunities n/a n/a n/a n/a 12/31/96
</TABLE>
*Inception Dates reflect date of first trade.
Performance Comparisons
Performance information for an Option may be compared, in reports and
advertising, to: (1) Standard & Poor's Stock Index (S&P 500), Dow Jones
Industrial Averages, (DJIA), Donoghue Money Market Institutional Averages, or
other unmanaged indices generally regarded as representative of the securities
markets; (2) other variable annuity separate accounts or other investment
products tracked by Lipper Analytical Services, Inc. or the Variable Annuity
Research and Data Service, which are widely used independent research firms that
rank mutual funds and other investment companies by overall
5
<PAGE>
performance, investment objectives, and assets; and (3) the Consumer Price Index
(measure of inflation) to assess the real rate of return from an investment in
a contract. Unmanaged indices may assume the reinvestment of dividends but
generally do not reflect deductions for annuity charges, investment management
costs, brokerage costs and other transaction costs that are normally paid when
directly investing in securities.
Each Option may from time to time also include the ranking of its performance
figures relative to such figures for groups of mutual funds categorized by
Lipper Analytical Services (Lipper) as having the same or similar investment
objectives or by similar services that monitor the performance of mutual funds.
Each Option may also from time to time compare its performance to average mutual
fund performance figures compiled by Lipper in Lipper Performance Analysis.
Advertisements or information furnished to present shareholders or prospective
investors may also include evaluations of an Option published by nationally
recognized ranking services and by financial publications that are nationally
recognized such as Barron's, Business Week, CDA Technologies, Inc., Changing
Times, Consumer's Digest, Dow Jones Industrial Average, Financial Planning,
Financial Times, Financial World, Forbes, Fortune, Global Investor, Hulbert's
Financial Digest, Institutional Investor, Investors Daily, Money, Morningstar
Mutual Funds, The New York Times, Personal Investor, Stanger's Investment
Adviser, Value Line, The Wall Street Journal, Wiesenberger Investment Company
Service and USA Today.
The performance figures described above may also be used to compare the of an
Option's shares against certain widely recognized standards or indices for stock
and bond market performance. The following are the indices against which the
Options may compare performance:
The Standard & Poor's Composite Index of 500 Stocks (the S&P 500) is a market
value-weighted and unmanaged index showing the changes in the aggregate market
value of 500 stocks relative to the base period 1941-43. The S&P 500 Index is
composed almost entirely of common stocks of companies listed on the NYSE,
although the common stocks of a few companies listed on the American Stock
Exchange or traded OTC are included. The 500 companies represented include 400
industrial, 60 transportation and 50 financial services concerns. The S&P 500
Index represents about 80% of the market value of all issues traded on the NYSE.
The Dow Jones Composite Average (or its component averages) is an unmanaged
index composed of 30 blue-chip industrial corporation stocks (Dow Jones
Industrial Average), 15 utilities company stocks and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
The New York Stock Exchange composite or component indices are unmanaged indices
of all industrial, utilities, transportation and finance company stocks listed
on the New York Stock Exchange.
The Wilshire 5000 Equity Index (or its component indices) represents the return
of the market value of all common equity securities for which daily pricing is
available. Comparisons of performance assume reinvestment of dividends.
The Morgan Stanley Capital International EAFE Index is an arithmetic, market
value-weighted average of the performance of over 900 securities on the stock
exchanges of countries in Europe, Australia and the Far East.
The Morgan Stanley Capital International World Index - An arithmetic, market
value-weighted average of the performance of over 1,470 securities listed on the
stock exchanges of countries in Europe, Australia, the Far East, Canada and the
United States.
The Goldman Sachs 100 Convertible Bond Index currently includes 67 bonds and 33
preferred stocks. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
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The Lehman Brothers Government Bond Index (the Lehman Government Index) is a
measure of the market value of all public obligations of the U.S. Treasury; all
publicly issued debt of all agencies of the U.S. Government and all quasi-
federal corporations; and all corporate debt guaranteed by the U.S. Government.
Mortgage-backed securities, flower bonds and foreign targeted issues are not
included in the Lehman Government Index.
The Lehman Brothers Government/Corporate Bond Index (the Lehman
Government/Corporate Index) is a measure of the market value of approximately
5,300 bonds with a face value currently in excess of $1 million, which have at
least one year to maturity and are rated "Baa" or higher (investment grade) by a
nationally recognized statistical rating agency.
The Lehman Brothers Government/Corporate Intermediate Bond Index (the Lehman
Government/Corporate Intermediate Index) is composed of all bonds covered by the
Lehman Brothers Government/Corporate Bond Index with maturities between one and
9.99 years. Total return comprises price appreciation/depreciation and income as
a percentage of the original investment. Indexes are rebalanced monthly by
market capitalization.
The Lehman Brothers Intermediate Treasury Bond Index includes bonds with
maturities between one and ten years with a face value currently in excess of $1
million, that are rated investment grade or higher by a nationally recognized
statistical rating agency.
The Shearson Lehman Long-Term Treasury Bond Index is composed of all bonds
covered by the Shearson Lehman Hutton Treasury Bond Index with maturities of 10
years or greater.
The National Association of Securities Dealers Automated Quotation System
(NASDAQ) Composite Index covers 4,500 stocks traded over the counter. It
represents many small company stocks but is heavily influenced by about 100 of
the largest NASDAQ stocks. It is a value-weighted index calculated on price
change only and does not include income.
The NASDAQ Industrial Index is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not include
income.
The Value Line (Geometric) Index is an unweighted index of the approximately
1,700 stocks followed by the Value Line Investment Survey.
The Salomon Brothers GNMA Index includes pools of mortgages originated by
private lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.
The Salomon Brothers' World Market Index is a measure of the return of an
equally weighted basket of short-term (three month U.S. Government securities
and bank deposits) investments in eight major currencies: the U.S. dollars, UK
pounds sterling, Canadian dollars, Japanese yen, Swiss francs, French francs,
German deutsche mark and Netherlands guilder.
The Salomon Brothers Broad Investment-Grade Bond Index contains approximately
3,800 Treasury and agency, corporate and mortgage bonds with a rating of BBB or
higher, a stated maturity of at least one year, and a par value outstanding of
$25 million or more. The index is weighted according to the market value of all
bond issues included in the index.
The Salomon Brothers High Grade Corporate Bond Index consists of publicly
issued, non-convertible corporate bonds rated AA or AAA. It is a value-weighted,
total return index, including approximately 800 issues with maturities of 12
years or grater.
The Salomon Brothers World Bond Index measures the total return performance of
high-quality securities in major sectors of the international bond market. The
index covers approximately 600 bonds from 10
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currencies: Australian dollars, Canadian dollars, European Currency Units,
French francs, Japanese yen, Netherlands guilder, Swiss francs, UK pounds
sterling, U.S. dollars, and German deutsche marks.
The J.P. Morgan Global Government Bond Index is a total return, market
capitalization weighted index, rebalanced monthly consisting of the following
countries: Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan,
Netherlands, Spain, Sweden, United Kingdom and United States.
The 50/50 Index assumes a static mix of 50% of the S&P 500 Index and 50% of the
Lehman Government Corporate Index.
Other Composite Indices: 70% S&P 500 Index and 30% NASDAQ Industrial Index; 35%
S&P 500 Index and 65% Salomon Brothers High Grade Bond Index; and 65% S&P Index
and 35% Salomon Brothers High Grade Bond Index.
The SEI Median Balanced Fund Universe measures a group of funds with an average
annual equity commitment and an average annual bond-plus-private-placement
commitment greater than 5% each year. SEI must have at least two years of data
for a fund to be considered for the population.
The Russell 2000/Small Stock Index comprises the smallest 2000 stocks in the
Russell 3000 Index, and represents approximately 11% of the total U.S. equity
market capitalization. The Russell 3000 Index comprises the 3,000 largest U.S.
companies by market capitalization. The smallest company has a market value of
roughly $20 million.
The Russell 2500 Index is comprised of the bottom 500 stocks in the Russell 1000
Index which represents the universe of stocks from which most active money
managers typically select; and all the stocks in the Russell 2000 Index. The
largest security in the index has a market capitalization of approximately 1.3
billion.
The Consumer Price Index (or Cost of Living Index), published by the United
States Bureau of Labor Statistics is a statistical measure of change, over time,
in the price of goods and services in major expenditure groups.
Stocks, Bonds, Bills and Inflation, published by Hobson Associates, presents an
historical measure of yield, price and total return for common and small company
stocks, long-term government bonds, Treasury bills and inflation.
Savings and Loan Historical Interest Rates as published in the United States
Savings & Loan League Fact Book.
Historical data supplied by the research departments of First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch, Pierce,
Fenner & Smith, Shearson Lehman Hutton and Bloomberg L.P.
The MSCI Combined Far East Free ex Japan Index is a market-capitalization
weighted index comprising stocks in Hong Kong, Indonesia, Korea, Malaysia,
Philippines, Singapore and Thailand. Korea is included in the MSCI Combined Far
East Free ex Japan Index at 20% of its market capitalization.
The First Boston High Yield Index generally includes over 180 issues with an
average maturity range of seven to ten years with a minimum capitalization of
$100 million. All issues are individually trader-priced monthly.
In reports or other communications to shareholders, the Fund may also describe
general economic and market conditions affecting the Options and may compare the
performance of the Options with (1) that of mutual funds included in the
rankings prepared by Lipper or similar investment services that monitor the
performance of insurance company separate accounts or mutual funds, (2)
IBC/Donoghue's Money
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Fund Report, (3) other appropriate indices of investment securities and averages
for peer universe of funds which are described in this Statement of Additional
Information, or (4) data developed by National Integrity or any of the Sub-
Advisers derived from such indices or averages.
Individualized Computer Generated Illustrations
National Integrity may from time to time use computer-based software available
through Morningstar, CDA/Wiesenberger and/or other firms to provide registered
representatives and existing and/or potential owners of the contracts with
individualized hypothetical performance illustrations for some or all of the
Variable Account Options. Such illustrations may include, without limitation,
graphs, bar charts and other types of formats presenting the following
information: (i) the historical results of a hypothetical investment in a single
Option; (ii) the historical fluctuation of the value of a single Option (actual
and hypothetical); (iii) the historical results of a hypothetical investment in
more than one Option; (iv) the historical performance of two or more market
indices in relation to one another and/or one or more Options; (v) the
historical performance of two or more market indices in comparison to a single
Option or a group of Options; (vi) a market risk/reward scatter chart showing
the historical risk/reward relationship of one or more mutual funds or Options
to one or more indices and a broad category of similar anonymous variable
annuity subaccounts; and (vii) Option data sheets showing various information
about one or more Options (such as information concerning total return for
various periods, fees and expenses, standard deviation, alpha and beta,
investment objective, inception date and net assets). We reserve the right to
republish figures independently provided by Morningstar or any similar agency or
service.
PART 4 - DETERMINATION OF ANNUITY UNIT VALUES
This section relates to the discussion in the prospectus under "Annuity
Payments."
The annuity unit value was fixed on May 7, 1987 at $1.00 for certificates with
assumed base rates of net investment return of 5% and 3.5% a year, respectively.
For each valuation period after that date, it is the annuity value for the
preceding valuation period multiplied by the adjusted net investment factor
under the certificates. For each valuation period, the adjusted net investment
factor is equal to the net investment factor reduced for each day in the
valuation period by:
* .00013366 for a certificate with an assumed base rate of net investment
return of 5% a year; or
* .00009425 for a certificate with an assumed base rate of net investment
return of 3.5% a year.
Because of this adjustment, the annuity unit value rises and falls depending on
whether the actual rate of net investment return (after charges) is higher or
lower than the assumed base rate.
All certificates have a 5% assumed base rate, except in states where that rate
is not permitted. Annuity payments under certificates with an assumed base rate
of 3.5% will at first be smaller than those under certificates with a 5% assumed
base rate. Payments under the 3.5% certificates, however, will rise more rapidly
when unit values are rising, and payments will fall more slowly when unit values
are falling, than those under 5% certificates.
The amounts of variable annuity payments are determined as follows:
Payments normally start on the Annuitant's retirement date. The first three
monthly payments are the same. Each of the first three monthly payments will be
based on the amount taken from the tables in the certificate or on our current
rates, whichever is more favorable to the participant. Where the Company's
current annuity rates are used, contributions in the current and five prior
participation years will qualify for the Company's current individual annuity
rates applicable to funds derived from sources
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outside the Company. The balance of the proceeds will qualify for the Company's
current individual annuity rates for payment of proceeds.
The first three monthly payments depend on the assumed base rate of net
investment return and the forms of annuity chosen (and any fixed period). If the
annuity involves a life contingency, the risk class and the age of the
annuitants will affect payments.
Payments after the first three months will vary according to the investment
performance of the Variable Account Option or Options selected. After that, each
payment will be calculated by multiplying the number of annuity units credited
by the average annuity unit value for the second calendar month before the due
date of the payment. The average annuity unit value is the average of the
annuity unit values for the valuation periods ending in that month.
Illustration of Changes in Annuity Unit Values. To show how we determine
variable annuity payments from month to month, assume that the certificate value
on a retirement date is enough to fund an annuity with a monthly payment of $363
and that the annuity unit value for the valuation period that includes the due
date of the first annuity payment is $1.05. The number of annuity units credited
under your certificate would be 345.71 (363 divided by 1.05 = 345.71).
If the fourth monthly payment is due in March, and the average annuity unit
value for January was $1.10, the annuity payment for March would be the number
of units (345.71) times the average annuity unit value ($1.10), or $380.28. If
the average annuity unit value was $1.00 in February, the annuity payment for
April would be 345.71 times $1.00 or, or $345.71.
For period certain life annuities and life income annuities, the participant may
not surrender or redeem once annuity payments commence. For period certain life
annuities only, if the payee (or the payee and the other annuitant under a joint
and survivor annuity) dies before the period selected ends, the remaining
payments will go to another named payee who may have the right to redeem the
annuity and secure the present value of future guaranteed payments in a lump
sum. The present value of future guaranteed payments for a period certain is
based on the number of payments left, the assumed base rate of net return, the
number of annuity units and the annuity unit value for the date the Company
receives a written request for lump sum payment of remaining values.
PART 5 - FINANCIAL STATEMENTS
Ernst & Young LLP, Suite 2100, 400 West Market Street, Louisville, Kentucky
40202, is our independent auditor and serves as independent auditor of the
Separate Account. Ernst & Young LLP on an annual basis will audit certain
financial statements prepared by management and express an opinion on such
financial statements based on their audits.
The financial statements of the Separate Account and the statutory-basis
financial statements of National Integrity as of and for the years ended
December 31, 1995 and 1994 included in this SAI have been audited by Ernst &
Young LLP, independent auditors, as set forth in their reports included herein.
The financial statements of National Integrity should be distinguished from the
financial statements of the Separate Account and should be considered only as it
relates to the ability of National Integrity to meet its obligations under the
contract. They should not be considered as relating to the investment
performance of the assets held in the Separate Account.
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