<PAGE>
As filed with the Securities and Exchange Commission
on April 26, 1999
Registration No. 33-51126
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. ___ / /
Post-Effective Amendment No. 11 /X/
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 12 /X/
(Check appropriate box or boxes)
Separate Account II of National Integrity Life Insurance Company
(Exact Name of Registrant)
National Integrity Life Insurance Company
(Name of Depositor)
515 West Market Street, Louisville, KY 40202
(Address of Depositor's Principal Executive Offices) (Zip Code)
Depositor's Telephone Number, including Area Code (502) 582-7900
Kevin L. Howard
National Integrity Life Insurance Company
515 West Market Street
Louisville, Kentucky 40202
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon after the effective date
of this Registration Statement as is practicable.
It is proposed that this filing will become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b) of Rule 485
/X/ on May 1, 1998 pursuant to paragraph (b) of Rule 485
/ / 60 days after filing pursuant to paragraph (a)(1) of Rule 485
/ / on (date) pursuant to paragraph (a)(1) of Rule 485
If appropriate, check the following box:
/X/ this post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
<PAGE>
PROSPECTUS
PINNACLE
FLEXIBLE PREMIUM VARIABLE ANNUITY
issued by NATIONAL INTEGRITY LIFE INSURANCE COMPANY
This prospectus describes a flexible premium variable annuity contract offered
by National Integrity Life Insurance Company, a subsidiary of ARM Financial
Group, Inc. (ARM). The contracts provide several types of benefits, some of
which have tax-favored status under the Internal Revenue Code of 1986, as
amended. Separate Account II funds the Variable Annuity contracts. You may
allocate contributions to various available investment divisions of Separate
Account II, called Variable Account Options, or to our Fixed Accounts, or both.
The Variable Account Options and Fixed Accounts are together referred to as
INVESTMENT OPTIONS.
Your contributions to the Variable Account Options are invested in shares of the
Portfolios of the following mutual funds: BT Insurance Funds Trust; Fidelity's
Variable Insurance Products Fund (VIP), Fidelity's Variable Insurance Products
Fund II (VIP II), and Fidelity's Variable Insurance Products Fund III (VIP III),
trust funds of the Fidelity Investments-Registered Trademark- group of
companies; The Legends Fund, Inc.; Janus Aspen Series; J.P. Morgan Series Trust
II; Morgan Stanley Dean Witter Universal Funds, Inc.; and Select Ten Plus Fund,
LLC. The prospectuses for the Portfolios describe their investment objectives,
policies and risks. The value of your contributions to the Variable Account
Options reflects the performance of the Portfolios. There are 27 Variable
Account Options available under Separate Account II:
<TABLE>
<S> <C>
BT FUNDS TRUST FIDELITY'S VIP FUNDS
EAFE-Registered Trademark- Equity Index Fund VIP Equity-Income Portfolio: Initial Class
Equity 500 Index Fund VIP II Contrafund Portfolio: Initial Class
Small Cap Index Fund VIP III Growth & Income Portfolio: Initial Class
VIP III Growth Opportunities Portfolio: Initial Class
JANUS ASPEN SERIES VIP Growth Portfolio: Service Class
Janus Aspen Capital Appreciation Portfolio VIP III Mid Cap Portfolio: Service Class
Janus Aspen Balanced Portfolio
Janus Aspen Worldwide Growth Portfolio J.P. MORGAN SERIES TRUST II
Janus Aspen Money Market Portfolio J.P. Morgan International Opportunities Portfolio
J.P. Morgan Bond Portfolio
LEGENDS FUND MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
Harris Bretall Sullivan & Smith Equity Growth Portfolio MSDW Universal Funds Asian Equity Portfolio
Zweig Asset Allocation Portfolio MSDW Universal Funds Emerging Markets Debt Portfolio
Zweig Equity (Small Cap) Portfolio MSDW Universal Funds High Yield Portfolio
Scudder Kemper Value Portfolio MSDW Universal Funds U.S. Real Estate Portfolio
</TABLE>
SELECT TEN PLUS FUND
Select Ten Plus Division March
Select Ten Plus Division June
Select Ten Plus Division September
Select Ten Plus Division December
We also offer Guaranteed Rate Options (GROs) and a Systematic Transfer Option
(STO), together referred to as FIXED ACCOUNTS. The money you put into a GRO
earns a fixed interest rate that we declare at the beginning of the duration you
select. A MARKET VALUE ADJUSTMENT will be made for withdrawals, surrenders,
transfers and certain other transactions made before your GRO Account expires.
However, your value under a GRO Account can't be decreased below an amount equal
to your contribution less prior withdrawals plus interest compounded at an
annual effective rate of 3% (MINIMUM VALUE). Withdrawal charges and an annual
administrative charge may apply, and may invade principal. Your allocation to
the STO earns a fixed interest rate that we declare each calendar quarter,
guaranteed never to be less than an effective annual yield of 3%. YOU MUST
TRANSFER ALL CONTRIBUTIONS YOU MAKE TO THE STO INTO OTHER INVESTMENT OPTIONS
WITHIN ONE YEAR OF CONTRIBUTION ON A MONTHLY OR QUARTERLY BASIS.
<PAGE>
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 isn't valid unless provided
with the current Portfolio prospectuses, which you should also read.
For further information and assistance, contact our Administrative Office at
National Integrity Life Insurance Company, 15 Matthews Street, Suite 200,
Goshen, New York, 10924. You may also call the following toll-free number:
1-800-433-1778.
Registration statements relating to the contracts, which include a Statement of
Additional Information dated May 1, 1999, have been filed with the Securities
and Exchange Commission. The SAI is incorporated by reference into this
prospectus. A free copy of the SAI is available by writing to or calling our
Administrative Office. A table of contents for the SAI is found in Appendix C.
THE CONTRACTS ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY ANY
BANK, NOR ARE THEY INSURED BY THE FDIC. THEY ARE SUBJECT TO INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE
CONTRACTS OR PASSED ON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
YOU CAN REVIEW AND COPY INFORMATION ABOUT THE CONTRACTS AT THE SEC'S PUBLIC
REFERENCE ROOM IN WASHINGTON, D.C. FOR HOURS OF OPERATION OF THE PUBLIC
REFERENCE ROOM, PLEASE CALL 1-800-SEC-0330. YOU MAY ALSO OBTAIN INFORMATION
ABOUT THE CONTRACTS ON THE SEC'S INTERENET SITE AT HTTP://WWW.SEC.GOV, OR,
UPON PAYMENT OF A DUPLICATING FEE, BY WRITING THE SEC'S PUBLIC REFERENCE
SECTION, WASHINGTON, D.C. 20459-6009.
The date of this Prospectus is May 1, 1999.
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
SECTION 1 - SUMMARY
<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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Your Initial Right to Revoke . . . . . . . . . . . . . . . . . . . . . . . 2
Risk/Return Summary: Investments and Risks. . . . . . . . . . . . . . . . 3
Year 2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Table of Annual Fees and Expenses. . . . . . . . . . . . . . . . . . . . . 4
Examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
SECTION 2 - NATIONAL INTEGRITY AND SEPARATE ACCOUNT II
National Integrity Life Insurance Company. . . . . . . . . . . . . . . . . 8
Separate Account II and the Variable Account Options . . . . . . . . . . . 8
Assets of Our Separate Account . . . . . . . . . . . . . . . . . . . . . . 8
Changes In How We Operate. . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 3 - YOUR INVESTMENT OPTIONS
The Legends Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
BT Insurance Funds Trust . . . . . . . . . . . . . . . . . . . . . . . . . 10
Fidelity's Variable Insurance Products Funds . . . . . . . . . . . . . . . 10
Janus Aspen Series . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
J.P. Morgan Series Trust II. . . . . . . . . . . . . . . . . . . . . . . . 12
Morgan Stanley Dean Witter Universal Funds, Inc. . . . . . . . . . . . . . 12
The Select Ten Plus Fund . . . . . . . . . . . . . . . . . . . . . . . . . 13
Performance History of the Dogs of the Dow Strategy -- Comparison
of Historical Total Return. . . . . . . . . . . . . . . . . . . . . . 16
Fixed Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Guaranteed Rate Options . . . . . . . . . . . . . . . . . . . . . . . 17
Renewals of GRO Accounts. . . . . . . . . . . . . . . . . . . . . . 17
Market Value Adjustments. . . . . . . . . . . . . . . . . . . . . . 18
Systematic Transfer Option. . . . . . . . . . . . . . . . . . . . . . 18
SECTION 4 - DEDUCTIONS AND CHARGES
Separate Account Charges . . . . . . . . . . . . . . . . . . . . . . . . . 19
Annual Administrative Charge . . . . . . . . . . . . . . . . . . . . . . . 19
Portfolio Charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Reduction or Elimination of Separate Account or Administrative Charges . . 19
State Premium Tax Deduction. . . . . . . . . . . . . . . . . . . . . . . . 20
Contingent Withdrawal Charge . . . . . . . . . . . . . . . . . . . . . . . 20
Reduction or Elimination of the Contingent Withdrawal Charge . . . . . . . 20
Transfer Charge. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Hardship Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Tax Reserve. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
iii
<PAGE>
SECTION 5 - TERMS OF YOUR VARIABLE ANNUITY
Contributions Under Your Contract. . . . . . . . . . . . . . . . . . . . . 21
Your Account Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Units in Separate Account II . . . . . . . . . . . . . . . . . . . . . . . 22
How We Determine Unit Value. . . . . . . . . . . . . . . . . . . . . . . . 22
Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Withdrawals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Assignments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Death Benefits and Similar Benefit Distributions . . . . . . . . . . . . . 24
Annuity Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Annuities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Fixed Annuity Payments . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Timing of Payment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
How You Make Requests and Give Instructions. . . . . . . . . . . . . . . . 26
SECTION 6 - VOTING RIGHTS
Portfolio Voting Rights. . . . . . . . . . . . . . . . . . . . . . . . . . 26
How We Determine Your Voting Shares. . . . . . . . . . . . . . . . . . . . 26
How Portfolio Shares Are Voted . . . . . . . . . . . . . . . . . . . . . . 27
Separate Account Voting Rights . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 7 - TAX ASPECTS OF THE CONTRACTS
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Your Contract is an Annuity. . . . . . . . . . . . . . . . . . . . . . . . 27
Taxation of Annuities Generally. . . . . . . . . . . . . . . . . . . . . . 28
Distribution-at-Death Rules. . . . . . . . . . . . . . . . . . . . . . . . 29
Diversification Standards. . . . . . . . . . . . . . . . . . . . . . . . . 29
Tax-Favored Retirement Programs. . . . . . . . . . . . . . . . . . . . . . 29
Federal and State Income Tax Withholding . . . . . . . . . . . . . . . . . 29
Impact of Taxes on National Integrity. . . . . . . . . . . . . . . . . . . 29
Transfers Among Investment Options . . . . . . . . . . . . . . . . . . . . 29
SECTION 8 - ADDITIONAL INFORMATION
Systematic Withdrawals . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Income Plus Withdrawal Program . . . . . . . . . . . . . . . . . . . . . . 30
Dollar Cost Averaging. . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Systematic Transfer Program. . . . . . . . . . . . . . . . . . . . . . . . 31
Customized Asset Rebalancing . . . . . . . . . . . . . . . . . . . . . . . 31
Callan Asset Allocation and Rebalancing Program. . . . . . . . . . . . . . 32
Systematic Contributions . . . . . . . . . . . . . . . . . . . . . . . . . 32
Performance Information. . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 9 - PRIOR CONTRACTS
Death Benefit Information for Contacts Issued Before January 1, 1997 . . . 33
Reduction in Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Contingent Withdrawal Charge . . . . . . . . . . . . . . . . . . . . . . . 34
Retirement Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Callan Asset Allocation and Rebalancing Program. . . . . . . . . . . . . . 35
Hardship Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Fixed Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
iv
<PAGE>
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
APPENDIX A - FINANCIAL INFORMATION FOR SEPARATE ACCOUNT II. . . . . . . . 38
APPENDIX B - ILLUSTRATION OF A MARKET VALUE ADJUSTMENT . . . . . . . . . . 41
APPENDIX C - TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION. . . 44
</TABLE>
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.
v
<PAGE>
SECTION I - SUMMARY
YOUR VARIABLE ANNUITY CONTRACT
When this prospectus uses the terms "we," "our" and "us," it means National
Integrity Life Insurance Company. When it uses the terms "you" and "your" it
means the Annuitant, who is the person upon whose life the annuity benefit and
the death benefit are based. That person is usually the Owner of the contract.
If the Annuitant doesn't own the contract, the Owner has all the rights under
the contract until annuity payments begin. If there are Joint Owners, they
share the contract rights and any changes or transactions must be signed by both
of them. The death of the first Joint Owner to die will determine the timing of
distribution.
If you want to invest for retirement by buying a Pinnacle Variable Annuity
contract, complete a Customer Profile form (unless your state requires an
application) and send it to us along with at least the minimum initial
contribution. Because the premium is flexible, your future contributions can be
any amount you choose, as long as it's above the minimum required contribution,
discussed below.
The latest your endowment or "retirement" date can be is your 98th birthday,
unless your state law requires it to be a different date, or unless you specify
an earlier date.
YOUR BENEFITS
Your contract has an Account Value, an annuity benefit and a death benefit.
These benefits are described in more detail below.
Your benefits under the annuity contract may be controlled by the usual tax
rules for annuities, including deferral of taxes on your investment growth until
you actually make a withdrawal. You should read Section 7, "Tax Aspects of the
Contracts" for more information, and possibly consult a tax adviser. The
contract can also provide your benefits under tax-favored retirement programs,
which may be subject to special eligibility and contribution rules.
HOW YOUR CONTRACT IS TAXED
Under the current tax laws, any increases in the value of your contributions
won't be considered part of your taxable income until you make a withdrawal.
However, most of the withdrawals you make before you are 59 1/2 years old are
subject to a 10% federal tax penalty on the taxable portion of the amounts
withdrawn.
YOUR CONTRIBUTIONS
The minimum initial contribution is $1,000. Contributions after your initial one
can be as little as $100. Some tax-favored retirement plans allow smaller
contributions. For more details on contribution requirements, see Section 5,
"Contributions Under Your Contract."
YOUR INVESTMENT OPTIONS
You may have your contributions placed in the Variable Account Options or in the
Fixed Accounts, or place part of your contributions in each of them. The
Variable Account Options and Fixed Accounts are together referred to as the
INVESTMENT OPTIONS. You may have money in as many as nine different Investment
Options at any one time. See "Contributions Under Your Contract" in Section 5.
The effective dates of contributions to the Select Ten Plus Divisions are
subject to special rules. See "The Select Ten Plus Fund" in Section 3. To
select Investment Options that most closely reflect your investment goals, see
Section 3, "Your Investment Options."
VARIABLE ACCOUNT OPTIONS
Each of the Variable Account Options invests in shares of an investment
portfolio of a mutual fund. Each investment portfolio is referred to as a
PORTFOLIO. The investment goals of each Variable Account Option are the same as
the Portfolio in which it's invested. For example, if your investment goal is
to save money for retirement, you might choose a GROWTH oriented Variable
Account Option, which invests in a GROWTH Portfolio. Your value in a Variable
Account Option will vary
1
<PAGE>
with the performance of the corresponding Portfolio. For a full description of
each Portfolio, see that Portfolio's prospectus and Statement of Additional
Information.
ACCOUNT VALUE, ADJUSTED ACCOUNT VALUE AND CASH VALUE
Your ACCOUNT VALUE consists of the values of your Fixed Accounts and Variable
Account Options added together. Your ADJUSTED ACCOUNT VALUE is your Account
Value increased or decreased by any MARKET VALUE ADJUSTMENT. Your Account Value
in the GROs can never be decreased below the Minimum Value. You'll find a
discussion of Market Value Adjustment in the Guaranteed Rate Options paragraph
of Section 3, "Your Investment Options." Your Cash Value is your ADJUSTED
ACCOUNT VALUE reduced by any withdrawal charges or pro rata annual
administrative charges that may apply. Fees and charges are discussed in more
detail in the "Charges and Fees" section below.
TRANSFERS
You may transfer all or any part of your Account Value among the Investment
Options, although there are some restrictions that apply. You can find these
under "Transfers" in Section 5. Any transfer must be for at least $250 and may
be arranged through our telephone transfer service. Transfers may also be made
among certain Investment Options under the following special programs: (i)
Dollar Cost Averaging, (ii) Customized Asset Rebalancing, (iii) Callan Asset
Allocation and Rebalancing, or (iv) transfer of your STO contributions. All of
these programs are discussed in Section 8. If you make more than twelve
transfers between your Investment Options in one contract year, your account can
be charged up to $20 for each transfer.
CHARGES AND FEES
If your Account Value is less than $50,000 as of the last day of any contract
year before your Retirement Date, an annual administrative expense charge of $30
is deducted from your Account. A daily charge equal to an annual fee of 1.35%
is deducted from the Account Value of each of your Variable Account Options to
cover mortality and expense risks (1.20%) and certain administrative expenses
(.15%). The charges will never be greater than this. For more information
about the account charges, see Section 4, "Deductions and Charges."
Investment management fees and other expenses are deducted from amounts Separate
Account II invests in the Portfolios. The advisory fees of a Portfolio can't be
increased without the consent of its shareholders. See "Table of Annual Fees
and Expenses" below. For a discussion about the fees of various investment
advisers and sub-advisers of the Portfolios, see the Portfolio prospectuses.
WITHDRAWALS
You may make any number of withdrawals as often as you wish. Each withdrawal
must be for at least $300. You may withdraw up to 10% of your Account Value
each year with no withdrawal charges. After the first 10% within a year, there
will be a charge for any withdrawals you make, based upon the length of time
your money has been in your account. See Section 4, "Contingent Withdrawal
Charge" and Section 5, "Withdrawals."
YOUR INITIAL RIGHT TO REVOKE
You can cancel your contract within ten days after you receive it by returning
it to our Administrative Office. We will extend the ten-day period as required
by law in some states. If you cancel your contract, we'll return your entire
contribution, with adjustments made for any investment gain or loss experienced
by the Variable Account Options from the date you purchased it until the date we
receive your cancelled contract, along with any charges deducted. If your state
requires, upon cancellation we'll return your contribution without any
adjustments. We'll return the amount of any contribution to the Guaranteed Rate
Option upon cancellation.
2
<PAGE>
RISK/RETURN SUMMARY: INVESTMENTS AND RISKS
VARIABLE ANNUITY INVESTMENT GOALS
The investment goals of the Pinnacle Flexible Premium Variable Annuity are
protecting your investment, building for retirement and providing future income.
We strive to achieve these goals through extensive portfolio diversification and
superior portfolio management.
RISKS
An investment in any of the Variable Account Options carries with it certain
risks, including the risk that the value of your investment will decline and you
could lose money. This could happen if one of the issuers of the stocks becomes
financially impaired or if the stock market as a whole declines. Because most
of the Variable Account Options are in common stocks, there's also the inherent
risk that holders of common stock generally are behind creditors and holders of
preferred stock for payments in the event of the bankruptcy of a stock issuer.
The Select Ten Plus Divisions and the Janus Aspen Capital Appreciation Portfolio
are non-diversified, which means that they invest a large amount of their assets
in a very small number of issuers. As a result, an investment in one of these
Portfolios may experience greater fluctuations in value than an investment in a
diversified Portfolio. In addition, the non-diversified Portfolios may be
concentrated in one or more market sectors. Concentration may involve addition
risk because of the decreased diversification of economic, financial and market
risks.
For a complete discussion of the risks associated with an investment in any
particular Portfolio, see the prospectus of that Portfolio.
YEAR 2000
Many computer programs are written so that only the last two digits of the year
are read. Because of this, many computer systems will read the year 2000 as
1900. This could cause many programs to malfunction. We are evaluating, on an
ongoing basis, our computer systems and the systems of other companies on which
we rely, to determine if they'll function properly, and make the transition from
1999 to 2000 smoothly. These activities are designed to ensure that there is no
adverse effect on our business operations. While we've been working very hard
to make sure that this process will be problem-free, we can't guarantee that
there won't be some Year 2000 problems experienced by our systems and we can't
make any representations or guarantees that the outside sources on which we rely
will be ready to make a smooth transition to Year 2000 with their systems.
3
<PAGE>
TABLE OF ANNUAL FEES AND EXPENSES
<TABLE>
<S> <C>
Contract Owner Transaction Expenses
- -----------------------------------
Sales Load on Purchases . . . . . . . . . . . . . . . . . . . . . . . $0
Deferred Sales Load (as a percentage of contributions)(1) . . . . . . 7% Maximum
Exchange Fee(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . $0
Annual Administrative Charge
- ----------------------------
Annual Administrative Charge* . . . . . . . . . . . . . . . . . . . . $30
* This charge applies only if the Account Value is less than
$50,000 at the end of any contract year before your Retirement
Date. See "Annual Administrative Charge" in Section 4.
Annual Expenses of the Separate Account
(As a Percentage of Average Account Value)(3)
- ---------------------------------------------
Mortality and Expense Risk Charge . . . . . . . . . . . . . . . . . 1.20%
Administrative Expenses . . . . . . . . . . . . . . . . . . . . . . .15%
Total Separate Account Annual Expenses. . . . . . . . . . . . . . . 1.35%
Portfolio Annual Expenses After Waivers/Reimbursements
(As a Percentage of Average Net Assets)
- ---------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Management Other Total Annual
Portfolio Fees Expenses Expenses
- --------- ---- -------- --------
<S> <C> <C> <C>
EAFE-Registered Trademark- Equity Index. . . . . . . . . . 0.45%(4) 0.20%(4) 0.65%(4)
Equity 500 Index . . . . . . . . . . . . . . . . . . . . . 0.20%(4) 0.10%(4) 0.30%(4)
Small Cap Index. . . . . . . . . . . . . . . . . . . . . . 0.35%(4) 0.10%(4) 0.45%(4)
VIP Equity-Income: Initial Class . . . . . . . . . . . . . 0.49% 0.08% 0.57%(5)
VIP II Contrafund: Initial Class . . . . . . . . . . . . . 0.59% 0.07% 0.66%(5)
VIP III Growth & Income: Initial Class . . . . . . . . . . 0.49% 0.11% 0.60%(5)
VIP III Growth Opportunities: Initial Class. . . . . . . . 0.59% 0.11% 0.70%(5)
VIP Growth: Service Class. . . . . . . . . . . . . . . . . 0.59% 0.16%(6) 0.75%(5)
VIP III Mid Cap: Service Class . . . . . . . . . . . . . . 0.56% 0.54%(6) 1.10%(7)
Harris Bretall Sullivan & Smith Equity Growth. . . . . . . 0.65% 0.30% 0.95%(8)
Scudder Kemper Value . . . . . . . . . . . . . . . . . . . 0.65% 0.29% 0.94%(8)
Zweig Asset Allocation . . . . . . . . . . . . . . . . . . 0.90% 0.28% 1.18%(8)
Zweig Equity (Small Cap) . . . . . . . . . . . . . . . . . 1.05% 0.47% 1.52%(8)
Janus Aspen Capital Appreciation . . . . . . . . . . . . . 0.70%(9) 0.22%(9) 0.92%(9)
Janus Aspen Balanced . . . . . . . . . . . . . . . . . . . 0.72%(9) 0.02%(9) 0.74%(9)
Janus Aspen Worldwide Growth . . . . . . . . . . . . . . . 0.65%(9) 0.07%(9) 0.72%(9)
Janus Aspen Money Market . . . . . . . . . . . . . . . . . 0.25%(9) 0.09%(9) 0.34%(9)
J.P. Morgan International Opportunities. . . . . . . . . . 0.60% 0.60%(10) 1.20%(10)
J.P. Morgan Bond . . . . . . . . . . . . . . . . . . . . . 0.30% 0.45%(10) 0.75%(10)
MSDW Universal Funds Asian Equity. . . . . . . . . . . . . 0.00%(11) 1.21%(11) 1.21%(11)
MSDW Universal Funds Emerging Markets Debt . . . . . . . . 0.27%(11) 1.25%(11) 1.52%(11)
MSDW Universal Funds High Yield. . . . . . . . . . . . . . 0.15%(11) 0.65%(11) 0.80%(11)
MSDW Universal Funds U.S. Real Estate. . . . . . . . . . . 0.17%(11) 0.93%(11) 1.10%(11)
Select Ten Plus Division March . . . . . . . . . . . . . . 0.50%(12) 0.35%(13) 0.85%(13)
Select Ten Plus Division June . . . . . . . . . . . . . . 0.50%(12) 0.35%(13) 0.85%(13)
Select Ten Plus Division September . . . . . . . . . . . . 0.50%(12) 0.35%(13) 0.85%(13)
Select Ten Plus Division December. . . . . . . . . . . . . 0.50%(12) 0.35%(13) 0.85%(13)
</TABLE>
4
<PAGE>
(1) See "Deductions and Charges - Contingent Withdrawal Charge" in Section 4.
You may make a partial withdrawal of up to 10% of the Account Value in any
contract year minus withdrawals during the current contract year, without
incurring a withdrawal charge.
(2) After the first twelve transfers during a contract year, we can charge a
transfer fee of $20 for each transfer. This charge doesn't apply to transfers
made for dollar cost averaging, customized asset rebalancing, asset allocation
and rebalancing, or systematic transfers. See "Deductions and Charges - Transfer
Charge" in Section 4.
(3) See "Deductions and Charges - Separate Account Charges" in Section 4.
(4) Under the Advisory Agreement with Bankers Trust, the Portfolios will pay
advisory fees at the following annual percentage rates of the average daily net
assets of each Portfolio: 0.45% for the EAFE Equity Index Fund, 0.20% for the
Equity 500 Index Fund and 0.35% for the Small Cap Index Fund. These fees are
accrued daily and paid monthly. Bankers Trust has voluntarily undertaken to
waive its fees and to reimburse the Portfolios for certain expenses so that the
EAFE Equity Index Fund, Equity 500 Index Fund and Small Cap Index Fund total
operating expenses will not exceed 0.65%, 0.30% and 0.45%, respectively.
Without the waiver and reimbursement, annualized total expense ratios for the
year ended December 31, 1998 would have been as follows: 1.66% for the EAFE
Equity Index Fund, 1.19% for the Equity 500 Index Fund and 1.58% for the Small
Cap Index Fund.
(5) Part of the brokerage commissions that certain of Fidelity's VIP Funds pay
was used to reduce the Portfolios' expenses. In addition, certain Portfolios,
or FMR on behalf of certain Portfolios, have arranged with their custodian to
use uninvested cash balances to reduce custodian expenses. Without these
reductions, the total operating expenses presented in the table would have been
.58% for VIP Equity-Income Portfolio, .80% for VIP Growth Portfolio, .70% for
VIP II Contrafund Portfolio, .71% for VIP III Growth Opportunities Portfolio,
and .61% for VIP III Growth & Income Portfolio.
(6) The "Other Expenses" reflect the payment of 0.10% pursuant to a Rule 12b-1
Plan adopted by the underlying Mutual Funds.
(7) The investment adviser agreed to reimburse part of the expenses for the VIP
III Mid Cap Portfolio during the period. Without this reimbursement, the
management fee, other expenses and total expenses would have been .56%, 115.40%
and 115.96% respectively for the VIP III Mid Cap Portfolio.
(8) Integrity Capital Advisors has agreed to reimburse each of the Legends Fund
Portfolios for operating expenses (excluding management fees) above an annual
rate of .50% of average net assets for all Portfolios of the Legends Fund.
Without reimbursements, total annual expenses for the Portfolio's fiscal year
ended June 30, 1998 would have been 1.56% for the Zweig Equity (Small Cap)
Portfolio. Integrity Capital Advisors has reserved the right to withdraw or
modify its policy of expense reimbursement for the Portfolios, but doesn't
intend to do so during 1999. In the Legends Fund's prospectus, see "Management
of the Fund."
(9) The fees and expenses in the table above are based on gross expenses after
expense offset arrangements for the fiscal year ended December 31, 1998. Fee
reductions for the Janus Aspen Balanced, Janus Aspen Capital Appreciation and
Janus Aspen Worldwide Growth Portfolios reduce the management fee to the level
of the corresponding Janus retail fund. Other waivers, if applicable, are first
applied against the management fee and then against other expenses. Without
waivers or reductions, the Management Fee, Other Expenses, and Total Annual
Expenses would have been .67%, .07%, and .74% for Worldwide Growth Portfolio and
.75%, .22% and .97% for Capital Appreciation Portfolio. Janus has agreed to
continue the waivers and fee reductions until at least the next annual renewal
of the advisory agreement.
(10) The information in this table has been restated to reflect a voluntary
agreement by Morgan Guaranty Trust Company of New York, an affiliate of JPMIM,
to reimburse the Trust to the extent certain expenses in any fiscal year exceed
1.20% of the average daily net assets of J.P. Morgan International Opportunities
Portfolio and .75% of the average daily net assets of J.P. Morgan Bond
Portfolio. Without this agreement, the Other Expenses and Total Annual Expenses
for the fiscal year ended December 31, 1998 would have been as follows: 2.66%
and 3.26% for the International Opportunities Portfolio, and 0.72% and 1.02% for
the Bond Portfolio.
5
<PAGE>
(11) The Portfolios' expenses were voluntarily waived and reimbursed by the
Portfolios' investment advisers. Without the waiver and/or reimbursement,the
Management Fee, Other Expenses and Total Annual Expenses for the fiscal year
ended December 31, 1998 would have been as follows: .80%, 2.00% and 2.80% for
the Asian Equity Portfolio; .80%, 1.25% and 2.05% for the Emerging Markets Debt
Portfolio; .50%, 0.65% and 1.15% for the High Yield Portfolio; and .80%, 0.93%
and 1.73% for the U.S. Real Estate Portfolio. MSDW Investment Management Inc.
or Miller Anderson & Sherrerd, LLP may modify or terminate the waivers or
reductions at any time.
(12) Integrity Capital Advisors will pay a portion of its Management Fee to
National Asset for its services under a sub-advisory agreement at an annual rate
of .10% of the Divisions' average daily net assets up to $100 million and .05%
of the Divisions' average daily net assets in excess of $100 million. Integrity
Capital Advisors has guaranteed it will pay National Asset a minimum
sub-advisory fee of $25,000 during the Divisions' first year of operations.
(13) Integrity Capital Advisors has agreed to reimburse each Division for
operating expenses (excluding management fees) above an annual rate of .35% of
each Division's average net assets. Without that reimbursement, Integrity
Capital Advisors estimates that operating expenses would be approximately 4.20%.
Integrity Capital Advisors reserves the right to withdraw or modify its policy
of expense reimbursement for the Divisions, but doesn't intend to do so during
1999.
EXAMPLES
The examples below show the expenses charged to the Annuitant per $1,000
investment, assuming a $60,000 average contract value and a 5% annual rate of
return on assets.
CUMULATIVE 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>
EAFE-Registered Trademark- Equity Index. . . . . . . . $ 90.99 $114.75 $140.98 $238.35
Equity 500 Index . . . . . . . . . . . . . . . . . . . $ 87.41 $103.87 $122.66 $200.80
Small Cap Index. . . . . . . . . . . . . . . . . . . . $ 88.94 $108.54 $130.54 $217.06
VIP Equity-Income: Initial Class . . . . . . . . . . . $ 90.17 $112.27 $136.82 $229.88
VIP II Contrafund: Initial Class . . . . . . . . . . . $ 91.10 $115.06 $141.50 $239.40
VIP III Growth & Income: Initial Class . . . . . . . . $ 90.48 $113.20 $138.38 $233.07
VIP III Growth Opportunities: Initial Class. . . . . . $ 91.51 $116.30 $143.57 $243.61
VIP Growth: Service Class. . . . . . . . . . . . . . . $ 92.02 $117.84 $146.16 $248.84
VIP III Mid Cap: Service Class . . . . . . . . . . . . $ 95.61 $128.62 $164.14 $284.71
Harris Bretall Sullivan & Smith Equity Growth. . . . . $ 94.07 $124.01 $156.47 $269.49
Scudder Kemper Value . . . . . . . . . . . . . . . . . $ 93.97 $123.70 $155.95 $268.47
Zweig Asset Allocation . . . . . . . . . . . . . . . . $ 96.42 $131.07 $168.21 $292.73
Zweig Equity (Small Cap) . . . . . . . . . . . . . . . $ 99.91 $141.44 $185.35 $326.10
Janus Aspen Capital Appreciation . . . . . . . . . . . $ 93.76 $123.09 $154.93 $266.42
Janus Aspen Balanced . . . . . . . . . . . . . . . . . $ 91.92 $117.53 $145.65 $247.79
Janus Aspen Worldwide Growth . . . . . . . . . . . . . $ 91.71 $116.92 $144.61 $245.70
Janus Aspen Money Market . . . . . . . . . . . . . . . $ 87.82 $105.12 $124.76 $205.16
J.P. Morgan International Opportunities . . . . . . . $ 96.63 $131.68 $169.22 $294.73
J.P. Morgan Bond . . . . . . . . . . . . . . . . . . . $ 92.02 $117.84 $146.16 $248.84
MSDW Universal Funds Asian Equity. . . . . . . . . . . $ 96.73 $131.99 $169.73 $295.72
MSDW Universal Funds Emerging Markets Debt . . . . . . $ 99.91 $141.44 $185.35 $326.10
MSDW Universal Funds High Yield . . . . . . . . . . . $ 92.53 $119.39 $148.75 $254.04
MSDW Universal Funds U.S. Real Estate. . . . . . . . . $ 95.61 $128.62 $164.14 $284.71
Select Ten Plus Division March . . . . . . . . . . . . $ 93.04 $120.93 $151.33 $259.22
Select Ten Plus Division June. . . . . . . . . . . . . $ 93.04 $120.93 $151.33 $259.22
Select Ten Plus Division September . . . . . . . . . . $ 93.04 $120.93 $151.33 $259.22
Select Ten Plus Division December. . . . . . . . . . . $ 93.04 $120.93 $151.33 $259.22
</TABLE>
6
<PAGE>
CUMULATIVE EXPENSES PER $1,000 INVESTMENT IF YOU ELECT THE NORMAL FORM OF
ANNUITY OR DON'T SURRENDER YOUR CONTRACT AT THE END OF THE SPECIFIED PERIOD
(I.E., NO DEFERRED SALES LOAD CHARGED):
<TABLE>
<CAPTION>
Portfolio 1 year 3 years 5 years 10 years
- --------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
EAFE-Registered Trademark- Equity Index. . . . . . . . . $20.99 $64.75 $110.98 $238.35
Equity 500 Index . . . . . . . . . . . . . . . . . . . . $17.41 $53.87 $ 92.66 $200.80
Small Cap Index. . . . . . . . . . . . . . . . . . . . . $18.94 $58.54 $100.54 $217.06
VIP Equity-Income: Initial Class . . . . . . . . . . . . $20.17 $62.27 $106.82 $229.88
VIP II Contrafund: Initial Class . . . . . . . . . . . . $21.10 $65.06 $111.50 $239.40
VIP III Growth & Income: Initial Class . . . . . . . . . $20.48 $63.20 $108.38 $233.07
VIP III Growth Opportunities: Initial Class. . . . . . . $21.51 $66.30 $113.57 $243.61
VIP Growth: Service Class. . . . . . . . . . . . . . . . $22.02 $67.84 $116.16 $248.84
VIP III Mid Cap: Service Class . . . . . . . . . . . . . $25.61 $78.62 $134.14 $284.71
Harris Bretall Sullivan & Smith Equity Growth. . . . . . $24.07 $74.01 $126.47 $269.49
Scudder Kemper Value . . . . . . . . . . . . . . . . . . $23.97 $73.70 $125.95 $268.47
Zweig Asset Allocation . . . . . . . . . . . . . . . . . $26.42 $81.07 $138.21 $292.73
Zweig Equity (Small Cap) . . . . . . . . . . . . . . . . $29.91 $91.44 $155.35 $326.10
Janus Aspen Capital Appreciation . . . . . . . . . . . . $23.76 $73.09 $124.93 $266.42
Janus Aspen Balanced . . . . . . . . . . . . . . . . . . $21.92 $67.53 $115.65 $247.79
Janus Aspen Worldwide Growth . . . . . . . . . . . . . . $21.71 $66.92 $114.61 $245.70
Janus Aspen Money Market . . . . . . . . . . . . . . . . $17.82 $55.12 $ 94.76 $205.16
J.P. Morgan International Opportunities. . . . . . . . . $26.63 $81.68 $139.22 $294.73
J.P. Morgan Bond . . . . . . . . . . . . . . . . . . . . $22.02 $67.84 $116.16 $248.84
MSDW Universal Funds Asian Equity. . . . . . . . . . . . $26.73 $81.99 $139.73 $295.72
MSDW Universal Funds Emerging Markets Debt . . . . . . . $29.91 $91.44 $155.35 $326.10
MSDW Universal Funds High Yield. . . . . . . . . . . . . $22.53 $69.39 $118.75 $254.04
MSDW Universal Funds U.S. Real Estate. . . . . . . . . . $25.61 $78.62 $134.14 $284.71
Select Ten Plus Division March . . . . . . . . . . . . . $23.04 $70.93 $121.33 $259.22
Select Ten Plus Division June. . . . . . . . . . . . . . $23.04 $70.93 $121.33 $259.22
Select Ten Plus Division September . . . . . . . . . . . $23.04 $70.93 $121.33 $259.22
Select Ten Plus Division December. . . . . . . . . . . . $23.04 $70.93 $121.33 $259.22
</TABLE>
These examples assume the current charges that are borne by Separate Account II,
and the investment management fees and other expenses of the Portfolios as they
were for their most recent fiscal years or estimated expenses (after
reimbursement), if applicable. ACTUAL PORTFOLIO EXPENSES MAY BE GREATER OR LESS
THAN THOSE ON WHICH THESE EXAMPLES WERE BASED. The annual rate of return assumed
in the examples isn't an estimate or guarantee of future investment performance.
The table also assumes an estimated $60,000 average contract value, so that the
administrative charge per $1,000 of net asset value in the Separate Account is
$0.50. The per $1,000 charge would be higher for smaller Account Values and
lower for higher values.
The above table and examples are shown only to increase your understanding of
the various costs and expenses that apply to your contract, directly or
indirectly. These tables show expenses of Separate Account II as well as those
of the Portfolios. Premium taxes at the time of payout also may be applicable.
CONDENSED FINANCIAL INFORMATION FOR SEPARATE ACCOUNT II IS PROVIDED IN
APPENDIX A.
7
<PAGE>
SECTION 2 - NATIONAL INTEGRITY AND SEPARATE ACCOUNT II
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
National Integrity is a stock life insurance company organized under the laws of
New York. Our principal executive offices are located in Louisville, Kentucky.
We are authorized to sell life insurance and annuities in nine states and the
District of Columbia. We sell flexible premium annuities with underlying
investment options, fixed single premium annuity contracts and flexible premium
annuity contracts offering both traditional fixed guaranteed interest rates
along with fixed equity indexed options. In addition to issuing annuity
products, we provide administrative and investment support for products
designed, underwritten and sold by other insurance companies.
National Integrity is a subsidiary of ARM, which specializes in providing retail
and institutional customers with products and services designed for long-term
savings and retirement planning. ARM is a publicly traded company listed on the
New York Stock Exchange under the symbol "ARM." At December 31, 1998, ARM had
$9.9 billion of assets under management.
SEPARATE ACCOUNT II AND THE VARIABLE ACCOUNT OPTIONS
Under your contract, you may allocate contributions to Separate Account II or to
our Fixed Accounts or both. Separate Account II is established and maintained
under the insurance laws of the State of New York.
Separate Account II was established in 1992 and is a unit investment trust,
which is a type of investment company, registered with the Securities and
Exchange Commission (SEC). SEC registration doesn't mean that the SEC is
involved in any way in supervising the management or investment policies of
Separate Account II. Each of Separate Account II's Variable Account Options
invests in shares of a corresponding Portfolio. We may establish additional
Investment Options from time to time. The Variable Account Options currently
available are listed in Section 3, "Your Investment Options."
ASSETS OF OUR SEPARATE ACCOUNT
Under New York law, we own the assets of Separate Account II and use them to
support the variable portion of yours and other variable annuity contracts.
Annuitants under other variable annuity contracts participate in Separate
Account II in proportion to the amounts in their contracts. We can't use
Separate Account II's assets supporting the variable portion of these contracts
to satisfy liabilities arising out of any of our other businesses. Under
certain unlikely circumstances, one Variable Account Option may be liable for
claims relating to the operation of another Option.
Income, gains and losses, whether realized or unrealized, from assets allocated
to Separate Account II are credited to or charged against Separate Account II
without regard to our other income, gains or losses. We may allow charges owed
to us to stay in Separate Account II, and thus can participate proportionately
in Separate Account II. Amounts in Separate Account II greater than reserves
and other liabilities belong to us, and we may transfer them to our general
account.
CHANGES IN HOW WE OPERATE
We may change how we or our the Separate Account operates, subject to your
approval when required by the Investment Company Act of 1940 (1940 ACT) or other
applicable law or regulation. We'll notify you 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;
- - register or end the registration of Separate Account II under the 1940 Act;
8
<PAGE>
- - operate our Separate Account under the direction of a committee or
discharge 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 Portfolios;
- - 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'll rely on our own or outside counsel for advice.
SECTION 3 - YOUR INVESTMENT OPTIONS
Management fees and other expenses deducted from each Portfolio are described in
that Portfolio's prospectus. FOR A PROSPECTUS CONTAINING MORE COMPLETE
INFORMATION ON ANY PORTFOLIO, CALL OUR ADMINISTRATIVE OFFICE TOLL-FREE AT
1-800-325-8583.
THE LEGENDS FUND
The Legends Fund is an open-end management investment company registered with
the SEC. Integrity Capital Advisors is the investment adviser to the Legends
Fund. Integrity Capital Advisors has entered into a sub-advisory agreement with
a professional manager to invest the assets of each of its Portfolios. The
sub-adviser for each Portfolio is listed below.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Following is a summary of the
investment objectives of The Legends Fund Portfolios. We can't guarantee that
these objectives will be met. YOU SHOULD READ THE LEGENDS FUND PROSPECTUS
CAREFULLY BEFORE INVESTING.
HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH
Harris Bretall Sullivan & Smith Equity Growth Portfolio's goal is growth of your
Account Value. It invests primarily in stocks of established companies with
proven records of superior and consistent growth. The Portfolio may invest in
U.S. government securities, cash and cash equivalents when that appears to be a
better choice in light of the Portfolio's investment objective or when justified
by market conditions. Harris Bretall Sullivan & Smith, LLC is the sub-adviser
to the Portfolio.
SCUDDER KEMPER VALUE PORTFOLIO
Scudder Kemper Value Portfolio's goal is to increase your Account Value and to
provide current income. It invests primarily in stocks that its sub-adviser
considers to be undervalued. The sub-adviser's philosophy centers on choosing
stocks of large, well-known companies with solid financial strength and large
dividend payment histories that have low price-earnings ratios and have been
generally overlooked by the market. Scudder Kemper Investors, Inc. is the
sub-adviser to the Portfolio.
ZWEIG ASSET ALLOCATION PORTFOLIO
Zweig Asset Allocation Portfolio seeks to increase your Account Value over the
long term with investments primarily from the 1,000 most liquid stocks. The
Portfolio's sub-adviser strives to do this while protecting your principal and
reducing its exposure to market risk. The 1,000 most liquid stocks are those
that the sub-adviser considers comparable to those included in the S&P 500, and
that have a minimum of $400 million market capitalization, average daily trading
volume of 50,000 shares or $425 million in total assets, and that are traded on
the New York Stock Exchange (NYSE), American Stock Exchange (AMEX),
over-the-counter (OTC) or on foreign exchanges. Zweig/Glaser Advisers is the
sub-adviser to the Portfolio.
ZWEIG EQUITY (SMALL CAP) PORTFOLIO
Zweig Equity (Small Cap) Portfolio strives to build your Account Value with
investments primarily in Small Company Stocks. The Portfolio's sub-adviser
tries to do this while protecting your principal and reducing its exposure to
market risk. This Portfolio doesn't look for stocks that provide you with
current income. SMALL COMPANY STOCKS are the 2,000 stock positions immediately
after the 1,000 largest stocks ranked in terms of market capitalization and/or
trading volume, and that are traded on the NYSE, AMEX, OTC or on foreign
exchanges. Zweig/Glaser Advisers is the sub-adviser to the Portfolio.
9
<PAGE>
BT INSURANCE FUNDS TRUST
The BT Insurance Funds Trust is an open-end management investment company
registered with the SEC. Bankers Trust Global Asset Management Services, a unit
of Bankers Trust, is the investment adviser to the BT Funds Trust.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Following is a summary of the
investment objectives of the BT Funds Trust. We can't guarantee that these
objectives will be met. YOU SHOULD READ THE BT FUNDS TRUST PROSPECTUSES
CAREFULLY BEFORE INVESTING.
EAFE-Registered Trademark- EQUITY INDEX FUND
The EAFE-Registered Trademark- Equity Index Fund tries to replicate as closely
as possible (before expenses are deducted) the total return of the Morgan
Stanley Capital International Europe, Australia, Far East (EAFE) Index, a
capitalization-weighted index containing approximately 1,100 equity securities
of companies located outside the United States. The Portfolio invests primarily
in stocks of businesses organized and domiciled outside of the United States or
for which the principal trading market is outside the United States.
Statistical methods will be used to replicate the EAFE Index by buying most of
the EAFE Index securities. Securities purchased for the Portfolio will
generally, but not necessarily, be traded on a foreign securities exchange.
EQUITY 500 INDEX FUND
The Equity 500 Index Fund seeks to replicate as closely as possible (before the
deduction of expenses) the total return of the Standard & Poor's 500 Composite
Stock Price Index (the S&P 500), an index emphasizing large-capitalization
stocks. The Portfolio will include the common stock of those companies included
in the S&P 500, other than Bankers Trust New York Corporation, selected on the
basis of computer-generated statistical data, that have been determined to
represent the industry diversification of the entire S&P 500.
SMALL CAP INDEX FUND
The Small Cap Index Fund seeks to replicate as closely as possible (before
deduction of expenses) the total return of the Russell 2000 Small Stock Index
(the RUSSELL 2000), an index consisting of 2,000 small-capitalization common
stocks. The Portfolio will include the common stock of companies included in
the Russell 2000, on the basis of computer-generated statistical data, that have
been determined to represent the industry diversification of the entire Russell
2000.
FIDELITY'S VARIABLE INSURANCE PRODUCTS FUNDS
Each of Fidelity's VIP Funds is diversified mutual fund registered with the SEC.
Fidelity Management & Research Company (FMR) serves the investment adviser to
each Portfolio.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Below is a summary of the investment
objectives of the Portfolios of Fidelity's VIP Funds. There are no guarantees
that a Portfolio will be able to achieve its objective. YOU SHOULD READ
FIDELITY'S VIP FUNDS PROSPECTUS CAREFULLY BEFORE INVESTING.
VIP EQUITY-INCOME PORTFOLIO
VIP Equity-Income Portfolio seeks reasonable income. The Portfolio will also
consider the potential for capital appreciation. The Portfolio seeks a yield
which exceeds the composite yield on the securities comprising the S&P 500. FMR
normally invests at least 65% of the Portfolio's total assets in
income-producing equity securities.
VIP II CONTRAFUND PORTFOLIO
VIP II Contrafund Portfolio seeks long-term capital appreciation. FMR normally
invests the Portfolio's assets primarily in common stocks. FMR invests the
Portfolio's assets in securities of companies whose value FMR
10
<PAGE>
believes is not fully recognized by the public. The types of companies in which
the Portfolio may invest include companies experiencing positive fundamental
change such as a new management team or product launch, a significant
cost-cutting initiative, a merger or acquisition, or a reduction in industry
capacity that should lead to improved pricing; companies whose earnings
potential has increased or is expected to increase more than generally
perceived; companies that have enjoyed recent market popularity but which appear
to have temporarily fallen out of favor for reasons that are considered
non-recurring or short-term; and companies that are undervalued in relation to
securities of other companies in the same industry.
VIP III GROWTH & INCOME PORTFOLIO
VIP III Growth & Income Portfolio seeks high total return through a combination
of current income and capital appreciation. FMR normally invests a majority of
the Portfolio's assets in common stocks with a focus on those that pay current
dividends and show potential for capital appreciation. FMR may also invest the
Portfolio's assets in bonds, including lower-quality debt securities, as well as
stocks that are not currently paying dividends, but offer prospects for future
income or capital appreciation.
VIP III GROWTH OPPORTUNITIES PORTFOLIO
VIP III Growth Opportunities Portfolio seeks to provide capital growth. FMR
normally invests the Portfolio's assets primarily in common stocks. FMR may also
invest the Portfolio's assets in other types of securities, including bonds
which may be lower-quality debt securities.
VIP GROWTH PORTFOLIO
VIP Growth Portfolio seeks capital appreciation. FMR invests the Portfolio's
assets in companies FMR believes have above-average growth potential. Growth
may be measured by factors such as earnings or revenue. Companies with high
growth potential tend to be companies with higher than average price/earnings
(P/E) ratios. Companies with strong growth potential often have new products,
technologies, distribution channels or other opportunities or have a strong
industry or market position. The stocks of these companies are often called
"growth" stocks.
VIP III MID CAP PORTFOLIO
FMR normally invests the VIP III Mid Cap Portfolio's assets primarily in common
stocks. FMR normally invests at least 65% of the Portfolio's total assets in
securities of companies with medium market capitalizations. Medium market
capitalization companies are those whose market capitalization is similar to the
capitalization of companies in the S&P Mid Cap 400 at the time of the
investment. Companies whose capitalization no longer meets this definition
after purchase continue to be considered to have a medium market capitalization
for purposes of the 65% policy.
JANUS ASPEN SERIES
Each portfolio of the Janus Aspen Series is a mutual fund registered with the
SEC. Janus Capital Corporation serves as the investment adviser to each
Portfolio.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Below is a summary of the investment
goals of the Portfolios of the Janus Aspen Series. There are no guarantees that
these objectives will be met. YOU SHOULD READ THE JANUS ASPEN SERIES
PROSPECTUSES CAREFULLY BEFORE INVESTING.
JANUS ASPEN CAPITAL APPRECIATION PORTFOLIO
Janus Aspen Capital Appreciation Portfolio seeks long-term growth of capital.
It is a non-diversified portfolio that pursues its objective by investing
primarily in common stocks selected for their growth potential. The Portfolio
may invest in companies of any size, from larger, well-established companies to
smaller, emerging growth companies.
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JANUS ASPEN BALANCED PORTFOLIO
Janus Aspen Balanced Portfolio seeks long-term capital growth, consistent with
capital preservation and balanced by current income. It is a diversified
portfolio that pursues its objective by normally investing 40-60% of its assets
in securities selected primarily for their growth potential and 40-60% of its
assets in securities selected primarily for their income potential. The
Portfolio normally invests at least 25% of its assets in fixed-income
securities.
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO
Janus Aspen Worldwide Growth Portfolio seeks long-term growth of capital in a
manner consistent with the preservation of capital. It is a diversified
portfolio that pursues its objective by investing primarily in common stocks of
companies of any size throughout the world. The Portfolio normally invests in
issuers from at least five different countries, including the United States.
The Portfolio may at times invest in fewer than five countries or even a single
country.
JANUS ASPEN MONEY MARKET PORTFOLIO
Janus Aspen Money Market Portfolio seeks maximum current income to the extent
consistent with stability of capital. There is no guarantee that the Portfolio
will meet its investment goal or be able to maintain a stable net asset value of
$1.00 per share. The Portfolio will invest in high quality, short-term money
market instruments that present minimal credit risks, as determined by Janus
Capital. The Portfolio may invest only in U.S. dollar-denominated instruments
that have a remaining maturity of 397 days or less (as calculated pursuant to
Rule 2a-7 under the 1940 Act) and will maintain a dollar-weighted average
portfolio maturity of 90 days or less.
J.P. MORGAN SERIES TRUST II
Each portfolio of the J.P. Morgan Series Trust II is a diversified mutual fund
registered with the SEC. J.P. Morgan Investment Management Inc. is the
investment adviser to the J.P. Morgan Series Trust II.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Below is a summary of the investment
objectives of the Portfolios of the J.P. Morgan Series Trust II. There is no
guarantee that these objectives will be met. YOU SHOULD READ THE PROSPECTUS FOR
J.P. MORGAN SERIES TRUST II CAREFULLY BEFORE INVESTING.
J.P. MORGAN BOND PORTFOLIO
J.P. Morgan Bond Portfolio seeks to provide a high total return consistent with
moderate risk of capital and maintenance of liquidity. Total return will
consist of realized and unrealized capital gains and losses plus income, less
expenses. Although the net asset value of the Portfolio will fluctuate, the
Portfolio tries to preserve the value of its investments consistent with its
objective.
J.P. MORGAN INTERNATIONAL OPPORTUNITIES PORTFOLIO
J.P. Morgan International Opportunities Portfolio seeks to provide a high total
return from a portfolio of equity securities of foreign corporations. Total
return will consist of realized and unrealized capital gains and losses plus
income, less expenses. The Portfolio is designed for investors who have
long-term investment goals and who want to diversify their investments by adding
international equities, taking advantage of investment opportunities outside the
U.S. The Portfolio seeks to meet its investment goal through country allocation
and stock valuation and selection.
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
Each of the MSDW Universal Funds is a diversified mutual fund registered with
the SEC. Morgan Stanley Dean Witter Investment Management, Inc. (MSDW
INVESTMENT MANAGEMENT) is the investment adviser for the Emerging
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Markets Debt, U.S. Real Estate, and Asian Equity Portfolios. Miller Anderson &
Sherrerd, LLP (MAS) is the investment adviser for the High Yield Portfolio.
MSDW Investment Management and MAS are subsidiaries of Morgan Stanley Dean
Witter & Co.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Below is a summary of the investment
objectives of the Portfolios of the MSDW Universal Funds. There is no guarantee
that these objectives will be met. YOU SHOULD READ THE MSDW UNIVERSAL FUNDS
PROSPECTUS CAREFULLY BEFORE INVESTING.
MSDW UNIVERSAL FUNDS ASIAN EQUITY PORTFOLIO
MSDW Universal Funds Asian Equity Portfolio seeks long-term capital appreciation
by investing primarily in a diversified portfolio of equity securities of Asian
issuers (excluding Japan). The adviser employs a disciplined, value-oriented
approach to security selection, focusing on larger companies with strong
management teams. The adviser evaluates top-down country risk factors and
opportunities when determining position sizes and overall exposure to individual
markets.
MSDW UNIVERSAL FUNDS EMERGING MARKETS DEBT PORTFOLIO
MSDW Universal Funds Emerging Markets Debt Portfolio seeks high total return by
investing primarily in fixed income securities of government and
government-related issuers and, to a lesser extent, of corporate issuers in
emerging market countries.
MSDW UNIVERSAL FUNDS HIGH YIELD PORTFOLIO
MSDW Universal Funds High Yield Portfolio seeks above-average total return over
a market cycle of three to five years by investing primarily in a diversified
portfolio of high yield securities of both U.S. and non-U.S. issuers. The
adviser may also invest in other fixed income securities, including U.S.
government securities, investment grade corporate bonds, mortgage securities and
derivatives. High yield securities are rated below investment grade and are
commonly referred to as "junk bonds." The Portfolio's average weighted maturity
will usually be greater than five years.
MSDW UNIVERSAL FUNDS U.S. REAL ESTATE PORTFOLIO
MSDW Universal Funds U.S. Real Estate Portfolio seeks above-average current
income and long-term capital appreciation by investing primarily in equity
securities of U.S. and non-U.S. companies in the U.S. real estate industry,
including real estate investment trusts ("REITs") and real estate operating
companies.
THE SELECT TEN PLUS FUND
The Select Ten Plus Fund currently consists of four Divisions: March, June,
September and December. Each of the Select Ten Plus Divisions is a mutual fund
registered with the SEC. Integrity Capital Advisors serves as investment adviser
of the Divisions and National Asset Management serves as the sub-adviser of the
Divisions.
INVESTMENT OBJECTIVES OF THE SELECT TEN PLUS DIVISIONS
The investment objective of each Division is the same. Below is a discussion of
the investment objective and strategy of the Divisions. There is no guarantee
that this objective will be met. YOU SHOULD READ THE PROSPECTUS OF THE SELECT
TEN PLUS FUND CAREFULLY BEFORE INVESTING.
INVESTMENT OBJECTIVE
The Divisions seek total return by investing in shares of the ten highest
dividend yielding common stocks in the Dow Jones Industrial Average (DJIA) in
equal weights and holding them for twelve months. The dividend yield for each
stock is calculated by annualizing the last quarterly or semi-annual ordinary
dividend distributed on that stock
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and dividing the result by the market value of that stock at the close of the
New York Stock Exchange (NYSE) on the business day before the investment date.
This yield is historical and we can't guarantee that any dividends will be
declared or paid in the future on the stocks in the Divisions. The term "equal
weights" means that if you invested $100 in a Division, the Division would buy
$10 of each of the ten highest yielding stocks.
The selection process is a straightforward, objective, mathematical application
that ignores any subjective factors concerning an issuer in the DJIA, an
industry or the economy generally. The application of the selection process may
cause a Division to own a stock that the sub-adviser doesn't recommend for
purchase. In fact, the sub-adviser may have sell recommendations on a number of
the stocks at the time the stocks are selected for inclusion in a Division's
portfolio.
INVESTMENT STRATEGY
The Divisions seek total return by buying the ten highest yielding stock in the
Dow Jones Industrial Average (DJIA) in equal weights and holding them for
approximately twelve months. Each new Division begins on the last Business Day
of each calendar quarter. At the end of each Division's twelve-month period,
its portfolio is restructured to hold the current ten highest yielding stocks in
the DJIA. The four Divisions, operating at the same time, may each have
different investment portfolios for its own twelve-month period.
New contributions and transfers to a Division are invested on only one day each
year, the INVESTMENT DATE, as follows:
Division Investment Date
-------- ---------------
Select Ten Plus Division - March last Business Day of March
Select Ten Plus Division - June last Business Day of June
Select Ten Plus Division - September last Business Day of September
Select Ten Plus Division - December last Business Day of December
The weights of the individual stock positions won't be rebalanced during the
year, and additional contributions or transfers won't be accepted during any
Division's twelve-month holding period. Instead, additional contributions or
transfers are invested on the next Investment Date.
Transfers from any other Investment Option into one of the Divisions will be
effective at a price determined as of the day preceding the next available
Investment Date. We reserve the right not to accept transfer instructions
received less than two business days before any Investment Date. See Section 5,
"Transfers."
THE DOW JONES INDUSTRIAL AVERAGE
The DJIA consists of 30 common stocks chosen by the editors of THE WALL STREET
JOURNAL as representative of the NYSE and of American industry. The companies
are highly capitalized in their industries and their stocks are widely followed
and held by individual and institutional investors. The companies marked below
with an asterisk are the ten highest yielding stocks in the DJIA as of the
market close on March 31, 1999. The ten highest yielding stocks in the DJIA are
commonly known as the "Dogs of the Dow":
AT&T Hewlett-Packard
Allied Signal IBM
Aluminum Co. of America International Paper
American Express J.P. Morgan*
Boeing Johnson & Johnson
Caterpillar* McDonald's
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Chevron* Merck
Citigroup Minnesota Mining & Manufacturing*
Coca-Cola Philip Morris*
DuPont* Proctor & Gamble
Eastman Kodak* Sears Roebuck
Exxon* Union Carbide
General Electric United Technologies
General Motors* Walmart
Goodyear* Walt Disney
The designations "Dow Jones-Registered Trademark-", "Dow Jones Industrial
Average-SM-" and "DJIA-SM-" are the property of Dow Jones & Company, Inc. (DOW
JONES). Dow Jones isn't affiliated with the Divisions, hasn't participated in
any way in the creation of the Divisions or in the selection of stocks included
in the Divisions and hasn't reviewed or approved any information included in
this prospectus. The Divisions aren't sponsored, endorsed, sold or promoted by
Dow Jones, and Dow Jones has no relationship at all with the Divisions. Dow
Jones isn't responsible for and doesn't participate in determining the timing,
price, or quantity of the Divisions' shares to be issued or redeemed. Dow Jones
doesn't have any obligation or liability in connection with the administration
or marketing of the Divisions.
STRATEGY SPECIFIC RISKS
Each Division is non-diversified and invests a larger portion of its assets in
the securities of fewer issuers than diversified investment companies. As a
result, an investment in a Division may be subject to greater fluctuation in
value than an investment in a diversified investment company. In addition, a
Division may be concentrated in issuers primarily engaged in a particular
industry. Concentration may involve additional risk because of the decreased
diversification of economic, financial, and market risks. In addition,
increased regulation, particularly with respect to the environment or with
respect to the petroleum or tobacco industry, may have a negative impact on
certain companies represented in a Division's portfolio.
For a more complete discussion of the risks associated with an investment in the
Divisions, see the Select Ten Plus Fund prospectus.
PERFORMANCE INFORMATION
The performance of the investment strategies for the Divisions relative to other
investment strategies can be shown using historical data. You should note that
the Divisions have not yet started operations. Therefore, the returns shown in
the following tables reflect the historical performance of a hypothetical
investment in the ten highest yielding stocks in the DJIA and the performance of
the DJIA, and not the performance of any Division. They don't guarantee future
performance or predict any Division's returns. Stock prices (which will
fluctuate in value) and dividends (which may be increased, reduced or
eliminated) can affect the returns. The strategy has underperformed the DJIA in
certain years. Accordingly, we can't guarantee that any Division will
outperform the DJIA over the life of the Division.
An investor in a Division might not receive as high a total return on an
investment in the Divisions that the hypothetical returns are based on because
(1) the total return figures shown don't reflect Division expenses or brokerage
commissions, and (2) the Divisions are established at different times of the
year. If these charges were reflected in the hypothetical returns, the returns
would be lower than those shown here.
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PERFORMANCE HISTORY OF THE DOGS OF THE DOW STRATEGY --
COMPARISON OF HISTORICAL TOTAL RETURN (1)
<TABLE>
<CAPTION>
Ten Highest Dividend
Year Yielding Stocks(2) DJIA
---- ------------------ ----
<S> <C> <C>
1973 3.9% (13.1)%
1974 (1.3)% (23.1)%
1975 55.9% 44.4%
1976 34.8% 22.7%
1977 0.9% (12.7)%
1978 (0.1)% 2.7%
1979 12.4% 10.5%
1980 27.2% 21.5%
1981 5.0% (3.4)%
1982 23.6% 25.8%
1983 38.7% 25.7%
1984 7.6% 1.1%
1985 29.5% 32.8%
1986 32.1% 26.9%
1987 6.1% 6.0%
1988 22.9% 16.0%
1989 26.5% 31.7%
1990 (7.6)% (0.4)%
1991 39.3% 23.9%
1992 7.9% 7.4%
1993 27.3% 16.8%
1994 4.1% 4.9%
1995 36.7% 36.4%
1996 27.9% 28.9%
1997 21.9% 24.9%
1998 10.7% 18.1%
Cumulative 7,271.4% 2,429.7%
</TABLE>
- ----------------------------------
(1) Total Return is the sum of the percentage change in market value of each
group of stocks between the first and last trading days of a period and the
total dividends paid on each group of stocks during the period, divided by
the opening market value of each group of stocks as of the first trading
day of a period. Total Return doesn't take into consideration any expenses
or commissions. Over the twenty-six years listed above, the ten highest
dividend yielding stocks in the DJIA achieved an average annual total
return of 18.0%. Over this period, the strategy achieved a greater average
annual total return than that of the DJIA, which was 13.2%. Although each
Division seeks to achieve a better performance than the DJIA as a whole, we
can't guarantee that a Division will achieve a better performance.
Performance may also be compared to the performance of the S&P 500
Composite Price Stock Index or performance data from publications such as
Morningstar Publications, Inc. Source for years 1973-1997: BEATING THE
DOW, by Michael O=Higgins with John Downes, published by Harper Perennial,
1992, and "Beating the Dow," edited by John Downes, published by the Hirsch
Organization. Used with permission of the authors. Source for 1998: ARM.
(2) The ten highest dividend yielding stocks in the DJIA for any given year
were selected by ranking the dividend yields for each of the stocks in the
index at the beginning of that year, based upon an annualization of the
last quarterly or semi-annual regular dividend distribution (which would
have been declared in the preceding year), divided by that stock=s market
value on the first trading day on the NYSE in that year.
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Investors shouldn't rely on performance information as an indication of the past
or future performance of the Divisions. We can't guarantee that any of the
Divisions will outperform the DJIA.
Performance data for the Divisions, including the yield and total return of the
Divisions, may appear in advertisements or sales literature. See "Performance
Information" in Section 8 for a discussion of how performance is calculated.
FIXED ACCOUNTS
FOR VARIOUS LEGAL REASONS, GRO CONTRACTS HAVEN'T BEEN REGISTERED UNDER THE 1940
ACT OR THE SECURITIES ACT OF 1933 ("1933 ACT"). THUS, NEITHER THE GRO 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 HASN'T REVIEWED THE DISCLOSURE IN THIS
PROSPECTUS RELATING TO THE GROS OR THE GENERAL ACCOUNT. DISCLOSURES REGARDING
THE GROS OR THE GENERAL ACCOUNT MAY, HOWEVER, BE SUBJECT TO CERTAIN GENERALLY
APPLICABLE PROVISIONS OF THE FEDERAL SECURITIES LAWS RELATING TO THE ACCURACY
AND COMPLETENESS OF STATEMENTS MADE IN PROSPECTUSES.
GUARANTEED RATE OPTIONS
We offer GROs with durations of two, three, five, seven and ten years. We can
change the durations available from time to time. When you put money in a GRO,
that locks in a fixed effective annual interest rate that we declare (GUARANTEED
INTEREST RATE) for the duration you select. The duration of your GRO Account is
the GUARANTEE PERIOD. Each contribution or transfer to a GRO establishes a new
GRO Account for the duration you choose at the then-current Guaranteed Interest
Rate we declare. We won't 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. All contributions you make to a GRO Account are placed in a
non-unitized separate account. Values and benefits under your GRO contract 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 haven't transferred or
withdrawn any amounts, will be the amount you put in plus interest at the
Guaranteed Interest Rate. We credit interest daily at an effective annual rate
equal to the Guaranteed Interest Rate.
We may declare a higher rate of interest in the first year of any GRO Account
that exceeds the Guaranteed Interest Rate credited during the rest of the
Guarantee Period (ENHANCED RATE). This Enhanced Rate will be guaranteed for the
Guaranteed Period's first year and is declared at the time of purchase. We can
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 AVAILABLE IN CERTAIN STATES.
Each group of GRO Accounts of the same duration is considered one GRO. For
example, all of your three-year GRO Accounts are one GRO while all of your
five-year GRO Accounts are another GRO, even though they may have different
maturity dates.
You can get our current Guaranteed Interest Rates by calling our Administrative
Office.
ALLOCATIONS TO GROS CAN'T BE MADE UNDER CONTRACTS ISSUED IN CERTAIN STATES.
RENEWALS OF GRO ACCOUNTS. When a GRO Account expires, we'll set up a new GRO
Account for the same duration as your old one, at the then-current Guaranteed
Interest Rate, unless you withdraw your GRO Value or transfer it to another
Investment Option. We'll notify you in writing before your GRO Accounts expire.
You must tell us before the expiration of your GRO Accounts if you want to make
any changes.
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The effective date of a renewal of a GRO Account will be the expiration date of
the old GRO Account. If a GRO Account expires and it can't be renewed for the
same duration, the new GRO Account will be set up for the next shortest
duration. For example, if your expiring GRO Account was for 10 years and when
it expires we don't offer a 10-year GRO, but we do offer a seven-year GRO, your
new one will be for seven years. You can tell us if you want something
different within 30 days before the GRO Account expires. You may not choose, and
we won't renew, a GRO Account that expires after your Retirement Date.
MARKET VALUE ADJUSTMENTS. A MARKET VALUE ADJUSTMENT is an adjustment, either up
or down, that we make to your GRO Value if you make an early withdrawal or
transfer from your GRO Account. No Market Value Adjustment is made for free
withdrawal amounts or for withdrawals or transfers made within 30 days of the
expiration of the GRO Account. In addition, we won't make a Market Value
Adjustment for a death benefit. The market adjusted value may be higher or
lower than the GRO Value, but will never be less than the MINIMUM VALUE. Minimum
Value is an amount equal to your contribution to the GRO Account, less previous
withdrawals (and associated charges) from the GRO Account plus 3% interest,
compounded annually and less any applicable contingent withdrawal and
administrative charges. Withdrawal charges and the administrative expense charge
could take away part of your principal.
The Market Value Adjustment we make to your GRO Account is based on the changes
in our Guaranteed Interest Rate. If our Guaranteed Interest Rate has increased
since the time of your investment, the Market Value Adjustment will reduce your
GRO Value (but not below the Minimum Value). On the other hand, if our
Guaranteed Interest Rate has decreased since the time of your investment, the
Market Value Adjustment will increase your GRO Value.
The Market Value Adjustment (MVA) for a GRO Account is determined under the
following formula:
N/12 N/12
MVA= GRO Value x [(1 + A) / (1 + B + .0025) - 1], where
A is the Guaranteed Interest Rate being credited to the GRO Account subject
to the Market Value Adjustment,
B is the current Guaranteed Interest Rate, as of the effective date of the
Market Value Adjustment, for current allocations to a GRO Account, with a
duration that is equal to the number of whole months remaining in your GRO
Account. Subject to certain adjustments, if that remaining period isn't
equal to an exact period for which we have declared a new Guaranteed
Interest Rate, B will be determined by a formula that finds a value between
the Guaranteed Interest Rates for GRO Accounts of the next highest and next
lowest durations.
N is the number of whole months remaining in your GRO Account.
For contracts issued in certain states, the formula will be adjusted to comply
with state requirements.
If for any reason we are no longer declaring current Guaranteed Interest Rates,
then for purposes of determining B we'll use the yield to maturity of U. S.
Treasury Notes with the same remaining term as your GRO Account, using a formula
to find a value 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 B.
SYSTEMATIC TRANSFER OPTION
We also offer a Systematic Transfer Option that guarantees an interest rate that
we declare in advance for each calendar quarter. This interest rate applies to
all contributions made to the STO Account during the calendar quarter for which
the rate has been declared. You MUST transfer all STO contributions into other
Investment Options within one year of your most recent STO contribution.
Transfers are automatically made in approximately equal quarterly or monthly
installments of at least $1,000 each. You can't transfer from other Investment
Options into the STO. Normal contingent withdrawal charges apply to withdrawals
from the STO. We guarantee that the STO's
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effective annual yield will never be less than 3.0%. See "Systematic Transfer
Program" in Section 8 for details on this program. This option may not be
available in some states.
New contributions to a Select Ten Plus Division can be held in the STO or
another Investment Option until the next available Investment Date. You can
also tell us to transfer approximately equal quarterly installments of at least
$1,000 each over a one-year period from the STO to each of the four Divisions.
We can hold new contributions received less than five Business Days before any
Division's Investment Date, and put in the STO, in the STO until the following
Investment Date.
SECTION 4 - DEDUCTIONS AND CHARGES
SEPARATE ACCOUNT CHARGES
We deduct a daily expense amount from the unit value equal to an effective
annual rate of 1.35% of the Account Value in the Variable Account Options. This
daily expense rate can't be increased without your consent.
Of the 1.35% total charge, .15% of the Account Value in the Variable Account
Options is used to reimburse us for administrative expenses not covered by
the annual administrative charge described below. The remaining 1.20% is
deducted for our 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. Mortality risk, as used here, refers to the risk we take that
annuitants, as a class of persons, will live longer than estimated and we
will be required to pay out more annuity benefits than anticipated. The
relative proportion of the mortality and expense risk charges may be changed,
but the total 1.20% effective annual risk charge can't be increased.
We may realize a gain from these daily charges to the extent they aren't 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
before your Retirement Date, we charge an annual administrative charge of $30.
This charge is deducted pro rata from your Account Value in each Investment
Option. The part of the charge deducted from the Variable Account Options
reduces the number of units credited to you. The part of the charge deducted
from the Fixed Accounts is withdrawn in dollars. The annual administrative
charge is pro-rated in the event of the Annuitant's retirement, death,
annuitization or contract termination during a contract year.
PORTFOLIO CHARGES
Separate Account II buys shares of the Portfolios at net asset value. That
price reflects investment management fees and other direct expenses that have
already been deducted from the assets of the Portfolios. The amount charged for
investment management can't be increased without shareholder approval.
REDUCTION OR ELIMINATION OF SEPARATE ACCOUNT OR ADMINISTRATIVE CHARGES
We can reduce or eliminate the separate account or administrative charges for
individuals or groups of individuals if we anticipate expense savings. We may
do this based on the size and type of the group or the amount of the
contribution.
We won't unlawfully discriminate against any person or group if we reduce or
eliminate these charges.
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STATE PREMIUM TAX DEDUCTION
We won't deduct state premium taxes from your contributions before investing
them in the Investment Options, unless required to by your state law. If the
Annuitant elects an annuity benefit, we'll deduct any applicable state premium
taxes from the amount available for the annuity benefit. State premium taxes
currently range up to 4%, if applicable.
CONTINGENT WITHDRAWAL CHARGE
We don't deduct sales charges when you make a contribution to the contract.
However, contributions withdrawn may be subject to a withdrawal charge of up to
7%. As shown below, the charge varies, depending upon the "age" of the
contributions included in the withdrawal- that is, the number of years that have
passed since each contribution was made. The maximum of 7% would apply if the
entire amount of the withdrawal consisted of contributions made during your
current contribution year. We don't deduct withdrawal charges when you withdraw
contributions made more than seven years before your withdrawal. To calculate
the withdrawal charge, (1) the oldest contributions are treated as the first
withdrawn and more recent contributions next, and (2) partial withdrawals up to
the free withdrawal amount aren't subject to the withdrawal charge. For partial
withdrawals, the total amount deducted from your account will include the
withdrawal amount requested, any Market Value Adjustment that applies, and any
withdrawal charges that apply, so that the net amount you receive will be the
amount you requested.
You may take up to 10% of your account value (less any earlier withdrawal in the
same year) each year without any contingent withdrawal charge or Market Value
Adjustment. This is referred to as your "free withdrawal." If you don't take
any free withdrawals in one year, you can't add it to the next year's free
withdrawal. If you aren't 59-1/2, federal tax penalties may apply.
<TABLE>
<CAPTION>
Contribution Year in Which Charge as a % of the
Withdrawn Contribution Was Made Contribution Withdrawn
------------------------------- ----------------------
<S> <C>
Current. . . . . . . . . . . . . . . . . . . 7%
First Prior. . . . . . . . . . . . . . . . . 6
Second Prior . . . . . . . . . . . . . . . . 5
Third Prior. . . . . . . . . . . . . . . . . 4
Fourth Prior . . . . . . . . . . . . . . . . 3
Fifth Prior. . . . . . . . . . . . . . . . . 2
Sixth Prior. . . . . . . . . . . . . . . . . 1
Seventh Prior and Earlier. . . . . . . . . . 0
</TABLE>
We won't deduct a contingent withdrawal charge if you use the withdrawal to buy
from us either an immediate annuity benefit with life contingencies, or an
immediate annuity without life contingencies with a restricted prepayment option
that provides for level payments over five or more years. Similarly, we won't
deduct a charge if the Annuitant dies. See "Death Benefits and Similar Benefit
Distributions" in Section 5.
REDUCTION OR ELIMINATION OF THE CONTINGENT WITHDRAWAL CHARGE
We can reduce or eliminate the contingent withdrawal charge for individuals or a
group of individuals if we anticipate expense savings. We may do this based on
the size and type of the group, the amount of the contribution, or whether there
is some relationship with us. Examples of these relationships would include
being an employee of National Integrity or an affiliate, receiving distributions
or making internal transfers from other contracts we issued, or transferring
amounts held under qualified plans we or our affiliate sponsored. We won't
unlawfully discriminate against any person or group if we reduce or eliminate
the contingent withdrawal charge.
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TRANSFER CHARGE
If you make more than twelve transfers among your Investment Options during one
contract year, we may charge your account up to $20 for each additional transfer
during that year. Transfer charges don't apply to transfers under (i) Dollar
Cost Averaging, (ii) Customized Asset Rebalancing, (iii) Callan Asset Allocation
and Rebalancing, or (iv) systematic transfers from the STO, nor do these
transfers count toward the twelve free transfers you can make during a year.
HARDSHIP WAIVER
We can waive contingent withdrawal charges on full or partial withdrawal
requests of $1,000 or more under a hardship circumstance. We can also waive the
Market Value Adjustment on any amounts withdrawn from the GRO Accounts.
Hardship circumstances include the Owner's (1) confinement to a nursing home,
hospital or long term care facility, (2) diagnosis of terminal illness with any
medical condition that would result in death or total disability, and (3)
unemployment. We can require 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 apply in some states, and, in other states, may not be available at all. The
waivers of withdrawal charges and Market Value Adjustment apply to the Owner,
not to the Annuitant. If there are joint Owners, the waivers apply to the
primary Owner. If no primary Owner can be determined, the waivers will apply to
the youngest Owner.
TAX RESERVE
We can make a charge in the future for taxes or for reserves set aside for
taxes, which will reduce the investment experience of the Variable Account
Options.
SECTION 5 - TERMS OF YOUR VARIABLE ANNUITY
CONTRIBUTIONS UNDER YOUR CONTRACT
You can make contributions of at least $100 at any time up to the Annuitant's
Retirement Date. Your first contribution, however, can't be less than $1,000.
We'll accept contributions of at least $50 for salary allotment programs. We
have special rules for minimum contribution amounts for tax-favored retirement
programs. See "Tax-Favored Retirement Programs" in the SAI.
We may limit the total contributions under one contract to $1,000,000 if you are
under age 76 or to $250,000 if you are over age 76. Once you reach nine years
before your Retirement Date, we may refuse to accept any contribution.
Contributions may also be limited by various laws or prohibited by us for all
annuitants under the contract. If your contributions are made under a
tax-favored retirement program, we won't measure them against the maximum limits
set by law.
Contributions are applied to the various Investment Options you select and are
used to pay annuity and death benefits. Each contribution is credited as of the
date we have RECEIVED (as defined below) at our Administrative Office both the
contribution and instructions for allocation among the Investment Options,
PROVIDED THAT AT ANY TIME YOU MAY NOT HAVE AMOUNTS IN MORE THAN NINE INVESTMENT
OPTIONS. In determining 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 when they are delivered in good order to
our Administrative Office. A BUSINESS DAY is defined as any day that the New
York Stock Exchange is open. Contributions to the Select Ten Plus Divisions are
subject to special rules described in "The Select Ten Plus Fund" in Section 3,
"Your Investment Options."
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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 the Administrative Office
receives it, the change will be effective for any contribution that accompanies
it and for all future contributions. See "Transfers" in Section 5. For special
rules on transfers to the Select Ten Plus Divisions, see "The Select Ten Plus
Fund" in Section 3, "Your Investment Options."
YOUR ACCOUNT VALUE
Your Account Value reflects various charges. See Section 4, "Deductions and
Charges." Annual deductions are made as of the last day of each contract year.
Withdrawal charges and Market Value Adjustments, if applicable, are made as of
the effective date of the transaction. Charges against Separate Account II are
reflected daily. Any amount allocated to a Variable Account Option will go up or
down in value depending on the investment experience of that Option. The value
of contributions allocated to the Variable Account Options aren't guaranteed.
The value of your contributions allocated to the Fixed Accounts is guaranteed,
subject to any applicable Market Value Adjustments. See "Guaranteed Rate
Options" in Section 3.
UNITS IN SEPARATE ACCOUNT II
Allocations to the Variable Account Options are used to purchase units. On any
given day, the value you have in a Variable Account Option is the unit value
multiplied by the number of units credited to you in that Option. The units of
each Variable Account Option have different unit values.
The number of units purchased or redeemed (sold) in any Variable Account Option
is calculated by dividing the dollar amount of the transaction by the Option's
unit value, calculated as of 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, which in turn reflects the
investment income and realized and unrealized capital gains and losses of the
Portfolios, as well as the Portfolios' expenses.
Your unit values also change because of deductions and charges we make to
Separate Account II. The number of units credited to you, however, won't vary
due to changes in unit values. Units of a Variable Account Option are purchased
when you allocate new contributions or transfer prior contributions to that
Option. Units are redeemed when you make withdrawals or transfer amounts from a
Variable Account Option. We also redeem units to pay the death benefit when the
Annuitant dies and to pay the annual administrative charge. Please note that
special rules apply to the timing of allocations to the Select Ten Plus
Divisions. See "The Select Ten Plus Fund" in Section 3, "Your Investment
Options."
HOW WE DETERMINE UNIT VALUE
We determine unit values for each Variable Account Option at 4 p.m. Eastern Time
on each Business Day.
The unit value of each Variable Account Option for any Business Day is equal to
the unit value for the previous Business Day, 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 Portfolios.
- - Next, we add any dividends or capital gains distributions by the Portfolio
on that day.
- - Then, we charge or credit for any taxes or amounts set aside as a reserve
for taxes.
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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 that a unit value was determined
(after giving effect to any transactions on that day).
- - Finally, we subtract a daily asset charge for each calendar day since the
last day that a unit value was determined (for example, a Monday
calculation will include charges for Saturday and Sunday). The daily charge
is an amount equal to an effective annual rate of 1.35%. This charge is for
the mortality risk, administrative expenses and expense risk assumed by us
under the contract.
Generally, this means that we adjust unit values to reflect what happens to the
Portfolios, and also for the mortality and expense risk charge and any charge
for administrative expenses or taxes.
TRANSFERS
You may transfer your Account Value among the Variable Account Options and the
GROs, subject to our transfer restrictions. You can't make a transfer into the
STO. Transfers to a GRO must be to a newly elected GRO (that is, to a GRO that
you haven't already purchased) at the then-current Guaranteed Interest Rate,
unless we agree otherwise. Unless you make a transfer from a GRO within 30 days
before the expiration date of a GRO Account, the transfer is subject to a Market
Value Adjustment. See "Guaranteed Rate Options" in Section 3. Transfers from
GROs will be made according to the order in which money was originally allocated
to the GRO.
You can transfer from a Select Ten Plus Division at any time. Transfers to a
Select Ten Plus Division from any other Investment Option in which you are
invested will be effected at a price determined as of the day preceding the next
available Investment Date. We reserve the right not to accept transfer
instructions received less than two Business Days before any Investment Date.
See "The Select Ten Plus Fund" in Section 3, "Your Investment Options" for
important information on the Divisions.
The amount transferred must be at least $250 or, if less, the entire amount in
the Investment Option. You have twelve free transfers during a contract year.
After those twelve transfers, a charge of up to $20 may apply to each additional
transfer during that contract year. No charge will be made for transfers under
our Dollar Cost Averaging, Customized Asset Rebalancing, Callan Asset Allocation
and Rebalancing or Systematic Transfer programs, described in Section 8.
You may request a transfer by sending a written request directly to the
Administrative Office. Each 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 if you've established a Personal Identification
Number (PIN CODE). We'll honor telephone transfer instructions from any person
who provides correct identifying information and we aren't responsible for
fraudulent telephone transfers we believe to be genuine according to these
procedures. Accordingly, you bear the risk of loss if unauthorized persons make
transfers on your behalf.
A transfer request is effective as of the Business Day our Administrative Office
receives it, except for transfers to the Select Ten Plus Divisions (see "The
Select Ten Plus Fund" in Section 3, "Your Investment Options.") A transfer
request doesn't change the allocation of current or future contributions among
the Investment Options. Telephone transfers may be requested from 9:00 a.m. -
5:00 p.m., Eastern Time, on any day we're open for business. You'll receive the
Variable Account Options' unit values as of the close of business on the day you
call, except that you'll receive the unit values for the Select Ten Plus
Divisions as described in "The Select Ten Plus Fund" in Section 3, "Your
Investment Options." Accordingly, transfer requests for Variable Account Options
(other than the Select Ten Plus Divisions) received after 4:00 p.m. Eastern Time
(or the close of the New York Stock Exchange, if earlier) will be processed
using unit values as of the close of business on the next Business Day after the
day you call. All transfers will be confirmed in writing.
Transfer requests submitted by agents or market timing services that represent
multiple policies will be processed not later than the next Business Day after
the requests are received by our Administrative Office.
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WITHDRAWALS
You may make any number of withdrawals as often as you wish. Each withdrawal
must be at least $300. The money will be taken from your Investment Options pro
rata, in the same proportion their value bears to your total Account Value. For
example if your Account Value is divided in equal 25% shares among four
Investment Options, when you make a withdrawal, 25% of the money withdrawn will
come from each of your Investment Options. You can tell us if you want your
withdrawal handled differently. During the first seven years of your contract,
there is a contingent withdrawal charge for any withdrawals other than free
withdrawals (discussed below). The charge starts at 7% and decreases depending
on the age of your account. This charge is in addition to any Market Value
Adjustments made to early withdrawals from GRO Accounts. Under some
circumstances, the contingent withdrawal charge and Market Value Adjustment may
be waived.
When you make a partial withdrawal, the total amount deducted from your Account
Value will include the withdrawal amount requested plus any contingent
withdrawal charges and any Market Value Adjustments. The total amount that you
receive will be the total that you requested. Most of the withdrawals you make
before you are 59-1/2 years old are subject to a 10% federal tax penalty. If
your contract is part of a tax-favored retirement plan, the plan may limit your
withdrawals. See "Tax Aspects of the Contracts" in Section 7.
ASSIGNMENTS
If your contract isn't part of a tax-favored program, you may assign the
contract before the Annuitant's Retirement Date. You can't, however, make a
partial assignment. An assignment of the contract may have adverse tax
consequences. See Section 7, "Tax Aspects of the Contracts." We won't be bound
by an assignment unless it is in writing and is received at our Administrative
Office in a form acceptable to us.
DEATH BENEFITS AND SIMILAR BENEFIT DISTRIBUTIONS
We'll pay a death benefit to the Annuitant's surviving beneficiary (or
beneficiaries, in equal shares) if the last Annuitant dies before annuity
payments have started. If the Annuitant dies at or over age 90 (or after the
contract's 10th anniversary date, if later), the death benefit is the contract
account value at the end of the business day when we receive proof of death.
Similarly, if the contract was issued on or after the youngest Annuitant's 86th
birthday, the death benefit is the contract account value at the end of the
business day when we receive proof of death.
For contracts issued before the Annuitant's 86th birthday, if the Annuitant dies
before age 90 (or the contract's 10th anniversary date, if later) and before
annuity payments have started, the death benefit is the highest of:
a) Your highest Account Value on any contract anniversary (before age
81), plus subsequent contributions and minus subsequent withdrawals
(after being adjusted for associated charges and adjustments);
b) Total contributions, minus subsequent withdrawals (after being
adjusted for associated charges and adjustments); or
c) Your current Account Value.
The reductions in death benefit described in a) and b) above for subsequent
withdrawals will be calculated on a pro rata basis with respect to Account Value
at the time of withdrawal. We'll also adjust the death benefit for any
applicable Market Value Adjustments and/or charges.
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 a benefit option hasn't
been selected for the beneficiary at the Annuitant's death, the beneficiary can
select an option.
The Owner selects the beneficiary of the death benefit. An Owner may change
beneficiaries by submitting the appropriate form to the Administrative Office.
If an Annuitant's beneficiary doesn't survive the Annuitant, then the death
benefit is generally paid to the Annuitant's estate. A death benefit won't be
paid after the Annuitant's death if
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there is a contingent Annuitant. In that case, the contingent Annuitant becomes
the new Annuitant under the contract.
The maximum issue age for the Annuitant is 82 years old.
ANNUITY BENEFITS
All annuity benefits under your contract are calculated as of the Retirement
Date you select. You can change the Retirement Date by writing to the
Administrative Office any time before the Retirement Date. The Retirement Date
can't be later than your 90th birthday, or earlier if required by law. Contract
terms applicable to various retirement programs, along with federal tax laws,
establish certain minimum and maximum retirement ages.
Annuity benefits may be a lump sum payment or paid out over time. A lump sum
payment will provide the Annuitant with the Cash Value under the contract,
shortly after the Retirement Date. The amount applied toward the purchase of an
annuity benefit is the Account Value less any pro-rata Annual Administrative
Charge, except that the Cash Value will be the amount applied if the annuity
benefit doesn't have a life contingency and either the term is less than five
years or the annuity can be changed to a lump sum payment without a withdrawal
charge.
ANNUITIES
Annuity benefits can provide for fixed payments which may be made monthly,
quarterly, semi-annually or annually. You can't change or redeem the annuity
once payments have begun. For any annuity, the minimum initial payment must be
at least $100 monthly, $300 quarterly, $600 semi-annually or $1,200 annually.
If you haven't already elected a lump sum payment or an annuity benefit, we'll
send you a notice within six months before your Retirement Date outlining your
options. If you fail to notify us of your benefit payment election before your
Retirement Date, you'll receive a lump sum benefit.
We currently offer the following types of annuities:
A LIFE AND TEN YEARS CERTAIN ANNUITY is a fixed life income annuity with 10
years of payments guaranteed, funded through our General Account.
A PERIOD CERTAIN ANNUITY provides for fixed payments to the Annuitant or the
Annuitant's beneficiary for a fixed period. The amount is determined by the
period selected. If the Annuitant dies before the end of the period selected,
the Annuitant's beneficiary can choose to receive the total present value of
future payments in cash.
A PERIOD CERTAIN LIFE ANNUITY provides for fixed payments for at least the
period selected and after that for the life of the Annuitant, or for the lives
of the Annuitant and another annuitant under a joint and survivor annuity. If
the Annuitant (or the Annuitant and the other annuitant under a joint and
survivor annuity) dies before the period selected ends, the remaining payments
will go to the Annuitant's beneficiary. The Annuitant's beneficiary can redeem
the annuity and receive the present value of future guaranteed payments in a
lump sum.
A LIFE INCOME ANNUITY provides fixed payments to the Annuitant for the life of
the Annuitant, or until the last annuitant dies under a joint and survivor
annuity.
FIXED ANNUITY PAYMENTS
Fixed annuity payments won't 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 Annuitant's age (or
Annuitant and a joint annuitant in the case of a joint and survivor annuity) and
sex (except under most tax-favored retirement programs). If our current annuity
rates would provide a larger payment, those current rates will apply instead of
the contract rates.
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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'll deduct the overpayment from the next payment or payments
due. We add underpayments to the next payment.
TIMING OF PAYMENT
We normally 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 delayed, however, for any period during which
(1) the New York Stock Exchange has been closed or trading on it is restricted;
(2) an emergency exists so that disposal of securities isn't reasonably
practicable or it isn't reasonably practicable for a Separate Account
fairly to determine the value of its net assets; or
(3) the SEC, by order, permits us to delay action to protect persons with
interests in Separate Account II. We can delay payment of your Fixed
Accounts for up to six months, and interest will be paid on any payment
delayed for 30 days or more.
HOW YOU MAKE REQUESTS AND GIVE INSTRUCTIONS
When you write to our Administrative Office, use the address on the first page
of this prospectus. We can't honor your request or instruction unless it's
proper and complete. Whenever possible, use one of our printed forms, which may
be obtained from our Administrative Office.
SECTION 6 - VOTING RIGHTS
PORTFOLIO VOTING RIGHTS
We are the legal owner of the shares of the Portfolios held by Separate Account
II and, therefore, have the right to vote on certain matters. Among other
things, we may vote to elect a Portfolio's Board of Directors, to ratify the
selection of independent auditors for a Portfolio, and on any other matters
described in a Portfolio's current prospectus or requiring a vote by
shareholders under the 1940 Act.
Whenever a shareholder vote is taken, we give you the opportunity to tell us how
to vote the number of shares purchased as a result of contributions to your
contract. We'll send you Portfolio proxy materials and a form for giving us
voting instructions.
If we don't receive instructions in time from all Owners, we'll vote shares in a
Portfolio for which we have not received instructions 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
sent to us indirectly, through your employer, but we aren't responsible for any
failure by your employer to solicit your instructions or to send your
instructions to us. We'll vote any Portfolio shares that we're entitled to vote
directly, because of amounts we have accumulated in Separate Account II, in the
same proportion that other Owners vote. If the federal securities laws or
regulations or interpretations of them change so that we're permitted to vote
shares of a Portfolio on our behalf or to restrict Owner voting, we may do so.
HOW WE DETERMINE YOUR VOTING SHARES
You vote only on matters concerning the Portfolios in which your contributions
are invested. We determine the number of Portfolio shares in each Variable
Account Option under your contract by dividing your Account Value allocated to
that Option by the net asset value of one share of the corresponding Portfolio
on the record date set by a Portfolio's Board for its shareholders' meeting. For
this purpose, the record date can't be more than 60 days before the meeting of a
Portfolio. We count fractional shares. After annuity payments have commenced,
voting
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rights are calculated in a similar manner based on the actuarially determined
value of your interest in each Variable Account Option.
HOW PORTFOLIO SHARES ARE VOTED
All Portfolio 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) that require collective approval. On
matters where the interests of the individual Portfolios differ, the approval of
the shareholders in one Portfolio isn't needed to make a decision in another
Portfolio. To the extent shares of a Portfolio are sold to separate accounts of
other insurance companies, the shares voted by those companies according to
instructions received from their contract holders will dilute the effect of
voting instructions received by us 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 Section 2) may require Owner approval. In that
case, you'll 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'll cast votes attributable to amounts we have in the Variable
Account Options in the same proportions as votes cast by Owners.
SECTION 7 - TAX ASPECTS OF THE CONTRACTS
INTRODUCTION
The effect of federal income taxes on the amounts held under a contract, on
annuity payments, and on the economic benefits to the Owner, Annuitant, and the
beneficiary or other payee may depend on several factors. These factors may
include National Integrity's tax status, the type of retirement plan, if any,
for which the contract is purchased, and the tax and employment status of the
individuals concerned.
The following discussion of the federal income tax treatment of the contract
isn't designed to cover all situations and isn't intended to be tax advice. It's
based upon our understanding of the federal income tax laws as currently
interpreted by the Internal Revenue Service (IRS) and various courts. We can't
guarantee that the tax code or the courts will or won't change their views on
the treatment of these contracts. Future legislation could affect annuity
contracts adversely. Moreover, we haven't attempted to consider any applicable
state or other tax laws. Because of the complexity of tax laws and the fact that
tax results will vary according to particular circumstances, anyone considering
the purchase of a contract, selecting annuity payments under the contract, or
receiving annuity payments under a contract should consult a qualified tax
adviser. NATIONAL INTEGRITY DOESN'T 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 federal tax law, anyone can purchase an annuity with after-tax dollars and
your annuity earnings won't be taxed until you make a withdrawal. Or, an
individual (or employer) may purchase the annuity to fund a tax-favored
retirement program (contributions are with pre-tax dollars), such as an IRA or
qualified plan. Finally, the individual (or employer) may purchase the annuity
to fund a Roth IRA (contributions are with after-tax dollars and earnings may be
excluded from taxable income at distribution).
This prospectus covers the basic tax rules that apply to an annuity purchased
directly with after-tax dollars (a nonqualified annuity), and some of the
special tax rules that apply to an annuity purchased to fund a tax-favored
retirement program (a qualified annuity). A qualified annuity may restrict your
rights and benefits to qualify for its special treatment under federal tax law.
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TAXATION OF ANNUITIES GENERALLY
Section 72 of the Code governs the taxation of annuities. In general,
contributions you put into the annuity (your "basis" or "investment" in the
contract) won't be taxed when you receive the amounts back in a distribution.
Also, an Owner isn't taxed on the annuity's earnings (increases in Account
Value) 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 can't defer tax on the annuity's income unless an
exception applies. In addition, if an Owner transfers an annuity as a gift to
someone other than a spouse (or former spouse), all increases in the Account
Value are taxed at the time of transfer. The assignment or pledge of any portion
of the value of a contract is treated as a taxable distribution of that portion
of the value of the contract.
You can take withdrawals from the contract or you can wait to annuitize it when
the annuitant reaches a certain age. The tax implications are different for
each type of distribution. Section 72 of the Code says that the proceeds of a
full or partial withdrawal from a contract before annuity payments begin are
treated first as taxable income, but only to the extent of the increase of the
Account Value. The rest of the withdrawal, representing your basis in the
annuity, is not taxable. Generally, the investment or basis in the contract
equals the contributions made by you or on your behalf, minus any amounts
previously withdrawn that weren't treated as taxable income. Special rules may
apply if the contract includes contributions made before August 14, 1982 that
were rolled over to the contract in a tax-free exchange.
If you take annuity payments over the lifetime of the annuitant, part of each
payment is considered to be a tax-free return of your investment. This tax-free
portion of each payment is figured using a ratio of the Owner's investment to
his or her expected return under the contract (exclusion ratio). Once you get
the tax-free part, the rest of each payment will be considered the increase of
your Account Value, and is ordinary income. When all of these tax-free portions
add up to your investment in the annuity, future payments are all counted as an
increase in your Account Value, and are taxable income. If the Annuitant dies
before recovering the total investment, a deduction for the remaining basis will
generally be allowed on the Owner's final federal income tax return.
We may be required to withhold federal income taxes on all distributions unless
the eligible recipients elect not to have any amounts withheld and properly
notify us of that election.
The taxable portion of a distribution is taxed at ordinary income tax rates. In
addition, you may be subject to a 10% penalty on the taxable portion of a
distribution unless it is:
(1) on or after the date on which the taxpayer attains age 59-1/2;
(2) as a result of the Owner's death;
(3) part of a series of "substantially equal periodic payments" (paid at
least annually) for the life (or life expectancy) of the taxpayer or
joint lives (or joint life expectancies) of the taxpayer and
beneficiary;
(4) a result of the taxpayer becoming disabled within the meaning of
Code Section 72(m)(7);
(5) from certain qualified plans (note, however, other penalties may
apply);
(6) under a qualified funding asset (as defined in Section 130(d) of the
Code);
(7) purchased by an employer on termination of certain types of
qualified plans and held by the employer until the employee
separates from service;
(8) under an immediate annuity as defined in Code Section 72(u)(4);
(9) for the purchase of a first home (distribution up to $10,000);
(10) for certain higher education expenses or
(11) to cover certain deductible medical expenses.
Please note that items (9), (10) and (11) apply to IRAs only.
Any withdrawal provisions of your contract will also apply. See "Withdrawals"
in Section 5.
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All annuity contracts issued by us or our 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 date the annuity starts and before the entire interest in the
contract has been distributed, then the rest of that annuity must be distributed
at least as quickly as the method in effect when the owner died; and (b) if any
Owner dies before the date the annuity starts, the entire contract must be
distributed within five years after the Owner's death. However, any interest
that is payable to a death beneficiary may be annuitized over the life of that
beneficiary, as long as distributions begin within one year after the Owner
dies. If the death beneficiary is the Owner's spouse, the contract (along with
the deferred tax status) may be continued in the spouse's name as the Owner.
DIVERSIFICATION STANDARDS
We manage the investments in the annuities under Section 817(h) of the Code to
ensure that you will be taxed as described above.
TAX-FAVORED RETIREMENT PROGRAMS
An owner can use this annuity with certain types of retirement plans that
receive favorable treatment under the Code. Numerous tax rules apply to the
participants in these qualified plans and to the contracts used in connection
with those 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 on the amount that may be borrowed, the
duration of the loan, and repayment of the loan. (Owners should always consult
their tax advisors and retirement plan fiduciaries before taking any loans from
the plan.) Also, special rules apply to the time at which distributions must
begin and the form in which the distributions must be paid. THE STATEMENT OF
ADDITIONAL INFORMATION CONTAINS GENERAL INFORMATION ABOUT THE USE OF CONTRACTS
WITH THE VARIOUS TYPES OF QUALIFIED PLANS.
FEDERAL AND STATE INCOME TAX WITHHOLDING
Certain states have indicated that pension and annuity withholding will apply to
payments made to residents. Generally, an election out of federal withholding
will also be considered an election out of state withholding. For more
information concerning a particular state, call our Administrative Office at the
toll-free number.
IMPACT OF TAXES ON NATIONAL INTEGRITY
The contracts allow us to charge Separate Account II for taxes. We can also set
up reserves for taxes.
TRANSFERS AMONG INVESTMENT OPTIONS
There won't be any tax liability if you transfer any part of the Account Value
among the Investment Options of your contract.
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<PAGE>
SECTION 8 - ADDITIONAL INFORMATION
SYSTEMATIC WITHDRAWALS
We offer a program that allows you to pre-authorize periodic withdrawals from
your contract before your Retirement Date. You can choose to have withdrawals
made monthly, quarterly, semi-annually or annually and can specify the day of
the month (other than the 29th, 30th or 31st) on which the withdrawal is 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, send the appropriate form to our
Administrative Office. Withdrawals may begin one business day after we receive
the form. You may terminate your participation in the program upon one day's
prior written notice, and we may end or change the systematic withdrawal program
at any time. If on any withdrawal date you don't have enough money in your
accounts to make all of the withdrawals you have specified, no withdrawal will
be made and your enrollment in the program will be ended.
Amounts you withdraw under the systematic withdrawal program may be within the
free withdrawal amount. If so, we won't deduct a contingent withdrawal charge
or make a Market Value Adjustment. See "Contingent Withdrawal Charge" in
Section 4. AMOUNTS WITHDRAWN UNDER THE SYSTEMATIC WITHDRAWAL PROGRAM GREATER
THAN 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 Section 7, "Tax Aspects of the Contracts."
INCOME PLUS WITHDRAWAL PROGRAM
We offer an Income Plus Withdrawal Program that allows you to pre-authorize
equal periodic withdrawals, based on your life expectancy, from your contract
before you reach age 59-1/2. You won't have to pay any tax penalty for these
withdrawals, but they will be subject to ordinary income tax. See "Taxation of
Annuities Generally," in Section 7. Once you begin receiving distributions,
they shouldn't be changed or stopped until the later of:
- - the date you reach age 59-1/2; or
- - five years from the date of the first distribution.
If you change or stop the distribution or take an additional withdrawal, you may
have to pay a 10% penalty tax that would have been due on all prior
distributions made under the Income Plus Program, plus any interest.
You can choose the Income Plus Withdrawal Program at any time if you're younger
than 59-1/2. You can elect this option by sending the election form to our
Administrative Office. You can choose to have withdrawals made monthly,
quarterly, semi-annually or annually and can specify the day of the month (other
than the 29th, 30th or 31st) on which the withdrawal is made. We'll calculate
the amount of the distribution under a method you select, subject to a minimum,
which is currently $100. You must also specify an account for direct deposit of
your Income Plus Withdrawals.
To enroll in our Income Plus Withdrawal Program, send the appropriate form to
our Administrative Office. Your withdrawals will begin at least one Business
Day after we receive your form. You may end your participation in the program
upon seven Business Days prior written notice, and we may end or change the
Income Plus Program at any time. If on any withdrawal date you don't have
enough money in your accounts to make all of the withdrawals you have specified,
no withdrawal will be made and your enrollment in the program will end. This
program isn't available in connection with the Systematic Withdrawal Program,
Dollar Cost Averaging, Systematic Transfer Option or Callan Asset Allocation and
Rebalancing Program.
If you haven't used up your free withdrawals in any given contract year, amounts
you withdraw under the Income Plus Withdrawal Program may be within the free
withdrawal amount. If they are, no contingent withdrawal charge or Market Value
Adjustment will be made. See "Contingent Withdrawal Charge" in Part 4. AMOUNTS
WITHDRAWN
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<PAGE>
UNDER THE INCOME PLUS WITHDRAWAL PROGRAM IN EXCESS OF THE FREE WITHDRAWAL AMOUNT
WILL BE SUBJECT TO A CONTINGENT WITHDRAWAL CHARGE AND A MARKET VALUE ADJUSTMENT
IF APPLICABLE.
DOLLAR COST AVERAGING
We offer a dollar cost averaging program under which we transfer contributions
allocated to the Janus Money Market Option to one or more other Variable Account
Options on a monthly, quarterly, semi-annual or annual basis. You must tell us
how much you want to be transferred into each Variable Account Option. The
current minimum transfer to each Option is $250. We won't charge a transfer
charge under our dollar cost averaging program, and these transfers won't count
towards the twelve free transfers you may make in a contract year. The Select
Ten Plus Divisions aren't eligible for the dollar cost averaging program.
To enroll under our dollar cost averaging program, send the appropriate form to
our Administrative Office. You may end your participation in the program upon
one day's prior written notice, and we may end or change the dollar cost
averaging program at any time. If you don't have enough money in the Janus Money
Market Option to transfer to each Variable Account Option specified, no transfer
will be made and your enrollment in the program will end.
SYSTEMATIC TRANSFER PROGRAM
We also offer a systematic transfer program under which we transfer
contributions allocated to the STO to one or more other Investment Options on a
monthly or quarterly basis, as you determine. See Section 3, "Systematic
Transfer Option." We'll transfer your STO contributions in equal installments
of at least $1,000 over a one-year period. If you don't have enough money in the
STO to transfer to each Option specified, a final transfer will be made on a pro
rata basis and your enrollment in the program will end. All interest accrued
and any money still in the STO at the end of the period during which transfers
are scheduled to be made will be transferred at the end of that period on a pro
rata basis to the Options you chose for this program. There is no charge for
transfers under this program, and these transfers won't count towards the twelve
free transfers you may make in a contract year.
We'll hold new contributions to a Select Ten Plus Division in the STO until the
next available Investment Date. You may ask us to transfer approximately equal
quarterly installments of at least $1,000 each over the next year from the STO
to each of the four Select Ten Plus Divisions. We can hold new contributions
received less than five Business Days before any Investment Date in the STO
until the next Investment Date. See "The Select Ten Plus Fund" in Section 3,
"Your Investment Options" for important information on the Divisions.
To enroll under our systematic transfer program, send the appropriate form to
our Administrative Office. We can end the systematic transfer program in whole
or in part, or restrict contributions to the program. This program may not be
available in some states.
CUSTOMIZED ASSET REBALANCING
We offer a customized asset rebalancing program that allows you to determine how
often the rebalancing occurs. You can choose to rebalance monthly, quarterly,
semi-annually or annually. The value in the Variable Account Options will be
automatically rebalanced by transfers among the 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 are making
contributions. We won't charge a transfer charge to transfers under our
customized asset rebalancing program, and these transfers won't count towards
the twelve free transfers you may make in a contract year.
Fixed Accounts and the Select Ten Plus Divisions aren't included in the
customized asset rebalancing program.
To enroll in our customized asset rebalancing program, send the appropriate form
to our Administrative Office. You should be aware that other allocation
programs, such as dollar cost averaging, and transfers and withdrawals that you
make, may not work with the customized asset rebalancing program. You should,
therefore, monitor your
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<PAGE>
use of other programs, transfers, and withdrawals while the customized asset
rebalancing program is in effect. You may end your participation in the program
upon one day's prior written notice, and we may end or change the customized
asset rebalancing program at any time.
CALLAN ASSET ALLOCATION AND REBALANCING PROGRAM
We also offer an Asset Allocation and Rebalancing Program, developed with Callan
Associates. Callan Associates is an independent research and consulting firm,
specializing in the strategic asset allocation decision.
You may select one of five proposed Asset Allocation and Rebalancing Models:
Conservative, Moderately Conservative, Moderate, Moderately Aggressive, or
Aggressive. The contributions you are making will initially be allocated among
the Options established for each Model. You and your financial representative
can design a program that is tailored to your specific retirement needs.
When you select this program, your contributions will be allocated and your
variable portfolios will be rebalanced at least annually. The program applies
to all contributions made to your annuity contract. You will receive a
confirmation notice after each rebalancing. No transfer charge will apply to
transfers made under the Callan Asset Allocation and Rebalancing Program, nor
will these transfers count toward the twelve transfers you may make in a
contract year before we charge a transfer fee. See "Transfer Charges" in
Section 4.
In each Asset Allocation and Rebalancing Model, a portion of all contributions
is allocated to a five-year Guaranteed Rate Option (GRO). The amount allocated
to the GRO won't be reallocated or rebalanced while you are participating in a
specific Model. You may cancel or change the Model you have selected at any
time. The GRO funds may be subject to a market value adjustment (MVA) that may
increase or decrease your account value.
To enroll under the Callan Asset Allocation and Rebalancing Program, complete
the Dollar Cost Averaging/Asset Allocation and Rebalancing form. You should be
aware that other allocation programs, such as dollar cost averaging, as well as
additions, transfers and withdrawals that you make, may not work with the
Customized Asset Rebalancing program. If, after selecting one of the five
Models, you request a transaction that results in a reallocation outside your
Model, your participation in the program automatically ends. Because of this,
you should monitor your use of other programs, transfers, and withdrawals while
the Asset Allocation and Rebalancing program is in effect. This program isn't
available with the Customized Asset Rebalancing program described above. The
Select Ten Plus Divisions aren't eligible for the Asset Allocation and
Rebalancing Program. We can end or change this program in whole or in part, and
we may restrict contributions to the program. This program may not be available
in all states.
You may end your participation in this program upon one day's prior written
notice.
SYSTEMATIC CONTRIBUTIONS
We offer a program for systematic contributions that allows you to pre-authorize
monthly, quarterly, or semi-annual withdrawals from your checking account to
make your contributions. To enroll in this program, send the appropriate form to
our Administrative Office. You or we may end your participation in the program
with 30 days' prior written notice. We may end your participation if your bank
declines to make any payment. The minimum amount for systematic contributions is
$100 per month. The Select Ten Plus Divisions aren't eligible for Systematic
Contributions.
PERFORMANCE INFORMATION
Performance data for the Investment Options, including the yield and effective
yield and total return of the Investment Options, may appear in advertisements
or sales literature. This performance data is based only on the performance of
a hypothetical investment in that Option during the particular period of time on
which the calculations are based. Performance information should be considered
in light of investment objectives and policies
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<PAGE>
of the Portfolio in which the Option invests and the market conditions during
the given time frame, and it shouldn't be considered a representation of
performance to be achieved in the future.
TOTAL RETURNS are based on the overall dollar or percentage change in value of a
hypothetical investment in an Option. Total return information reflects changes
in Portfolio share price, the automatic reinvestment of all distributions and
the deduction of contract charges and expenses that may apply, including any
contingent withdrawal charge that would apply if an Owner surrendered the
contract at the end of the period shown. Total returns may also be shown that
don't take into account the contingent withdrawal charge or the annual
administrative charge that is applied when the Account Value is less than
$50,000 at the end of the contract year.
CUMULATIVE TOTAL RETURNS show an Investment Option's performance over a specific
period of time, usually several years. An AVERAGE ANNUAL TOTAL RETURN shows the
hypothetical yearly return that would produce the same cumulative total return
if the Investment Option experienced exactly the same return each year for the
entire period shown. Because performance will fluctuate on a year-by-year
basis, the average annual total returns tend to show a smooth result that won't
mirror actual performance, even though the end result will be the same.
Some Investment Options may also advertise YIELD, which shows the income
generated by an investment in that particular Option over a specified period of
time. This income is annualized and shown as a percentage. Yields don't take
into account capital gains or losses or the contingent withdrawal charge that
may apply if you withdraw your money at the end of the hypothetical time period.
The Janus Aspen Money Market Option may advertise its CURRENT and EFFECTIVE
YIELD. Current yield reflects the income generated by an investment in that
Option over a specified seven-day period. Effective yield is calculated in a
similar manner, except that it assumes that the income earned is reinvested, and
the income on the reinvested amount is included. The J.P. Morgan Bond Option
may advertise a 30-day yield, which reflects the income generated by an
investment in that Option over a specified 30-day period.
For a detailed description of the methods used to determine the yield and total
return for the Variable Account Options, see the Statement of Additional
Information.
In Section 3 of this prospectus, there is a table showing what the performance
of the strategy for the Select Ten Plus Divisions would have been relative to
the Dow Jones Industrial Average for the last 26 years. The information is
historical and reflects a hypothetical investment, and shouldn't be used as an
indicator of future performance. In some years, the strategy outperformed the
Dow Jones index, and in some years, it didn't. The performance of this strategy
depends both on stock prices, which will fluctuate, and dividend payments, which
may increase, decrease or be eliminated. There are no guarantees that this
strategy will outperform the Dow Jones Industrial average over any given period
of time.
SECTION 9 - PRIOR CONTRACTS
AVAILABILITY OF VIP GROWTH PORTFOLIO AND VIP III MID CAP PORTFOLIO
For contracts issued before May 1, 1999, the VIP Growth Portfolio and VIP III
Mid Cap Portfolio are not yet available.
DEATH BENEFIT INFORMATION FOR CONTRACTS ISSUED BEFORE JANUARY 1, 1997
This section shows the Death Benefit information for contracts issued before
January 1, 1997. It may be different from other provisions in this prospectus.
For contracts issued before 1997, the following provisions apply:
For contracts issued before January 1, 1995, the amount of the death benefit is
the greatest of:
- your Account Value
- the Account Value at the beginning of the seventh contract year, plus
subsequent contributions and minus subsequent withdrawals
- your total contributions less the sum of withdrawals
- for Annuitants younger than 70 years old on the birthday nearest the
date on which their contract was issued, an enhanced minimum death
benefit, explained below.
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For contracts issued on or after January 1, 1995, 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 that apply to those withdrawals and reduce the
death benefit on a pro rata basis.
The enhanced minimum death benefit is the same as the guaranteed death benefit,
except that the guaranteed death benefit may not exceed the maximum guaranteed
death benefit. The guaranteed death benefit on your Participation Date is your
initial contribution. After that, every month we recalculate that portion of
your guaranteed death benefit allocated to the Separate Account by adding
interest at an annual rate of 7% until the contract anniversary nearest your
70th birthday, subject to the maximum. We subtract from that the sum of any
withdrawals or transfers from the Separate Account during the month and a pro
rata amount of the interest accumulated that applies to the withdrawn or
transferred amount. Therefore, your guaranteed death benefit at any time,
subject to the maximum, is the sum of (1) your Guarantee Period Values, and (2)
your Separate Account contributions, including the amount of interest calculated
on your Separate Account values for purposes of determining the guaranteed death
benefit, less any withdrawals or transfers and less the interest calculated on a
pro rata basis on those withdrawals or transfers. Your maximum guaranteed death
benefit is determined by totaling your contributions during your first five
participation years, subtracting all withdrawals, taking into consideration any
market value adjustments made under the contract, multiplying the result by two,
and then adding that to your total contributions made after the first five
participation years.
REDUCTION IN CHARGES
If your contract was issued on or after January 1, 1995, but before January 1,
1997, the effective annual rate of mortality, expense and administrative charges
will reduce to 1.10% after your contract has been in effect for six years.
CONTINGENT WITHDRAWAL CHARGE
For contracts issued before February 15, 1997 the following rules apply even if
they are different from other provisions in this prospectus:
There is a withdrawal charge of up to 7% on all contributions withdrawn. As
shown below, this charge varies, depending upon the "age" of the contributions
included in the withdrawal, that is, how long ago you made your contributions.
The maximum percentage of 7% would apply if the entire amount of the withdrawal
consisted of contributions made during your current contract year. No
withdrawal charge applies when you withdraw contributions made earlier than your
fifth prior contribution year. For purposes of calculating the withdrawal
charge, (1) the oldest contributions will be treated as the first withdrawn and
more recent contributions next, and (2) partial withdrawals up to the free
withdrawal amount won't 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.
No charge will be applied to your partial withdrawals that don't exceed the free
withdrawal amount in any contract year. On any Business Day, the free withdrawal
amount is the greater of (i) 10% of your Account Value and (ii) any investment
gain during the prior contract year, less withdrawals during the current
contract year. Investment gain is calculated as the increase in the Account
Value during the prior contract year, minus contributions during that year, plus
withdrawals made during that year. We'll deduct contingent withdrawal charges
for any partial withdrawal amount that is over the free withdrawal amount. The
contingent withdrawal charge is a sales charge to help pay our costs of selling
and promoting the contracts. We don't expect revenues from contingent withdrawal
charges to cover
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all of those costs. Any shortfall will be made up from our General Account
assets, which may include profits from other charges under the contracts.
<TABLE>
<CAPTION>
Contribution Year in Which Charge as a % of the
Withdrawn Contribution Was Made Contribution Withdrawn
------------------------------- ----------------------
<S> <C>
Current. . . . . . . . . . . . . . . . . . . 7%
First Prior. . . . . . . . . . . . . . . . . 6
Second Prior . . . . . . . . . . . . . . . . 5
Third Prior. . . . . . . . . . . . . . . . . 4
Fourth Prior . . . . . . . . . . . . . . . . 3
Fifth Prior. . . . . . . . . . . . . . . . . 2
Sixth Prior and Earlier. . . . . . . . . . . 0
</TABLE>
We won't deduct a contingent withdrawal charge if the Annuitant uses the
withdrawal to buy from us either an immediate annuity benefit with life
contingencies or an immediate annuity without life contingencies with a
restricted prepayment option that provides for level payments over five or more
years. Similarly, we won't deduct a charge if the Annuitant dies and the
withdrawal is made by the Annuitant's beneficiary. See "Death Benefits and
Similar Benefit Distributions" in Part 5.
The minimum withdrawal permitted is $300.
RETIREMENT DATE
For Contracts issued before January 1, 1997, the Retirement Date will be the
date you specify, but no later than your 85th birthday or the 10th Contract
Anniversary, whichever is later.
CALLAN ASSET ALLOCATION AND REBALANCING PROGRAM
The Callan Asset Allocation and Rebalancing Program uses the 4-year Guaranteed
Rate Option for the Fixed Income Investment Sector of the Model.
HARDSHIP WAIVERS
Hardship Waivers aren't available.
FIXED ACCOUNTS
SYSTEMATIC TRANSFER OPTION. The STO is not available for contracts issued
prior to July 7, 1998.
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GLOSSARY
ACCOUNT VALUE - the value of your contract, which consists of the values of your
Fixed Accounts and Variable Account Options added together.
ADJUSTED ACCOUNT VALUE - your Account Value increased or decreased by any Market
Value Adjustment made to your GRO Account.
ANNUITANT ("You," "Your") - the person upon whose life an annuity benefit and
death benefit are based.
ANNUITY PAYMENT - one of a series of payments made if you choose to annuitize
your contract.
ARM - ARM Financial Group, Inc.
BUSINESS DAY - any day that the New York Stock Exchange is open.
CASH VALUE - your Adjusted Account Value reduced by any withdrawal charges
and/or any pro rata annual administrative charges that may apply.
CONTRACT - your variable annuity contract.
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<PAGE>
DIVISION - an investment division of the Select Ten Plus Divisions. There are
four Divisions: the Select Ten Plus Division - March, June, September and
December.
ENHANCED RATE - a higher rate of interest we may declare for the first year of
any GRO Account that exceeds the Guaranteed Interest Rate credited during the
rest of the Guarantee Period.
FIXED ACCOUNTS - Guaranteed Rate Options and the Systematic Transfer Option.
GRO - Guaranteed Rate Option, which offer durations of two, three, five, seven
and ten years and lock in a fixed annual effective interest rate.
GRO VALUE - the value of a GRO Account. The GRO Value at the expiration of a
GRO Account, assuming you haven't withdrawn or transferred any amounts, will be
the amount you put in plus interest at the Guaranteed Interest Rate.
GUARANTEE PERIOD - the duration of your GRO Account.
GUARANTEED INTEREST RATE - a fixed annual effective interest rate that we
declare for the duration of your GRO Account.
INVESTMENT OPTIONS - Variable Account Options and Fixed Accounts, collectively.
MARKET VALUE ADJUSTMENT ("MVA")- an upward or downward adjustment (never below
the Minimum Value) made to the value of your GRO Account for withdrawals,
surrenders, transfers and certain other transactions made before the GRO Account
expires.
MINIMUM VALUE - an amount equal to your net allocation to a GRO Account, less
prior withdrawals (and associated charges) accumulated at 3% interest annually,
less any administrative charge.
NON-DIVERSIFIED - a "non-diversified" portfolio may invest a larger portion of
its assets in the securities of fewer issuers than could a diversified
portfolio.
OWNER - the person who owns the contract, and is usually the annuitant.
Includes any person named as Joint Owner.
PORTFOLIO - an investment portfolio of a mutual fund in which Separate Account
II invests its assets.
RETIREMENT DATE - the date you elect annuity payments to begin. The Retirement
Date can't be later than your 98th birthday, or earlier if required by law.
SEPARATE ACCOUNT - Separate Account II of National Integrity Life Insurance
Company. The Separate Account consists of assets that are segregated by National
Integrity and invested in Variable Account Options.
STO - Systematic Transfer Option - our STO provides a guaranteed interest rate;
contributions to the STO must be transferred into other Investment Options
within one year of your most recent STO contribution.
UNIT - a measure of your ownership interest in a Variable Account Option.
UNIT VALUE - the value of each unit calculated on any Business Day.
VARIABLE ACCOUNT OPTIONS - the various investment options available to you under
the contract, consisting of the Divisions and the Portfolios. The value of your
contract will reflect the investment performance of the Variable Account Options
you choose.
WE, OUR AND US - National Integrity Life Insurance Company, a subsidiary of ARM
Financial Group, Inc.
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APPENDIX A
FINANCIAL INFORMATION FOR SEPARATE ACCOUNT II
The table below shows the unit value for certain Variable Account Options at
inception, the number of units outstanding at December 31 of each year since
inception, and the unit value at the beginning and end of each period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996 1995 1994 1993 INCEPTION*
---- ---- ---- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
SCUDDER KEMPER VALUE
Unit value at beginning of period . . . . . . . $23.67 $18.39 $14.98 $10.43 $10.65 $10.00
Unit value at end of period . . . . . . . . . . $27.64 $23.67 $18.39 $14.98 $10.43 $10.65
Number of units outstanding at end of period. . 356,913 288,596 297,625 244,538 156,325 80,112
HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH
Unit value at beginning of period . . . . . . . $19.55 $14.71 $13.08 $10.07 $9.81 $10.00
Unit value at end of period . . . . . . . . . . $26.16 $19.55 $14.71 $13.08 $10.07 $9.81
Number of units outstanding at end of period. . 382,400 404,243 438,465 374,724 280,091 83,619
ZWEIG ASSET ALLOCATION
Unit value at beginning of period . . . . . . . $17.38 $14.45 $12.75 $10.65 $10.75 $10.00
Unit value at end of period . . . . . . . . . . $16.80 $17.38 $14.45 $12.75 $10.65 $10.75
Number of units outstanding at end of period. . 376,348 356,623 389,517 421,439 535,776 205,268
ZWEIG EQUITY (SMALL CAP)
Unit value at beginning of period . . . . . . . $18.14 $14.69 $12.57 $10.52 $10.73 - $10.00
Unit value at end of period . . . . . . . . . . $17.78 $18.14 $14.69 $12.57 $10.52 $10.73
Number of units outstanding at end of period. . 172,489 164,970 138,864 234,629 180,961 68,249
BT EAFE-Registered Trademark- EQUITY INDEX
Unit value at beginning of period . . . . . . . $9.88 - - - -
Unit value at end of period . . . . . . . . . . $11.86 $9.88
Number of units outstanding at end of period. . 75,887 5,623
BT EQUITY 500 INDEX
Unit value at beginning of period . . . . . . . $10.32 - - - - $10.00
Unit value at end of period . . . . . . . . . . $13.11 $10.32
Number of units outstanding at end of period. . 631,049 76,431
BT SMALL CAP INDEX
Unit value at beginning of period . . . . . . . $9.85 - - - - $10.00
Unit value at end of period . . . . . . . . . . $9.50 $9.85
Number of units outstanding at end of period. . 373,914 42,210
VIP EQUITY-INCOME
Unit value at beginning of period . . . . . . . $10.42 - - - - $10.00
Unit value at end of period . . . . . . . . . . $11.48 $10.42
Number of units outstanding at end of period. . 619,502 63,398
VIP II CONTRAFUND
Unit value at beginning of period . . . . . . . $9.91 - - - - $10.00
Unit value at end of period . . . . . . . . . . $12.70 $9.91
Number of units outstanding at end of period. . 636,505 65,551
VIP III GROWTH & INCOME
Unit value at beginning of period . . . . . . . $10.31 - - - - $10.00
Unit value at end of period . . . . . . . . . . $13.18 $10.31
Number of units outstanding at end of period. . 413,064 19,862
VIP III GROWTH OPPORTUNITIES
Unit value at beginning of period . . . . . . . $10.65 - - - - $10.00
Unit value at end of period . . . . . . . . . . $13.09 $10.65
Number of units outstanding at end of period. . 354,838 73,667
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996 1995 1994 1993 INCEPTION*
---- ---- ---- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
JANUS ASPEN CAPITAL APPRECIATION
Unit value at beginning of period . . . . . . . . $10.03 - - - - -
Unit value at end of period . . . . . . . . . . . $15.64 $10.03
Number of units outstanding at end of period . . 583,994 59,108
JANUS ASPEN BALANCED
Unit value at beginning of period . . . . . . . . $10.01 - - - - $10.00
Unit value at end of period . . . . . . . . . . . $13.26 $10.01
Number of units outstanding at end of period . . 1,741,026 1,827,787
JANUS ASPEN WORLDWIDE GROWTH
Unit value at beginning of period . . . . . . . . $9.93 - - - - $10.00
Unit value at end of period . . . . . . . . . . . $12.63 $9.93
Number of units outstanding at end of period . . 331,956 20,675
JANUS ASPEN MONEY MARKET
Unit value at beginning of period . . . . . . . . $10.06 - - - - $10.00
Unit value at end of period . . . . . . . . . . . $10.45 $10.06
Number of units outstanding at end of period . . 420,446 159,980
J.P. MORGAN INTERNATIONAL OPPORTUNITIES
Unit value at beginning of period . . . . . . . . $10.19 - - - - $10.00
Unit value at end of period . . . . . . . . . . . $10.53 $10.19
Number of units outstanding at end of period . . 21,124 5,359
J.P. MORGAN BOND
Unit value at beginning of period . . . . . . . . $10.16 - - - - $10.00
Unit value at end of period . . . . . . . . . . . $10.82 $10.16
Number of units outstanding at end of period . . 309,949 158,477
MSDW UNIVERSAL FUNDS ASIAN EQUITY
Unit value at beginning of period . . . . . . . . $9.23 - - - - $10.00
Unit value at end of period . . . . . . . . . . . $8.51 $9.23
Number of units outstanding at end of period . . 162,463 151,273
MSDW UNIVERSAL FUNDS EMERGING MARKETS DEBT
Unit value at beginning of period . . . . . . . . $10.88 - - - - $10.00
Unit value at end of period . . . . . . . . . . . $7.69 $10.88
Number of units outstanding at end of period . . 55,295 92,322
MSDW UNIVERSAL FUNDS HIGH YIELD
Unit value at beginning of period . . . . . . . . $10.19 - - - - $10.00
Unit value at end of period . . . . . . . . . . . $10.54 $10.19
Number of units outstanding at end of period . . 290,668 33,125
MSDW UNIVERSAL FUNDS U.S. REAL ESTATE
Unit value at beginning of period . . . . . . . . $10.38 - - - - $10.00
Unit value at end of period . . . . . . . . . . . $9.13 $10.38
Number of units outstanding at end of period . . 89,471 8,831
</TABLE>
- ------------------------------------------------------------
*The unit value for each Variable Account Option at inception is $10.00. The
inception date for the Harris Bretall Sullivan & Smith Equity Growth Option is
December 8, 1992. The inception date for the Zweig Asset Allocation, Scudder
Kemper Value and Zweig Equity Options is December 14, 1992. The inception date
for the EAFE-Registered Trademark- Equity Index, Equity 500 Index, Small Cap
Index, VIP Equity-Income, VIP II Contrafund,VIP III Growth & Income,VIP III
Growth Opportunities, Janus Aspen Capital Appreciation, Janus Aspen Balanced,
Janus Aspen Worldwide Growth, Janus Aspen Money Market, J.P.Morgan International
Opportunities, J.P. Morgan Bond, MSDW Universal Funds Asian Equity, MSDW
Universal Funds Emerging Markets Debt, MSDW Universal Funds High Yield, and MSDW
Universal Funds U.S. Real Estate Options is October 1, 1997.
39
<PAGE>
The inception date for the VIP Growth Portfolio and VIP III Mid Cap Portfolio is
May 1, 1999. Because the VIP Growth Portfolio, VIP III Mid Cap Portfolio and
Select Ten Plus Division March had not yet begun operations as of the end of
1998, we have provided no data for these Variable Account Options.
40
<PAGE>
APPENDIX B
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 at the end of the three year period after the
initial contribution. The Market Value Adjustment operates in a similar manner
for transfers. Contingent withdrawal charges don't apply 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 these examples that you haven't made any prior partial withdrawals
or transfers.
The Market Value Adjustment will be based on the rate we are 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 lower
number of complete months. If we don't declare a rate for the exact time
remaining, we'll use a formula to find a rate using 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 that at that time,
we're crediting 6.25% for a four-year GRO Account. Upon a full withdrawal, the
Market Value Adjustment, applying the above formula would be:
48/12 48/12
-0.0551589 = [(1 + .05) / (1 + .0625 + .0025) ] - 1
The Market Value Adjustment is a reduction of $3,192.67 from the GRO Value:
-$3,192.67 = -0.0551589 X $57,881.25
The Market Adjusted Value would be:
$54,688.58 = $57,881.25 - $3,192.67
A withdrawal charge of 5% would be assessed against the $50,000 original
contribution:
$2,500.00 = $50,000.00 X .05
Thus, the amount payable on a full withdrawal would be:
$52,188.58 = $57,881.25 - $3,192.67 - $2,500.00
41
<PAGE>
If instead of a full withdrawal, $20,000 was requested, we would first determine
the free withdrawal amount:
$5,788.13 = $57,881.25 X .10
Free Amount = $5,788.13
The non-free amount would be:
$14,211.87 = $20,000.00 - $5,788.13
The Market Value Adjustment, which is only applicable to the non-free amount,
would be
- $783.91 = -0.0551589 X $14,211.87
The withdrawal charge would be:
$789.25 = [($14,211.87+ $783.91)/(1 - .05)] - ($14,211.87+ 783.91)
Thus, the total amount needed to provide $20,000 after the Market Value
Adjustment and withdrawal charge would be:
$21,573.16 = $20,000.00 + $783.91 + $789.25
The ending Account Value would be:
$36,308.09 = $57,881.25 - $21,573.16
EXAMPLE OF AN UPWARD MARKET VALUE ADJUSTMENT:
An upward Market Value Adjustment results from a full or partial withdrawal that
occurs when interest rates have decreased. Assume interest rates have decreased
three years after the initial contribution and we're crediting 4% for a
four-year GRO Account. Upon a full withdrawal, the Market Value Adjustment,
applying the formula set forth in the prospectus, would be:
48/12 48/12
.0290890 = [(1 + .05) / (1 + .04 + .0025) ] - 1
The Market Value Adjustment is an increase of $1,683.71 to the GRO Value:
$1,683.71 = .0290890 X $57,881.25
The Market Adjusted Value would be:
$59,564.96 = $57,881.25 + $1,683.71
A withdrawal charge of 5% would be assessed against the $50,000 original
contribution:
$2,500.00 = $50,000.00 X .05
Thus, the amount payable on a full withdrawal would be:
$57,064.96 = $57,881.25 + $1,683.71 - $2,500.00
42
<PAGE>
If instead of a full withdrawal, $20,000 was requested, the free withdrawal
amount and non-free amount would first be determined as above:
Free Amount = $ 5,788.13
Non-Free Amount = $14,211.87
The Market Value Adjustment would be:
$413.41 = .0290890 X $14,211.87
The withdrawal charge would be:
$726.23 = [($14,211.87 - $413.41)/(1 - .05)] - ($14,211.87 - $413.41)
Thus, the total amount needed to provide $20,000 after the Market Value
Adjustment and withdrawal charge would be:
$20,312.82 = $20,000.00 - $413.41 + $726.23
The ending Account Value would be:
$37,568.43 = $57,881.25 - $20,312.82
Actual Market Value Adjustments may have a greater or lesser impact than
shown in the examples, depending on the actual change in interest crediting
rate and the timing of the withdrawal or transfer in relation to the time
remaining in the GRO Account. Also, the Market Value Adjustment can never
decrease the Account Value below your premium plus 3% interest, before any
applicable charges. Account values less than $50,000 will be subject to a
$30 annual charge.
The above examples will be adjusted to comply with applicable state regulation
requirements for contracts issued in certain states.
43
<PAGE>
APPENDIX C - TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
Part 1 - National Integrity and Custodian
Part 2 - Distribution of the Contracts
Part 3 - Management of Separate Account Ten
Part 4 - Portfolio Transactions and Brokerage
Part 5 - Performance Information
Part 6 - Determination of Accumulation Unit Values
Part 7 - Tax Favored Retirement Programs
Part 8 - 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
15 Matthews Street, Suite 200
Goshen, NY 10924
ATTN: Request for SAI of Separate Account II (Pinnacle)
Name:
--------------------------------------------
Address
------------------------------------------
City: State: Zip:
-------------- -------- -----------
44
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
FOR
PINNACLE
FLEXIBLE PREMIUM VARIABLE ANNUITY
ISSUED BY
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
AND
FUNDED THROUGH ITS SEPARATE ACCOUNT II
AND SEPARATE ACCOUNT TEN
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 Accumulation Unit Values.........................11
Part 5 - Tax-Favored Retirement Programs...................................11
Part 6 - Financial Statements..............................................13
</TABLE>
This Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the prospectus for the contracts, dated May 1, 1999.
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"), 15 Matthews Street, Suite 200, Goshen, NY 10924, or by
calling 1-800-433-1778.
1
<PAGE>
PART 1 - NATIONAL INTEGRITY AND CUSTODIAN
National Integrity Life Insurance Company is a New York stock life insurance
company organized in 1968 that sells life insurance and annuities. Its principal
executive offices are located at 15 Matthews Street, Suite 200, Goshen, NY
10924. National Integrity, the depositor of Separate Account I, is a wholly
owned subsidiary of Integrity Life Insurance Company, an Ohio corporation. All
outstanding shares of Integrity Life Insurance Company are owned by ARM
Financial Group, Inc. (ARM), a Delaware corporation that's a financial services
company focusing on the long-term savings and retirement marketplace by
providing retail and institutional products and services throughout the United
States. ARM owns 100% of the stock of (i) ARM Securities Corporation (ARM
SECURITIES), a Minnesota corporation, registered with the SEC as a broker-dealer
and a member of the National Association of Securities Dealers, Inc., (ii)
Integrity Capital Advisors, Inc., a Delaware 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.
ARM is 100% publicly owned, trading on the New York Stock Exchange (NYSE). No
one has the direct or indirect power to control ARM, except power he or she may
have by virtue of his or her capacity as a director or executive officer of ARM;
no individual beneficially owns more than 5% of the common shares.
Since 1994, ARM has provided substantially all of the services required to be
performed on behalf of Separate Account II. Total fees paid to ARM by Integrity
for management services, including services applicable to Separate Account II,
in 1996 were $13,823,048, in 1997 were $19,307,552 and in 1998 were $27,158,002.
National Integrity is the custodian for the shares of Portfolios owned by
Separate Account II. The shares are held in book-entry form.
Reports and marketing materials, from time to time, may include information
concerning the rating of National Integrity, as determined by A.M. Best Company,
Moody's Investors Service, Inc., 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"
(Adequate) from Moody's Investors Service, Inc., and "A+" (High) from Duff and
Phelps Credit Rating Company. However, National Integrity doesn't guarantee the
investment performance of the portfolios, and these ratings don't reflect
protection against investment risk.
TAX STATUS OF NATIONAL INTEGRITY
National Integrity is taxed as a life insurance company under Part I of
Subchapter L of the Internal Revenue Code of 1986, as amended (the CODE). Since
Separate Account II isn't a separate entity from us and its operations form a
part of us, it isn't taxed separately as a "regulated investment company" under
Subchapter M of the Code. Investment income and realized capital gains on the
assets of Separate Account II are reinvested and taken into account in
determining the accumulation value. Under existing federal income tax law,
Separate Account II's investment income, including realized net capital gains,
isn't taxed to us. We can make a tax deduction if federal tax laws change to
include these items in our taxable income.
PART 2 - DISTRIBUTION OF THE CONTRACTS
ARM Securities, a wholly owned subsidiary of ARM, is the principal underwriter
of the contracts. ARM Securities is registered with the SEC as a broker-dealer
and is a member in good standing of the National Association of Securities
Dealers, Inc. ARM Securities' address is 515 West Market Street, Louisville,
Kentucky 40202. The contracts are offered through ARM Securities on a continuous
basis.
We generally pay a maximum distribution allowance of 6.5% of initial
contributions and 7% of additional contributions, plus .50% trail commission
paid on Account Value after the eighth Contract Year. The amount of distribution
allowances paid was $2,290,049 for the year ended December 31, 1998, $223,270
for the year ended December 31, 1997 and $51,204 for the year ended December 31,
1996. Distribution allowances weren't retained by ARM Securities during these
years. National Integrity may from time to time pay or allow additional
promotional incentives, in the form
2
<PAGE>
of cash or other compensation, to broker-dealers that sell contracts. In some
instances, those types of incentives may be offered only to certain
broker-dealers that sell or are expected to sell certain minimum amounts of the
contracts during specified time periods.
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 units in
advertisements or in other information furnished to shareholders. The Janus
Aspen Money Market Option may also from time to time include the Yield and
Effective Yield of its units in information furnished to shareholders.
Performance information is computed separately for each Option in accordance
with the formulas described below. At any time in the future, total return and
yields may be higher or lower than in the past and there is no guarantee that
any historical results will continue.
TOTAL RETURNS
Total returns reflect all aspects of an Option's return, including the automatic
reinvestment by the Option of all distributions and the deduction of all
applicable charges to the Option on an annual basis, including mortality risk
and expense charges, the annual administrative charge and other charges against
contract values. Quotations also will assume a termination (surrender) at the
end of the particular period and reflect the deductions of the contingent
withdrawal charge, if applicable. Total returns may be shown at the same time
that don't take into account deduction of the contingent withdrawal charge,
and/or the annual administrative charge.
Nonstandardized "total return" will be calculated in a similar manner and for
the same time periods as the average annual total return and for three years
except total return will assume an initial investment of $60,000 and won't
reflect the deduction of any applicable contingent withdrawal charge, which, if
reflected, would decrease the level of performance shown. The contingent
withdrawal charge isn't reflected because the contracts are designed for long
term investment. We use an assumed initial investment of $60,000 because that
figure more closely approximates the size of a typical contract than does the
$1,000 figure used in calculating the standardized average annual total return
quotations. The amount of the hypothetical initial investment assumed affects
performance because the annual administrative charge is a fixed per contract
charge. For purposes of determining these investment results, the actual
investment performance of each fund is reflected as of the date each fund
commenced operations, although the Contracts weren't available at that time.
An AVERAGE ANNUAL TOTAL RETURN shows the hypothetical yearly return that would
produce the same cumulative total return if the Investment Option experienced
exactly the same return each year for the entire period shown. Because the
performance will fluctuate on a year-by-year basis, the average annual total
returns tend to show a smooth result that won't mirror the actual performance,
even though the end result will be the same. Investors should realize that the
Option's performance isn't 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 Janus Money Market
Option. Current Yield is based on the change in the value of a hypothetical
investment (exclusive of capital changes) over a particular 7-day period, less a
hypothetical charge reflecting deductions from contract values during the period
(the BASE period), and stated as a percentage of the investment at the start of
the base period (the BASE PERIOD RETURN). The base period return is then
annualized by multiplying by 365/7, with the resulting yield figure carried to
at least the nearest hundredth of one percent. Effective yield assumes that all
dividends received during an annual period have been reinvested. This
compounding effect causes effective yield to be higher than current yield.
Calculation of effective yield begins with the same base period return used in
the calculation of current yield, which is then annualized to reflect weekly
compounding pursuant to the following formula:
365/7
Effective Yield = {(Base Period Return) + 1) } - 1
4
<PAGE>
<TABLE>
<CAPTION>
SEC Standardized All figures are unaudited.
Average Annual Return (1)
---------------------------------------------------------------
FOR THE PERIOD ENDING: 12/31/98 ACCOUNT
VARIABLE OPTIONS INCEPTION LIFE OF
DATE (2) 1 YEAR 5 YEAR 10 YEAR ACCOUNT
<S> <C> <C> <C> <C> <C>
BT Insurance Funds Trust - EAFE Equity Index 11/6/97 13.97% n/a n/a 0.65%
BT Insurance Funds Trust - Equity 500 Index 11/6/97 20.98 n/a n/a 1.29%
BT Insurance Funds Trust - Small Cap Index 11/6/97 -9.50 n/a n/a -0.58%
Fidelity's VIP Equity-Income 11/7/97 4.12 n/a n/a 0.46%
Fidelity's VIP II Contrafund 11/6/97 22.23 n/a n/a 1.08%
Fidelity's VIP III Growth & Income 11/6/97 21.84 n/a n/a 1.32%
Fidelity's VIP III Growth Opportunities 11/12/97 16.93 n/a n/a 1.30%
Harris Bretall Sullivan & Smith Equity Growth 11/12/92 27.83 21.49 n/a 0.35%
Janus Aspen Series Balanced 11/5/97 26.48 n/a n/a 1.36%
Janus Aspen Series Capital Appreciation 11/7/97 49.98 n/a n/a 2.56%
Janus Aspen Series Worldwide Growth 11/6/97 21.18 n/a n/a 1.05%
JP Morgan Bond 11/12/97 -.55 n/a n/a 0.12%
JP Morgan International Opportunities 11/18/97 -2.68 n/a n/a -0.04%
MSDW Universal Funds Asian Equity 11/11/97 -13.71 n/a n/a -1.12%
MSDW Universal Funds Emerging Markets Debt 11/14/97 -35.33 n/a n/a -1.58%
MSDW Universal Funds High Yield 11/11/97 -2.61 n/a n/a -0.03%
MSDW Universal Funds U.S. Real Estate 11/17/97 -18.06 n/a n/a -0.80%
Scudder Kemper Value 1/12/93 10.79 20.84 n/a 0.37%
Zweig Asset Allocation 3/26/93 -9.39 9.05 n/a 0.18%
Zweig Equity (Small Cap) 1/14/93 -7.94 10.42 n/a 0.20%
</TABLE>
5
<PAGE>
(1) Standard average annual return reflects past fund performance based on a
$10,000 hypothetical investment over the period indicted. The performance
figures reflect the deduction of mortality and expense and administrative
charges totaling 1.35%. They also reflect any withdrawal charges that would
apply if any owner terminated the policy at the end of the period, but
exclude deductions for applicable premium tax charges. Surrender charges
are 7% in year one, declining 1% annually in years one through seven, 0%
thereafter.
(2) Inception date of the variable account option represents first trade date.
Returns for accounts in operation for less than one year aren't
annualized.
(3) Non-standard returns reflect all historical investment results, less
mortality and expense and administrative charges totaling 1.35%. The
calculation assumes the policy is still in force and therefore doesn't
take withdrawal charges into consideration.
(4) Italicized returns are calculated from the inception date through year-end.
(5) Represents the inception date of the underlying funds. Performance data for
periods prior to the actual inception of the variable account options is
hypothetical and based on the performance of the underlying funds. This
performance data has been adjusted to include all insurance company
contract charges and management fees of the underlying funds.
6
<PAGE>
<TABLE>
<CAPTION>
FOR THE PERIOD ENDING: 12/31/98 PLEASE SEE PRIOR PAGE FOR FOOTNOTES 3, 4 AND 5 All figures are unaudited.
RETURNS WITHOUT SURRENDER CHARGES (3)
CUMULATIVE TOTAL RETURN AVERAGE ANNUAL RETURN
----------------------- ---------------------
FUND
INCEPTION LIFE OF
VARIABLE OPTIONS DATE (5) 3 YEAR 5 YEAR 10 YEAR FUND 1 YEAR 3 YEAR 5 YEAR 10 YEAR
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BT Insurance Funds Trust - EAFE Equity Index 6/21/96 n/a n/a n/a 21.58% 19.97% n/a n/a n/a
BT Insurance Funds Trust - Equity 500 Index 12/31/92 93.71 148.09 n/a 159.42 26.98 24.66 19.93 n/a
BT Insurance Funds Trust - Small Cap Index 8/13/96 n/a n/a n/a 32.51 -3.50 n/a n/a n/a
Fidelity's VIP Equity-Income 10/9/86 56.89 120.85 272.77 339.65 10.12 16.20 17.17 14.06
Fidelity's VIP II Contrafund 1/3/95 87.77 n/a n/a 158.87 28.23 23.37 n/a n/a
Fidelity's VIP III Growth & Income 12/31/96 n/a n/a n/a 64.07 27.84 n/a n/a n/a
Fidelity's VIP III Growth Opportunities 1/3/95 83.87 n/a n/a 140.42 22.93 22.51 n/a n/a
Harris Bretall Sullivan & Smith Equity Growth 12/8/92 99.97 166.68 n/a 161.59 33.83 25.99 21.67 n/a
Janus Aspen Series Balanced 9/13/93 82.88 123.99 n/a 139.14 32.48 22.29 17.50 n/a
Janus Aspen Series Capital Appreciation 5/1/97 n/a n/a n/a 95.69 55.98 n/a n/a n/a
Janus Aspen Series Worldwide Growth 9/13/93 95.09 145.55 n/a 191.27 27.18 24.95 19.68 n/a
JP Morgan Bond 1/3/95 15.13 n/a n/a 30.51 6.55 4.81 n/a n/a
JP Morgan International Opportunities 1/3/95 19.95 n/a n/a 28.53 3.32 6.25 n/a n/a
MSDW Universal Funds Asian Equity 12/31/91 -46.76 -53.59 n/a 17.01 -7.71 -18.95 -14.23 n/a
MSDW Universal Funds Emerging Markets Debt 2/1/94 21.59 n/a n/a 16.39 -29.33 6.73 n/a n/a
MSDW Universal Funds High Yield 8/31/92 30.05 48.65 n/a 76.66 3.39 9.15 8.25 n/a
MSDW Universal Funds U.S. Real Estate 1/31/95 48.61 n/a n/a 77.70 -12.06 14.12 n/a n/a
Scudder Kemper Value 12/14/92 84.56 159.64 n/a 176.42 16.79 22.66 21.02 n/a
Zweig Asset Allocation 12/14/92 31.70 56.25 n/a 67.95 -3.39 9.61 9.34 n/a
Zweig Equity (Small Cap) 1/4/93 41.45 66.16 n/a 77.84 -1.94 12.25 10.69 n/a
<CAPTION>
CALENDAR YEAR RETURN(4)
-----------------------
LIFE OF
VARIABLE OPTIONS FUND 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C>
BT Insurance Funds Trust - EAFE Equity Index 8.04% n/a n/a n/a 0.94% 0.40% 19.97%
BT Insurance Funds Trust - Equity 500 Index 17.22 4.55 -3.08 32.15 20.35 26.77 26.98
BT Insurance Funds Trust - Small Cap Index 12.54 n/a n/a n/a 10.76 23.98 -3.50
Fidelity's VIP Equity-Income 12.87 16.70 5.01 34.05 12.73 26.38 10.12
Fidelity's VIP II Contrafund 26.91 n/a n/a 37.86 19.57 22.47 28.23
Fidelity's VIP III Growth & Income 28.11 n/a n/a n/a n/a 28.34 27.84
Fidelity's VIP III Growth Opportunities 24.58 n/a n/a 30.76 16.67 28.20 22.93
Harris Bretall Sullivan & Smith Equity Growth 17.49 -1.91 2.64 29.93 12.42 32.92 33.83
Janus Aspen Series Balanced 17.89 6.77 -.51 23.11 14.60 20.45 32.48
Janus Aspen Series Capital Appreciation 49.58 n/a n/a n/a n/a 25.46 55.98
Janus Aspen Series Worldwide Growth 22.36 18.62 .17 25.66 27.28 20.51 27.18
JP Morgan Bond 6.90 n/a n/a 13.36 .54 7.47 6.55
JP Morgan International Opportunities 6.49 n/a n/a 7.16 11.62 4.01 3.32
MSDW Universal Funds Asian Equity 2.27 102.53 -17.14 5.21 1.88 -43.37 -7.71
MSDW Universal Funds Emerging Markets Debt 3.14 n/a -23.87 25.75 48.64 15.74 -29.33
MSDW Universal Funds High Yield 9.40 18.31 -5.76 21.29 13.10 11.24 3.39
MSDW Universal Funds U.S. Real Estate 16.11 n/a n/a 19.58 37.53 22.89 -12.06
Scudder Kemper Value 18.58 6.47 -2.07 43.65 22.78 28.71 16.79
Zweig Asset Allocation 9.41 7.49 -.92 19.75 13.32 20.30 -3.39
Zweig Equity (Small Cap) 10.14 7.29 -1.97 19.54 16.87 23.42 -1.94
</TABLE>
7
<PAGE>
PERFORMANCE COMPARISONS
Performance information for an Option may be compared, in reports and
advertising, to: (1) Standard & Poor's Stock Index (S&P 500), Dow Jones
Industrial Averages, (DJIA), Donoghue Money Market Institutional Averages, or
other unmanaged indices generally regarded as representative of the securities
markets; (2) other variable annuity separate accounts or other investment
products tracked by Lipper Analytical Services, Inc. (LIPPER) or the Variable
Annuity Research and Data Service, which are widely used independent research
firms that rank mutual funds and other investment companies by overall
performance, investment objectives, and assets; and (3) the Consumer Price Index
(measure of inflation) to assess the real rate of return from an investment in a
contract. Unmanaged indices may assume the reinvestment of dividends but
generally don't 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 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, STANGE'S INVESTMENT ADVISER, VALUE LINE, THE WALL STREET
JOURNAL, WIESENBERGER INVESTMENT COMPANY SERVICE AND USA TODAY.
The performance figures described above may also be used to compare the
performance of an Option's units against certain widely recognized standards or
indices for stock and bond market performance. The following are the indices
against which the Options may compare performance:
The Standard & Poor's Composite Index of 500 Stocks (the S&P 500) is a market
value-weighted and unmanaged index showing the changes in the total market value
of 500 stocks compared to the base period 1941-43. The S&P 500 Index is composed
almost entirely of common stocks of companies listed on the NYSE, although the
common stocks of a few companies listed on the American Stock Exchange or traded
OTC are included. The 500 companies represented include 381 industrial, 37
utility, 11 transportation and 71 financial services concerns. The S&P 500 Index
represents about 80% of the market value of all issues traded on the NYSE.
The Dow Jones Composite Average (or its component averages) is an unmanaged
index composed of 30 blue-chip industrial corporation stocks (Dow Jones
Industrial Average), 15 utilities company stocks and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
The New York Stock Exchange composite or component indices are unmanaged indices
of all industrial, utilities, transportation and finance company stocks listed
on the New York Stock Exchange.
The Wilshire 5000 Equity Index (or its component indices) represents the return
of the market value of all common equity securities for which daily pricing is
available. Comparisons of performance assume reinvestment of dividends.
The Morgan Stanley Capital International EAFE Index is an arithmetic, market
value-weighted average of the performance of over 900 securities on the stock
exchanges of countries in Europe, Australia and the Far East.
The Morgan Stanley Capital International All Country World Index Free (ex-U.S.)
is an unmanaged index that measures developed and emerging foreign stock
market performance.
8
<PAGE>
The Goldman Sachs 100 Convertible Bond Index currently includes 67 bonds and 33
preferred stocks. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
The Lehman Brothers Government Bond Index (the LEHMAN GOVERNMENT INDEX) is a
measure of the market value of all public obligations of the U.S. Treasury; all
publicly issued debt of all agencies of the U.S. Government and all
quasi-federal corporations; and all corporate debt guaranteed by the U.S.
Government. Mortgage-backed securities, flower bonds and foreign targeted issues
aren't 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 doesn't 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 doesn't 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.
9
<PAGE>
The Salomon Brothers World Bond Index measures the total return performance of
high-quality securities in major sectors of the international bond market. The
index covers approximately 600 bonds from 10 currencies: Australian dollars,
Canadian dollars, European Currency Units, French francs, Japanese yen,
Netherlands guilder, Swiss francs, UK pounds sterling, U.S. dollars, and German
deutsche marks.
The J.P. Morgan Global Government Bond Index is a total return, market
capitalization weighted index, rebalanced monthly consisting of the following
countries: Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan,
Netherlands, Spain, Sweden, United Kingdom and United States.
The 50/50 Index assumes a static mix of 50% of the S&P 500 Index and 50% of the
Lehman Government Corporate Index.
Other Composite Indices: 70% S&P 500 Index and 30% NASDAQ Industrial Index; 35%
S&P 500 Index and 65% Salomon Brothers High Grade Bond Index; and 65% S&P Index
and 35% Salomon Brothers High Grade Bond Index.
The SEI Median Balanced Fund Universe measures a group of funds with an average
annual equity commitment and an average annual bond - plus - private - placement
commitment greater than 5% each year. SEI must have at least two years of data
for a fund to be considered for the population.
The Russell 2000/Small Stock Index comprises the smallest 2000 stocks in the
Russell 3000 Index, and represents approximately 11% of the total U.S. equity
market capitalization. The Russell 3000 Index comprises the 3,000 largest U.S.
companies by market capitalization. The smallest company has a market value of
roughly $20 million.
The Russell 2500 Index is comprised of the bottom 500 stocks in the Russell 1000
Index, which represents the universe of stocks from which most active money
managers typically select; and all the stocks in the Russell 2000 Index. The
largest security in the index has a market capitalization of approximately 1.3
billion.
The Consumer Price Index (or Cost of Living Index), published by the United
States Bureau of Labor Statistics is a statistical measure of change, over time,
in the price of goods and services in major expenditure groups.
STOCKS, BONDS, BILLS AND INFLATION, published by Hobson Associates, presents an
historical measure of yield, price and total return for common and small company
stocks, long-term government bonds, Treasury bills and inflation.
Savings and Loan Historical Interest Rates as published in the United States
Savings & Loan League Fact Book.
Historical data supplied by the research departments of First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch, Pierce,
Fenner & Smith, Shearson Lehman Hutton and Bloomberg L.P.
The MSCI Combined Far East Free ex Japan Index is a market-capitalization
weighted index comprising stocks in Hong Kong, Indonesia, Korea, Malaysia,
Philippines, Singapore and Thailand. Korea is included in the MSCI Combined Far
East Free ex Japan Index at 20% of its market capitalization.
The First Boston High Yield Index generally includes over 180 issues with an
average maturity range of seven to ten years with a minimum capitalization of
$100 million. All issues are individually trader-priced monthly.
In reports or other communications to shareholders, the Funds may also describe
general economic and market conditions affecting the Portfolios and may compare
the performance of the Portfolios with (1) that of mutual funds included in the
rankings prepared by Lipper or similar investment services that monitor the
performance of insurance company separate accounts or mutual funds, (2)
IBC/Donoghue's Money Fund Report, (3) other appropriate indices of investment
securities and averages for peer universe of funds which are described in this
SAI, or (4) data developed by National Integrity or any of the sub-advisers
derived from such indices or averages.
For those Variable Account Options which haven't been investment divisions
within the Separate Account for one of the quoted periods, the standardized
average annual total return and nonstandardized total return quotations will
show
10
<PAGE>
the investment performance those Options would have achieved (reduced by
the applicable charges) if they had been investment divisions within the
Separate Account for the period quoted.
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. These 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 can republish figures
independently provided by Morningstar or any similar agency or service.
PART 4 - DETERMINATION OF ACCUMULATION UNIT VALUES
The accumulation unit value of an Option will be determined on each day the New
York Stock Exchange is open for trading. The accumulation units are valued as of
the close of business on the New York Stock Exchange, which currently is 4:00
p.m., Eastern time. Each Option's accumulation unit value is calculated
separately. For all Options other than the Janus Money Market Option, the
accumulation unit value is computed by dividing the value of the securities held
by the Option plus any cash or other assets, less its liabilities, by the number
of outstanding units. For the Janus Money Market Option, accumulation unit value
is computed by dividing the value of the investments and other assets minus
liabilities by the number of units outstanding. Securities are valued using the
amortized cost method of valuation, which approximates market value. Under this
method of valuation, the difference between the acquisition cost and value at
maturity is amortized by assuming a constant (straight-line) accretion of a
discount or amortization of a premium to maturity. Cash, receivables and current
payables are generally carried at their face value.
PART 5 - TAX-FAVORED RETIREMENT PROGRAMS
The contracts described in this Prospectus may be used in connection with
certain tax-favored retirement programs, for groups and for individuals.
Following are brief descriptions of various types of qualified plans in
connection with which National Integrity may issue a contract. 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.
TRADITIONAL INDIVIDUAL RETIREMENT ANNUITIES
Code Section 408(b) permits eligible individuals to contribute to an individual
retirement program known as a Traditional IRA. An individual who receives
compensation and who hasn't reached age 70-1/2 by the end of the tax year may
establish a Traditional IRA and make contributions up to the deadline for filing
his or her federal income tax return for that year (without extensions).
Traditional IRAs are limited on the amount that may be contributed, the persons
who may be eligible, and the time when distributions may begin. An individual
may also roll over amounts distributed from another Traditional IRA or another
tax-favored retirement program to a Traditional IRA contract. Your Traditional
IRA contract will be issued with a rider outlining the special terms of your
contract that apply to Traditional IRAs. The Owner will be deemed to have
consented to any other amendment unless the Owner notifies us that he or she
doesn't consent within 30 days from the date we mail the amendment.
11
<PAGE>
ROTH INDIVIDUAL RETIREMENT ANNUITIES
Section 408A of the Code permits eligible individuals to contribute to an
individual retirement program known as a Roth IRA. An individual who receives
compensation may establish a Roth IRA and make contributions up to the deadline
for filing his or her federal income tax return for that year (without
extensions). Roth IRAs are limited on the amount that may be contributed, the
persons who are eligible to contribute, and the time when tax-favored
distributions may begin. An individual may also roll over amounts distributed
from another Roth IRA or Traditional IRA to a Roth IRA contract. Your Roth IRA
contract will be issued with a rider outlining the special terms of your
contract that apply to Roth IRAs. Any amendment made to comply with provisions
of the Code and related regulations may be made without your consent. The Owner
will be deemed to have consented to any other amendment unless the Owner
notifies us that he or she doesn't consent within 30 days from the date we mail
the amendment.
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.
SIMPLE INDIVIDUAL RETIREMENT ANNUITIES
Currently, we don't issue Individual Retirement Annuities known as a "SIMPLE
IRA" as defined in Section 408(p) of the Code.
TAX SHELTERED ANNUITIES
Section 403(b) of the Code permits the purchase of tax-sheltered annuities (TSA)
by employees of public schools and certain charitable, educational and
scientific organizations described in Section 501(c)(3) of the Code. The
contract isn't intended to accept other than employee contributions. Such
contributions aren't counted as part of 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). The Code also sets forth additional restrictions
governing such items as transferability, distributions and withdrawals. An
employee under this type of plan should consult a tax adviser as to the tax
treatment and suitability of such an investment. Your contract will be issued
with a rider outlining the special terms that apply to a TSA.
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 to also establish
tax-favored retirement plans for themselves and their employees. Tax-favored
retirement plans may permit the purchase of the contract to provide benefits
under the plans. Employers intending to use the contract in connection with
tax-favored plans should seek competent advice. The Company can request
documentation to substantiate that a qualified plan exists and is being properly
administered. National Integrity doesn't administer these types of plans.
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS
Section 457 of the Code permits employees of state and local governments and
tax-exempt organizations to defer a portion of their compensation without paying
current taxes. The employees must be participants in an eligible deferred
compensation plan. To the extent the contracts are used in connection with an
eligible plan, employees are considered general creditors of the employer and
the employer as Owner of the contract has the sole right to the proceeds of the
contract. However, Section 457(g) provides that on and after August 20, 1996, a
plan maintained by an eligible governmental employer must hold all assets and
income of the plan in a trust, custodial account, or
12
<PAGE>
annuity contract for the exclusive benefit of participants and their
beneficiaries. Loans to employees may be permitted under such plans; however, a
Section 457 plan isn't required to allow loans. Contributions to a contract in
connection with an eligible government plan are limited. Those who intend to
use the contracts in connection with such plans should seek competent advice.
The Company can request documentation to substantiate that a qualified plan
exists and is being properly administered. National Integrity doesn't
administer such plans.
DISTRIBUTIONS UNDER TAX FAVORED RETIREMENT PROGRAMs
Distributions from tax-favored plans are subject to certain restrictions.
Participants in qualified plans, with the exception of five-percent owners, must
begin receiving distributions by April 1 of the calendar year following the
later of either (i) the year in which the employee reaches age 70-1/2, or (ii)
the calendar year in which the employee retires. Participants in Traditional
IRAs must begin receiving distributions by April 1 of the calendar year
following the year in which the employee reaches age 70-1/2. Additional
distribution rules apply after the participant's death. If you don't take
mandatory distributions you may owe a 50% penalty tax on any difference between
the required distribution amount and the amount distributed.
The Taxpayer Relief Act of 1997 creating Roth IRAs eliminates mandatory
distribution of minimum amounts from Roth IRAs when the Owner reaches age
70-1/2.
Distributions from a tax-favored plan (not including a Traditional IRA or a Roth
IRA) to an employee, surviving spouse, or former spouse who is an alternate
payee under a qualified domestic relations order, in the form of a lump sum
settlement or periodic annuity payments for a fixed period of fewer than 10
years are subject to mandatory income tax withholding of 20% of the taxable
amount of the distribution, unless (1) the payee directs the transfer of the
amounts in cash to another plan or Traditional IRA; or (2) the payment is a
minimum distribution required under the Code. The taxable amount is the amount
of the distribution less the amount allocable to after-tax contributions. All
other types of taxable distributions are subject to withholding unless the payee
doesn't elect to have withholding apply.
We aren't permitted to make distributions from a contract unless you make a
request. It's your responsibility to comply with the minimum distribution rules.
You should consult your tax adviser regarding these rules.
This description of the federal income tax consequences of the different types
of tax-favored retirement plans that can be funded by the contract is only a
brief summary and isn't 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 adopting a plan and buying a contract to fund the plan should first
consult a qualified and competent tax adviser, with regard to the suitability of
the contract as an investment vehicle for the plan.
PART 6 - 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 Separate Account II as of December 31, 1998, and for
the periods indicated in the financial statements, and the statutory-basis
financial statements of National Integrity as of and for the years ended
December 31, 1998 and 1997 included herein have been audited by Ernst & Young
LLP as set forth in their reports.
The financial statements of National Integrity should be distinguished from the
financial statements of the Separate Account and should be considered only as
they relate to the ability of National Integrity to meet its obligations under
the contracts. They shouldn't be considered as relating to the investment
performance of the assets held in the Separate Account.
13
<PAGE>
Financial Statements
Separate Account II
of
National Integrity Life Insurance Company
December 31, 1998
With Report of Independent Auditors
<PAGE>
Separate Account II
of
National Integrity Life Insurance Company
Financial Statements
December 31, 1998
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . 1
Audited Financial Statements
Statement of Assets and Liabilities. . . . . . . . . . . . . . . . . . 2
Statement of Operations. . . . . . . . . . . . . . . . . . . . . . . . 4
Statements of Changes in Net Assets. . . . . . . . . . . . . . . . . . 6
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . .10
</TABLE>
<PAGE>
Report of Independent Auditors
Contract Holders
Separate Account II of National Integrity Life Insurance Company
We have audited the accompanying statement of assets and liabilities of Separate
Account II of National Integrity Life Insurance Company (comprising,
respectively, the, Zweig Asset Allocation, Harris Bretall Sullivan & Smith
Equity Growth, Scudder Kemper Value, Zweig Equity (Small Cap), EAFE Equity
Index, Equity 500 Index, Small Cap Index, VIP Equity-Income, VIP II Contrafund,
VIP III Growth & Income, VIP III Growth Opportunities, Janus Aspen Capital
Appreciation, Janus Aspen Balanced, Janus Aspen Worldwide Growth, Janus Aspen
Money Market, JPM International Opportunities, JPM Bond, Morgan Stanley Emerging
Markets Debt, Morgan Stanley High Yield, Morgan Stanley U.S. Real Estate and
Morgan Stanley Asian Equity Divisions) as of December 31, 1998 and the related
statements of operations and changes in net assets for the periods indicated
therein. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of mutual fund shares owned in The Legends Fund, Inc., BT Insurance
Funds Trust, Variable Insurance Products Fund, Variable Insurance Products Fund
II, Variable Insurance Products Fund III, Janus Aspen Series, J.P. Morgan Series
Trust II, and Morgan Stanley Universal Funds, Inc. (collectively the "Funds") as
of December 31, 1998, by correspondence with the transfer agents of the Funds.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective
divisions constituting Separate Account II of National Integrity Life Insurance
Company at December 31, 1998, the results of their operations and changes in
their net assets for each of the periods indicated therein, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young
Louisville, Kentucky
April 9, 1999
1
<PAGE>
<TABLE>
<CAPTION>
ZWEIG ASSET HARRIS BRETALL SCUDDER KEMPER ZWEIG EQUITY (SMALL
ALLOCATION SULLIVAN & SMITH VALUE CAP) DIVISION
DIVISION EQUITY DIVISION
GROWTH
DIVISION
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments at value
(aggregate cost of $106,886,167) $ 6,320,804 $ 10,003,299 $ 9,869,632 $ 3,067,504
Receivable from (payable to)
the general account of
National Integrity 1,842 285 (4,557) (650)
-------------------------------------------------------------------------------------
NET ASSETS $ 6,322,646 $ 10,003,584 $ 9,865,075 $ 3,066,854
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Unit value $ 16.80 $ 26.16 $ 27.64 $ 17.78
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Units outstanding 376,348 382,400 356,913 172,489
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
<CAPTION>
EAFE EQUITY EQUITY 500 SMALL CAP INDEX VIP
INDEX INDEX DIVISION EQUITY-INCOME
DIVISION DIVISION DIVISION
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments at value
(aggregate cost of $106,886,167) $ 899,820 $ 8,272,040 $ 3,553,030 $ 7,105,143
Receivable from (payable to)
the general account of
National Integrity 200 1,012 (847) 6,740
-------------------------------------------------------------------------------------
NET ASSETS $ 900,020 $ 8,273,052 $ 3,552,183 $ 7,111,883
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Unit value $ 11.86 $ 13.11 $ 9.50 $ 11.48
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Units outstanding 75,887 631,049 373,914 619,502
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
<CAPTION>
VIP II VIP VIP
CONTRAFUND III III
DIVISION GROWTH & GROWTH OPPORTUNITIES
INCOME DIVISION
DIVISION
-----------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investments at value
(aggregate cost of $106,886,167) $ 8,078,646 $ 5,437,384 $ 4,646,011
Receivable from (payable to)
the general account of
National Integrity 4,968 6,800 (1,182)
-----------------------------------------------------------------
NET ASSETS $ 8,083,614 $ 5,444,184 $ 4,644,829
-----------------------------------------------------------------
-----------------------------------------------------------------
Unit value $ 12.70 $ 13.18 $ 13.09
-----------------------------------------------------------------
-----------------------------------------------------------------
Units outstanding 636,505 413,064 354,838
-----------------------------------------------------------------
-----------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
<TABLE>
<CAPTION>
JANUS ASPEN JANUS ASPEN JANUS ASPEN JANUS ASPEN MONEY
CAPITAL BALANCED WORLDWIDE MARKET
APPRECIATION DIVISION GROWTH DIVISION
DIVISION DIVISION
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments at value
(aggregate cost of $106,886,167) $ 9,134,102 $ 23,083,856 $ 4,191,892 $ 4,394,634
Receivable from (payable to)
the general account of
National Integrity (436) 2,149 712 (973)
---------------------------------------------------------------------------
NET ASSETS $ 9,133,666 $ 23,086,005 $ 4,192,604 $ 4,393,661
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Unit value $ 15.64 $ 13.26 $ 12.63 $ 10.45
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Units outstanding 583,994 1,741,026 331,956 420,446
--------------------------------------------------------------------------
--------------------------------------------------------------------------
<CAPTION>
JPM INTERNATIONAL JPM BOND MORGAN STANLEY MORGAN STANLEY
OPPORTUNITIES DIVISION EMERGING MARKETS HIGH YIELD
DIVISION DEBT DIVISION
DIVISION
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments at value
(aggregate cost of $106,886,167) $ 222,192 $ 3,354,330 $ 426,886 $ 3,061,725
Receivable from (payable to)
the general account of
National Integrity 244 (682) (1,667) 1,916
--------------------------------------------------------------------------
NET ASSETS $ 222,436 $ 3,353,648 $ 425,219 $ 3,063,641
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Unit value $ 10.53 $ 10.82 $ 7.69 $ 10.54
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Units outstanding 21,124 309,949 55,295 290,668
--------------------------------------------------------------------------
--------------------------------------------------------------------------
<CAPTION>
MORGAN STANLEY MORGAN STANLEY TOTAL
U.S. REAL ESTATE ASIAN EQUITY
DIVISION DIVISION
--------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investments at value
(aggregate cost of $106,886,167) $ 816,045 $ 1,381,940 $ 117,320,915
Receivable from (payable to)
the general account of
National Integrity 825 620 17,319
--------------------------------------------------------
NET ASSETS $ 816,870 $ 1,382,560 $ 117,338,234
--------------------------------------------------------
--------------------------------------------------------
Unit value $ 9.13 $ 8.51
-------------------------------------
-------------------------------------
Units outstanding 89,471 162,463
-------------------------------------
-------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
<TABLE>
<CAPTION>
ZWEIG ASSET HARRIS BRETALL SCUDDER ZWEIG
ALLOCATION SULLIVAN & SMITH KEMPER EQUITY
DIVISION EQUITY GROWTH VALUE (SMALL
DIVISION DIVISION CAP)
DIVISION
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends $ 1,084,793 $ 905,098 $ 1,087,902 $ 706,394
EXPENSES
Mortality and expense risk and
administrative charges 88,944 104,005 116,216 42,625
--------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 995,849 801,093 971,686 663,769
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments 263,521 1,528,277 388,258 113,592
Net unrealized appreciation
(depreciation) of investments:
Beginning of period
1,346,313 1,256,040 192,707 273,307
End of period
(184,827) 1,155,242 82,487 (622,309)
--------------------------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period (1,531,140) (100,798) (110,220) (895,616)
--------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (1,267,619) 1,427,479 278,038 (782,024)
--------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ (271,770) $ 2,228,572 $ 1,249,724 $ (118,255)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<CAPTION>
EAFE EQUITY EQUITY 500 SMALL CAP INDEX VIP
INDEX INDEX DIVISION EQUITY-INCOME
DIVISION DIVISION DIVISION
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends $ 12,139 $ 223,266 $ 69,952 $ 78,855
EXPENSES
Mortality and expense risk and
administrative charges 4,830 59,523 25,970 56,312
----------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 7,309 163,743 43,982 22,543
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments 5,402 44,151 (14,811) (1,469)
Net unrealized appreciation
(depreciation) of investments:
Beginning of period
648 17,065 7,146 13,995
End of period
49,321 870,028 (93,093) 320,870
----------------------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period 48,673 852,963 (100,239) 306,875
----------------------------------------------------------------------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 54,075 897,114 (115,050) 305,406
----------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 61,384 $ 1,060,857 $ (71,068) $ 327,949
----------------------------------------------------------------------------
----------------------------------------------------------------------------
<CAPTION>
VIP VIP VIP
II III III
CONTRAFUND GROWTH & GROWTH
DIVISION INCOME OPPORTUNITIES
DIVISION DIVISION
------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends $ 69,789 $ 1,861 $ 38,724
EXPENSES
Mortality and expense risk and
administrative charges 57,075 31,385 30,589
------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 12,714 (29,524) 8,135
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments 7,917 42,233 14,854
Net unrealized appreciation
(depreciation) of investments:
Beginning of period
12,890 335 7,004
End of period
1,154,016 601,773 542,089
------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period 1,141,126 601,438 535,085
------------------------------------------------------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 1,149,043 643,671 549,939
------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 1,161,757 $ 614,147 $ 558,074
------------------------------------------------------------
------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
<TABLE>
<CAPTION>
JANUS ASPEN JANUS ASPEN JANUS ASPEN JANUS ASPEN MONEY
CAPITAL BALANCED WORLDWIDE MARKET
APPRECIATION DIVISION GROWTH DIVISION
DIVISION DIVISION
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends $ 5,282 $ 851,099 $ 49,143 $ 273,335
EXPENSES
Mortality and expense risk and
administrative charges 55,543 255,610 23,450 70,976
------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS)
(50,261) 595,489 25,693 202,359
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments 43,225 419,795 15,865 -
Net unrealized appreciation
(depreciation) of investments:
Beginning of period 14,295 239,772 5,622 49
End of period 2,172,022 4,583,497 267,596 -
------------------------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period 2,157,727 4,343,725 261,974 (49)
------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 2,200,952 4,763,520 277,839 (49)
------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 2,150,691 $ 5,359,009 $ 303,532 $ 202,310
------------------------------------------------------------------------------
------------------------------------------------------------------------------
<CAPTION>
JPM INTERNATIONAL JPM BOND MORGAN STANLEY MORGAN STANLEY
OPPORTUNITIES DIVISION EMERGING MARKETS HIGH YIELD
DIVISION DEBT DIVISION
DIVISION
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends $ 7,309 $ 136,669 $ 51,069 $ 191,389
EXPENSES
Mortality and expense risk and
administrative charges 1,912 33,014 9,751 24,593
------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS)
5,397 103,655 41,318 166,796
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments (4,885) 27,608 (98,098) (9,713)
Net unrealized appreciation
(depreciation) of investments:
Beginning of period (5,952) (20,141) 45,758 (15,980)
End of period (4,759) (317) (171,500) (125,881)
------------------------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period 1,193 19,824 (217,258) (109,901)
------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (3,692) 47,432 (315,356) (119,614)
------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 1,705 $ 151,087 $ (274,038) $ 47,182
------------------------------------------------------------------------------
------------------------------------------------------------------------------
<CAPTION>
MORGAN STANLEY MORGAN STANLEY TOTAL
U.S. REAL ASIAN EQUITY
ESTATE DIVISION
DIVISION
-----------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends $ 21,611 $ 10,795 $ 5,876,474
EXPENSES
Mortality and expense risk and
administrative charges 6,769 17,462 1,116,554
-----------------------------------------------------------
NET INVESTMENT INCOME (LOSS)
14,842 (6,667) 4,759,920
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments (16,566) (98,762) 2,670,394
Net unrealized appreciation
(depreciation) of investments:
Beginning of period 731 (75,264) 3,316,340
End of period (55,828) (105,679) 10,434,748
-----------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period (56,559) (30,415) 7,118,408
-----------------------------------------------------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (73,125) (129,177) 9,788,802
-----------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ (58,283) $ (135,844) $ 14,548,721
-----------------------------------------------------------
-----------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
<TABLE>
<CAPTION>
ZWEIG ASSET HARRIS BRETALL SCUDDER ZWEIG EQUITY (SMALL
ALLOCATION SULLIVAN & SMITH KEMPER CAP)
DIVISION EQUITY GROWTH VALUE DIVISION
DIVISION DIVISION
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ 995,849 $ 801,093 $ 971,686 $ 663,769
Net realized gain (loss) on sales of
investments 263,521 1,528,277 388,258 113,592
Change in net unrealized appreciation/
depreciation during the period (1,531,140) (100,798) (110,220) (895,616)
--------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations (271,770) 2,228,572 1,249,724 (118,255)
INCREASE (DECREASE) IN NET ASSETS FROM
CONTRACT RELATED TRANSACTIONS
Contributions from contract holders 1,201,224 1,630,035 3,227,445 942,501
Contract terminations and benefits (553,907) (2,432,491) (652,942) (283,356)
Net transfers among investment options (251,009) 674,517 (790,219) (466,592)
--------------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 396,308 (127,939) 1,784,284 192,553
--------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 124,538 2,100,633 3,034,008 74,298
Net assets, beginning of year 6,198,108 7,902,951 6,831,067 2,992,556
--------------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 6,322,646 $ 10,003,584 $ 9,865,075 $ 3,066,854
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 67,324 75,515 126,973 51,718
Terminations and benefits (31,336) (106,362) (25,289) (16,013)
Net transfers (16,263) 9,004 (33,367) (28,186)
--------------------------------------------------------------------------------
Net increase (decrease) in units 19,725 (21,843) 68,317 7,519
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<CAPTION>
EAFE EQUITY EQUITY 500 SMALL CAP VIP
INDEX INDEX INDEX EQUITY-INCOME
DIVISION DIVISION DIVISION DIVISION
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ 7,309 $ 163,743 $ 43,982 $ 22,543
Net realized gain (loss) on sales of
investments 5,402 44,151 (14,811) (1,469)
Change in net unrealized appreciation/
depreciation during the period 48,673 852,963 (100,239) 306,875
---------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 61,384 1,060,857 (71,068) 327,949
INCREASE (DECREASE) IN NET ASSETS FROM
CONTRACT RELATED TRANSACTIONS
Contributions from contract holders 517,701 5,163,765 2,911,637 5,503,354
Contract terminations and benefits (3,970) (92,937) (40,253) (82,196)
Net transfers among investment options 269,350 1,352,599 336,098 702,169
---------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 783,081 6,423,427 3,207,482 6,123,327
---------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 844,465 7,484,284 3,136,414 6,451,276
Net assets, beginning of year 55,555 788,768 415,769 660,607
---------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 900,020 $ 8,273,052 $ 3,552,183 $ 7,111,883
---------------------------------------------------------------------------
---------------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 46,614 448,400 301,131 500,983
Terminations and benefits (366) (7,873) (4,491) (7,570)
Net transfers 24,016 114,091 35,064 62,691
---------------------------------------------------------------------------
Net increase (decrease) in units 70,264 554,618 331,704 556,104
---------------------------------------------------------------------------
---------------------------------------------------------------------------
<CAPTION>
VIP II CONTRAFUND VIP VIP III
DIVISION III GROWTH
GROWTH & OPPORTUNITIES
INCOME DIVISION
DIVISION
---------------------------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ 12,714 $ (29,524) $ 8,135
Net realized gain (loss) on sales of
investments 7,917 42,233 14,854
Change in net unrealized appreciation/
depreciation during the period 1,141,126 601,438 535,085
---------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 1,161,757 614,147 558,074
INCREASE (DECREASE) IN NET ASSETS FROM
CONTRACT RELATED TRANSACTIONS
Contributions from contract holders 5,756,048 3,582,183 2,830,017
Contract terminations and benefits (73,373) (32,315) (47,678)
Net transfers among investment options 589,572 1,075,392 519,862
---------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 6,272,247 4,625,260 3,302,201
---------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 7,434,004 5,239,407 3,860,275
Net assets, beginning of year 649,610 204,777 784,554
---------------------------------------------------------------
NET ASSETS, END OF YEAR $ 8,083,614 $ 5,444,184 $ 4,644,829
---------------------------------------------------------------
---------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 524,542 307,158 244,320
Terminations and benefits (6,607) (2,733) (4,125)
Net transfers 53,019 88,777 40,976
---------------------------------------------------------------
Net increase (decrease) in units 570,954 393,202 281,171
---------------------------------------------------------------
---------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
6
<PAGE>
<TABLE>
<CAPTION>
JANUS ASPEN CAPITAL JANUS JANUS ASPEN JANUS ASPEN MONEY
APPRECIATION ASPEN WORLDWIDE MARKET
DIVISION BALANCED GROWTH DIVISION
DIVISION DIVISION
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ (50,261) $ 595,489 $ 25,693 $ 202,359
Net realized gain (loss) on sales of
investments 43,225 419,795 15,865 -
Change in net unrealized appreciation/
depreciation during the period 2,157,727 4,343,725 261,974 (49)
-------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 2,150,691 5,359,009 303,532 202,310
INCREASE (DECREASE) IN NET ASSETS FROM
CONTRACT RELATED TRANSACTIONS
Contributions from contract holders 5,034,893 2,415,242 2,522,632 8,074,765
Contract terminations and benefits (67,402) (2,407,347) (10,433) (1,369,000)
Net transfers among investment options 1,422,631 (577,047) 1,171,570 (4,123,813)
-------------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 6,390,122 (569,152) 3,683,769 2,581,952
-------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 8,540,813 4,789,857 3,987,301 2,784,262
Net assets, beginning of year 592,853 18,296,148 205,303 1,609,399
-------------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 9,133,666 $ 23,086,005 $ 4,192,604 $ 4,393,661
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 417,038 215,510 216,161 787,669
Terminations and benefits (5,349) (203,941) (887) (133,290)
Net transfers 113,197 (98,330) 96,007 (393,913)
-------------------------------------------------------------------------------
Net increase (decrease) in units 524,886 (86,761) 311,281 260,466
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<CAPTION>
JPM JPM BOND MORGAN STANLEY
INTERNATIONAL DIVISION EMERGING
OPPORTUNITIES MARKETS
DIVISION DEBT
DIVISION
----------------------------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ 5,397 $ 103,655 $ 41,318
Net realized gain (loss) on sales of
investments (4,885) 27,608 (98,098)
Change in net unrealized appreciation/
depreciation during the period 1,193 19,824 (217,258)
----------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 1,705 151,087 (274,038)
INCREASE (DECREASE) IN NET ASSETS FROM
CONTRACT RELATED TRANSACTIONS
Contributions from contract holders 151,790 1,155,669 93,456
Contract terminations and benefits (3,297) (374,645) (114,191)
Net transfers among investment options 17,630 811,411 (284,471)
----------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 166,123 1,592,435 (305,206)
----------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 167,828 1,743,522 (579,244)
Net assets, beginning of year 54,608 1,610,126 1,004,463
----------------------------------------------------------------
NET ASSETS, END OF YEAR $ 222,436 $ 3,353,648 $ 425,219
----------------------------------------------------------------
----------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 14,083 110,037 10,030
Terminations and benefits (322) (35,040) (10,287)
Net transfers 2,004 76,475 (36,770)
----------------------------------------------------------------
Net increase (decrease) in units 15,765 151,472 (37,027)
----------------------------------------------------------------
----------------------------------------------------------------
<CAPTION>
MORGAN STANLEY HIGH MORGAN STANLEY U.S. MORGAN STANLEY TOTAL
YIELD REAL ESTATE ASIAN EQUITY
DIVISION DIVISION DIVISION
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ 166,796 $ 14,842 $ (6,667) $ 4,759,920
Net realized gain (loss) on sales of
investments (9,713) (16,566) (98,762) 2,670,394
Change in net unrealized appreciation/
depreciation during the period (109,901) (56,559) (30,415) 7,118,407
----------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 47,182 (58,283) (135,844) 14,548,721
INCREASE (DECREASE) IN NET ASSETS FROM
CONTRACT RELATED TRANSACTIONS
Contributions from contract holders 2,411,521 627,027 139,325 55,892,230
Contract terminations and benefits (253,268) (5,801) (128,176) (9,028,978)
Net transfers among investment options 520,662 162,261 111,005 3,243,578
----------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 2,678,915 783,487 122,154 50,106,830
----------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 2,726,097 725,204 (13,690) 64,655,551
Net assets, beginning of year 337,544 91,666 1,396,250 52,682,682
----------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 3,063,641 $ 816,870 $ 1,382,560 $ 117,338,234
----------------------------------------------------------------------------
----------------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 231,191 65,075 17,776
Terminations and benefits (23,986) (628) (15,666)
Net transfers 50,340 16,193 9,480
-----------------------------------------------------
Net increase (decrease) in units 257,543 80,640 11,190
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
7
<PAGE>
<TABLE>
<CAPTION>
RENAISSANCE BALANCED ZWEIG ASSET NICHOLAS-APPLEGATE HARRIS BRETALL
ALLOCATION BALANCED SULLIVAN & SMITH
EQUITY GROWTH
DIVISION (1) DIVISION DIVISION (1) DIVISION
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ 1,179,624 $ (6,803) $ 1,582,908 $ 427,845
Net realized gain (loss) on sales of
investments (47,650) 283,834 1,142,519 416,103
Change in net unrealized appreciation/
depreciation during the period (331,511) 817,959 (745,131) 1,173,697
---------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 800,463 1,094,990 1,980,296 2,017,645
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 50,240 282,086 217,130 476,558
Contract terminations and benefits (2,048,893) (447,276) (797,813) (676,940)
Net transfers among investment options (6,987,630) (360,213) (13,062,770) (364,132)
---------------------------------------------------------------------------
Net increase (decrease) in net
assets
from contract related
transactions (8,986,283) (525,403) (13,643,453) (564,514)
---------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
(8,185,820) 569,587 (11,663,157) 1,453,131
Net assets, beginning of year
8,185,820 5,628,521 11,663,157 6,449,820
---------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ - $ 6,198,108 $ - $ 7,902,951
---------------------------------------------------------------------------
---------------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 3,235 15,508 12,383 24,893
Terminations and benefits (136,537) (28,230) (48,344) (36,846)
Net transfers (458,159) (20,172) (743,141) (22,269)
---------------------------------------------------------------------------
Net increase (decrease) in units (591,461) (32,894) (779,102) (34,222)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
<CAPTION>
SCUDDER KEMPER ZWEIG EQUITY PINNACLE FIXED ARM CAPITAL
VALUE (SMALL CAP) INCOME ADVISORS MONEY
MARKET
DIVISION DIVISION DIVISION (1) DIVISION (1)
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ 1,102,892 $ 87,317 $ 105,752 $ 40,591
Net realized gain (loss) on sales of
investments 1,054,089 134,755 23,940 -
Change in net unrealized appreciation/
depreciation during the period (586,088) 269,068 (45,807) -
---------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 1,570,893 491,140 83,885 40,591
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 1,165,539 702,306 75,944 253,284
Contract terminations and benefits (637,094) (123,974) (665,750) (2,648,502)
Net transfers among investment options (741,595) (116,828) (1,012,688) 1,008,280
---------------------------------------------------------------------------
Net increase (decrease) in net
assets
from contract related
transactions (213,150) 461,504 (1,602,494) (1,386,938)
---------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 1,357,743 952,644 (1,518,609) (1,346,347)
Net assets, beginning of year 5,473,324 2,039,912 1,518,609 1,346,347
---------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 6,831,067 $ 2,992,556 $ - $ -
---------------------------------------------------------------------------
---------------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 50,208 42,184 6,235 22,812
Terminations and benefits (29,791) (6,914) (55,386) (239,148)
Net transfers (29,446) (9,164) (83,132) 92,363
---------------------------------------------------------------------------
Net increase (decrease) in units (9,029) 26,106 (132,283) (123,973)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
<CAPTION>
MORGAN STANLEY MORGAN STANLEY EAFE EQUITY INDEX EQUITY 500 INDEX
ASIAN GROWTH WORLDWIDE HIGH
INCOME
DIVISION (1) DIVISION (1) DIVISION (2) DIVISION (2)
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ (24,390) $ 254,004 $ (77) $ (817)
Net realized gain (loss) on sales of
investments (1,083,367) (173,515) (230) 552
Change in net unrealized appreciation/
depreciation during the period (116,343) (23,791) 648 17,065
------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations (1,224,100) 56,698 341 16,800
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 61,870 194,121 39,018 578,039
Contract terminations and benefits (356,571) (47,984) - -
Net transfers among investment options (1,958,536) (1,162,798) 16,196 193,929
------------------------------------------------------------------------------
Net increase (decrease) in net
assets
from contract related
transactions (2,253,237) (1,016,661) 55,214 771,968
------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS (3,477,337) (959,963) 55,555 788,768
Net assets, beginning of year 3,477,337 959,963 - -
------------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ - $ - $ 55,555 $ 788,768
------------------------------------------------------------------------------
------------------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 6,152 12,450 4,002 56,973
Terminations and benefits (37,573) (2,859) - -
Net transfers (300,386) (79,204) 1,621 19,458
------------------------------------------------------------------------------
Net increase (decrease) in units (331,807) (69,613) 5,623 76,431
------------------------------------------------------------------------------
------------------------------------------------------------------------------
<CAPTION>
SMALL CAP INDEX VIP EQUITY-INCOME
DIVISION (2) DIVISION (2)
---------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ (586) $ (605)
Net realized gain (loss) on sales of
investments (1,178) 804
Change in net unrealized appreciation/
depreciation during the period 7,146 13,995
---------------------------------------------
Net increase (decrease) in net assets resulting
from operations 5,382 14,194
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 166,071 570,182
Contract terminations and benefits (171) -
Net transfers among investment options 244,487 76,231
---------------------------------------------
Net increase (decrease) in net
assets
from contract related
transactions 410,387 646,413
---------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 415,769 660,607
Net assets, beginning of year - -
---------------------------------------------
NET ASSETS, END OF YEAR $ 415,769 $ 660,607
---------------------------------------------
---------------------------------------------
UNIT TRANSACTIONS
Contributions 17,076 55,783
Terminations and benefits (17) -
Net transfers 25,151 7,615
---------------------------------------------
Net increase (decrease) in units 42,210 63,398
---------------------------------------------
---------------------------------------------
</TABLE>
(1) For the period January 1, 1997 to November 14, 1997 (date of substitution)
(2) For the period October 1, 1997 (commencement of operations) to December 31,
1997
SEE ACCOMPANYING NOTES.
8
<PAGE>
<TABLE>
<CAPTION>
VIP II Contrafund VIP III Growth VIP III Janus Aspen Capital
& Income Growth Opportunities Appreciation
Division (2) Division (2) Division (2) Division (2)
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets
from operations
Net investment income (loss) $ (584) $ 4,733 $ (679) $ 1,353
Net realized gain (loss) on sales of
investments (604) (575) 1,560 (471)
Change in net unrealized appreciation/
depreciation during the period 12,890 335 7,004 14,295
-------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 11,702 4,493 7,885 15,177
Increase (decrease) in net assets from contract
related transactions
Contributions from contract holders 541,632 58,386 75,419 523,386
Contract terminations and benefits - (199) (12) -
Net transfers among investment options 96,276 142,097 701,262 54,290
-------------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 637,908 200,284 776,669 577,676
-------------------------------------------------------------------------------
Increase (decrease) in net assets 649,610 204,777 784,554 592,853
Net assets, beginning of year - - - -
-------------------------------------------------------------------------------
Net assets, end of year $ 649,610 $ 204,777 $ 784,554 $ 592,853
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Unit transactions
Contributions 55,713 5,726 7,215 53,566
Terminations and benefits - (19) (1) -
Net transfers 9,838 14,155 66,453 5,542
-------------------------------------------------------------------------------
Net increase (decrease) in units 65,551 19,862 73,667 59,108
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<CAPTION>
Janus Aspen Janus Aspen Janus Aspen Money JPM International
Balanced Worldwide Growth Market Opportunities
Division (2) Division (2) Division (2) Division (2)
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets
from operations
Net investment income (loss) $ 124,668 $ 139 $ 6,879 $ 6,642
Net realized gain (loss) on sales of
investments 10,342 (172) - (21)
Change in net unrealized appreciation/
depreciation during the period 239,772 5,622 49 (5,952)
------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 374,782 5,589 6,928 669
Increase (decrease) in net assets from contract
related transactions
Contributions from contract holders 90,044 54,415 934,647 16,749
Contract terminations and benefits (309,924) - (33,861) (148)
Net transfers among investment options 18,141,246 145,299 701,685 37,338
------------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 17,921,366 199,714 1,602,471 53,939
------------------------------------------------------------------------------
Increase (decrease) in net assets 18,296,148 205,303 1,609,399 54,608
Net assets, beginning of year - - - -
------------------------------------------------------------------------------
Net assets, end of year $ 18,296,148 $ 205,303 $ 1,609,399 $ 54,608
------------------------------------------------------------------------------
------------------------------------------------------------------------------
Unit transactions
Contributions 10,767 5,578 93,292 1,650
Terminations and benefits (29,850) - (3,383) (15)
Net transfers 1,846,870 15,097 70,071 3,724
------------------------------------------------------------------------------
Net increase (decrease) in units 1,827,787 20,675 159,980 5,359
------------------------------------------------------------------------------
------------------------------------------------------------------------------
<CAPTION>
JPM Bond Morgan Stanley Morgan Stanley
Emerging Markets Debt High Yield
Division (2) Division (2) Division (2)
--------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in net assets
from operations
Net investment income (loss) $ 40,143 $ 34,939 $ 21,386
Net realized gain (loss) on sales of
investments 13 13,489 (99)
Change in net unrealized appreciation/
depreciation during the period (20,141) 45,758 (15,980)
--------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 20,015 94,186 5,307
Increase (decrease) in net assets from contract
related transactions
Contributions from contract holders 42,312 - 42,907
Contract terminations and benefits (7,095) (90,245) (194)
Net transfers among investment options 1,554,894 1,000,522 289,524
--------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 1,590,111 910,277 332,237
--------------------------------------------------------------
Increase (decrease) in net assets 1,610,126 1,004,463 337,554
Net assets, beginning of year - - -
--------------------------------------------------------------
Net assets, end of year $ 1,610,126 $ 1,004,463 $ 337,544
--------------------------------------------------------------
--------------------------------------------------------------
Unit transactions
Contributions 4,196 - 4,232
Terminations and benefits (704) (8,475) (19)
Net transfers 154,985 100,797 28,912
--------------------------------------------------------------
Net increase (decrease) in units 158,477 92,322 33,125
--------------------------------------------------------------
--------------------------------------------------------------
<CAPTION>
Morgan Stanley U.S. Morgan Stanley
Real Estate Asian Equity
Division (2) Division (2) Total
----------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in net assets
from operations
Net investment income (loss) $ 1,878 $ (554) $ 4,988,598
Net realized gain (loss) on sales of
investments 33 (1,417) 1,772,734
Change in net unrealized appreciation/
depreciation during the period 731 (75,264) 660,026
----------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 2,642 (77,235) 7,421,358
Increase (decrease) in net assets from contract
related transactions
Contributions from contract holders 41,347 5,253 7,258,885
Contract terminations and benefits - (29,383) (8,922,029)
Net transfers among investment options 47,677 1,497,615 181,658
----------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 89,024 1,473,485 (1,481,486)
----------------------------------------------------------
Increase (decrease) in net assets 91,666 1,396,250 5,939,872
Net assets, beginning of year - - 46,742,810
----------------------------------------------------------
Net assets, end of year $ 91,666 $ 1,396,250 $ 52,682,682
----------------------------------------------------------
----------------------------------------------------------
Unit transactions
Contributions 4,098 532
Terminations and benefits - (3,050)
Net transfers 4,733 153,791
------------------------------------------
Net increase (decrease) in units 8,831 151,273
------------------------------------------
------------------------------------------
</TABLE>
(1) For the period January 1, 1997 to November 14, 1997 (date of substitution)
(2) For the period October 1, 1997 (commencement of operations) to December 31,
1997
See accompanying notes.
9
<PAGE>
Separate Account II
of
National Integrity Life Insurance Company
Notes to Financial Statements
December 31, 1998
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS
National Integrity Life Insurance Company ("National Integrity") established
Separate Account II (the "Separate Account") on May 21, 1992 under the insurance
laws of the state of New York for the purpose of issuing flexible premium
variable annuity contracts ("contracts"). The Separate Account is a unit
investment trust registered with the Securities and Exchange Commission ("SEC")
under the Investment Company Act of 1940, as amended ("Investment Company Act").
The operations of the Separate Account are part of National Integrity.
National Integrity is a wholly owned subsidiary of Integrity Life Insurance
Company ("Integrity") and their ultimate parent is ARM Financial Group, Inc.
("ARM"). ARM specializes in the growing asset accumulation business with
particular emphasis on retirement savings and investment products.
Contract holders may allocate or transfer their account values to one or more
investment divisions of the Separate Account or to one or more fixed guaranteed
rate options or systematic transfer options of Integrity's Separate Account GPO.
The Separate Account divisions invest in shares of the corresponding portfolios
of the following funds or insurance trust funds ("Funds"): BT Insurance Funds
Trust ("BT Funds Trust"); Variable Insurance Products Fund ("VIP"), Variable
Insurance Products Fund II ("VIP II"), and Variable Insurance Products Fund III
("VIP III"), part of the Fidelity Investments group of companies (collectively,
"Fidelity's VIP Funds"); The Legends Fund, Inc. ("Legends Fund"); Janus Aspen
Series; J.P. Morgan Series Trust II ("JPM Series"); and Morgan Stanley Universal
Funds, Inc. ("Morgan Stanley Universal Funds"). Bankers Trust Global Asset
Management Services, a unit of Bankers Trust Company, is the investment manager
of the BT Funds Trust. Fidelity Management and Research Company serves as
investment adviser to Fidelity's VIP Funds. Integrity Capital Advisors, Inc., a
wholly owned subsidiary of ARM, is the investment adviser of the Legends Fund.
Janus Capital Corporation serves as investment adviser to the Janus Aspen
Series. J.P. Morgan Investment Management Inc. is the investment adviser to the
JPM Series. Morgan Stanley Dean Witter Asset Management Inc. ("MSDW") serves as
investment adviser to the Morgan Stanley Universal Funds except for Morgan
Stanley High Yield Portfolio, for which Miller Anderson & Sherrerd, LLP
10
<PAGE>
Separate Account II
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
serves as investment adviser. MSDW is a wholly owned subsidiary of Morgan
Stanley Dean Witter & Co. ("Morgan Stanley"). Prior to ARM's secondary public
offering of its common stock in May 1998, Morgan Stanley and ARM were considered
affiliates.
On July 23, 1997, National Integrity filed an application (amended on October 9,
1997) with the Securities and Exchange Commission ("SEC") pursuant to Section
26(b) of the Investment Company Act for an order to approve a substitution of
certain divisions of the Separate Account (the "Substitution"). The Substitution
involved the transfer of assets from a division within the Separate Account to a
new division which invests in shares of corresponding investment portfolios of
an insurance trust mutual fund ("New Division") deemed to have (i) substantially
similar investment strategies and (ii) historically stronger investment
performance and/or lower expense ratios (after waivers and reimbursements). The
Substitution was approved by the SEC on November 14, 1997, and was effected on
that day. The divisions of the Separate Account affected by the Substitution and
the New Divisions which received the assets are as follows:
Original Division New Division
- ----------------- ------------
Renaissance Balanced Janus Aspen Balanced
Nicholas-Applegate Balanced Janus Aspen Balanced
Pinnacle Fixed Income JPM Bond
ARM Capital Advisors Money Market Janus Aspen Money Market
Morgan Stanley Asian Growth Morgan Stanley Asian Equity
Morgan Stanley Worldwide High Income Morgan Stanley Emerging Markets Debt
11
<PAGE>
Separate Account II
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Units of each division of the Separate Account affected by the Substitution were
redeemed in-kind and the redemption proceeds were used to purchase units of the
New Division. The costs of the Substitution were borne by Integrity, and no
fees, transfer charges or sales charges to effect the Substitution were imposed
on the Separate Account or the contract holders. Prior to and immediately
following the Substitution, the account values of contract holders were the
same. In addition, the Substitution did not alter the tax or insurance benefits
to contract holders or the contractual obligation of National Integrity.
The contract holder's account value in a Separate Account division will vary
depending on the performance of the corresponding portfolio. The Separate
Account currently has twenty-one investment divisions available. The investment
objective of each division and its corresponding portfolio are the same. Set
forth below is a summary of the investment objectives of the portfolios of the
Funds.
ZWEIG ASSET ALLOCATION PORTFOLIO seeks long term capital appreciation with
investments from the 1,000 most liquid stocks. The Portfolio's sub-adviser
strives to do this while protecting principal and reducing exposure to
market risk. The 1,000 most liquid stocks are those that the sub-adviser
considers comparable to those included in the Standard & Poor's 500
Composite Stock Price Index ("S&P 500"), and that have a minimum of $400
million market capitalization, average daily trading volume of 50,000 share
or $425 million in total assets, and that are traded on the New York Stock
Exchange ("NYSE"), American Stock Exchange ("AMEX"), over-the-counter
("OTC") or on foreign exchanges. Zweig/Glaser Advisers is the sub-adviser
to the Portfolio.
HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH PORTFOLIO seeks long-term
capital appreciation. It primarily invests in stocks of established
companies with proven records of superior and consistent growth. The
Portfolio may invest in U.S. government securities, cash and cash
equivalents when that appears to be a better choice in light of the
Portfolio's investment objective or when justified by market conditions.
Harris Bretall Sullivan & Smith, LLC is the sub-adviser to the Portfolio.
SCUDDER KEMPER VALUE PORTFOLIO seeks primarily long-term capital
appreciation with a secondary objective of current income. It invests
principally in a diversified portfolio of securities believed by the
sub-adviser to be undervalued. The sub-adviser's philosophy centers on
identifying stocks of large, well-known companies with solid financial
strength and large dividend payment histories that have low price-
12
<PAGE>
Separate Account II
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
earnings ratios and have been generally overlooked by the market. Scudder
Kemper Investors, Inc. is sub-adviser to the Portfolio.
ZWEIG EQUITY (SMALL CAP) PORTFOLIO seeks long-term capital appreciation. It
invests primarily in "small company stocks," consistent with preservation
of capital and reduction of portfolio exposure to market risk, as
determined by the sub-adviser. Current income is not an objective. "Small
company stocks" are the 2,000 stock positions immediately after the 1,000
largest stocks ranked in terms of market capitalization and/or trading
volume, and which are traded on the NYSE, AMEX, OTC or on foreign
exchanges. Zweig/Glaser Advisers is the sub-adviser to the Portfolio.
EAFE EQUITY INDEX PORTFOLIO seeks to replicate as closely as possible
(before the deduction of expenses) the total return of the Morgan Stanley
Capital International Europe, Australia, Far East (EAFE) Index, a
capitalization-weighted index containing approximately 1,100 equity
securities of companies located outside the United States. The Portfolio
will be invested primarily in equity securities of business enterprises
organized and domiciled outside of the United States or for which the
principal trading market is outside the United States. Statistical methods
will be employed to replicate the EAFE Index by buying most of the EAFE
Index securities. Securities purchased for the portfolio will generally,
but not necessarily, be traded on a foreign securities exchange. Bankers
Trust Global Asset Management Services is the investment adviser to the
Portfolio.
EQUITY 500 INDEX PORTFOLIO seeks to replicate as closely as possible
(before the deduction of expenses) the total return of the S&P 500, an
index emphasizing large-capitalization stocks. The Portfolio will include
the common stock of those companies included in the S&P 500, other than
Bankers Trust New York Corporation, selected on the basis of computer
generated statistical data, that are deemed representative of the industry
diversification of the entire S&P 500. Bankers Trust Global Asset
Management Services is the investment adviser to the Portfolio.
13
<PAGE>
Separate Account II
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SMALL CAP INDEX PORTFOLIO seeks to replicate as closely as possible (before
the deduction of expenses) the total return of the Russell 2000 Small Stock
Index (the "Russell 2000"), an index consisting of 2,000
small-capitalization common stocks. The Portfolio will include the common
stock of companies included in the Russell 2000, on the basis of
computer-generated statistical data, that are deemed representative of the
industry diversification of the entire Russell 2000. Bankers Trust Global
Asset Management Services is the investment adviser to the Portfolio.
VIP EQUITY-INCOME PORTFOLIO seeks reasonable income by investing primarily
in income producing equity securities, with the potential for capital
appreciation as a consideration. It normally invests at least 65% of its
assets in income-producing equity securities. Fidelity Management and
Research Company serves as the investment adviser to the Portfolio.
VIP II CONTRAFUND PORTFOLIO seeks long-term capital appreciation. The
Portfolio invests primarily in common stocks and in securities whose value
the sub-adviser believes is not fully recognized by the public. The types
of companies in which the Portfolio may invest include companies
experiencing positive fundamental change such as a new management team or
product launch, a significant cost-cutting initiative, a merger or
acquisition, or a reduction in industry capacity that should lead to
improved pricing; companies whose earnings potential has increased or is
expected to increase more than generally perceived; companies that have
enjoyed recent market popularity but which appear to have temporarily
fallen out of favor for reasons that are considered non-recurring or
short-term; and companies that are undervalued in relation to securities of
other companies in the same industry. Fidelity Management and Research
Company serves as the investment adviser to the Portfolio.
VIP III GROWTH & INCOME PORTFOLIO seeks high total return through a
combination of current income and capital appreciation by investing mainly
in equity securities. It invests primarily in stocks of companies that
offer potential for growth in earnings while paying dividends, but offer
the potential for capital appreciation on future income. The Portfolio may
also invest in bonds, including lower-quality debt securities, as well as
stocks that are not currently paying dividends, but offer prospects for
future income or capital appreciation. Fidelity Management and Research
Company serves as the investment adviser to the Portfolio.
14
<PAGE>
Separate Account II
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
VIP III GROWTH OPPORTUNITIES PORTFOLIO seeks to provide capital growth by
investing primarily in common stocks. The Portfolio may also invest in
bonds, lower quality debt securities, as well as stocks that are not
currently paying dividends but offer prospects for future income or capital
appreciation. Fidelity Management and Research Company serves as the
investment adviser to the Portfolio.
JANUS ASPEN CAPITAL APPRECIATION PORTFOLIO seeks long-term growth of
capital. It is a non-diversified portfolio that pursues its objective by
investing primarily in common stocks of issuers selected for their growth
potential. The Portfolio may invest in companies of any size, from larger,
well-established companies to smaller emerging growth companies. Janus
Capital Corporation serves as the investment adviser to the Portfolio.
JANUS ASPEN BALANCED PORTFOLIO seeks long-term capital growth, consistent
with current income. It is a diversified portfolio that, under normal
circumstances, pursues its objective by investing 40-60% of its assets in
securities selected primarily for their growth potential and 40-60% of its
assets in securities selected primarily for their income potential. The
portfolio normally invests at least 25% of its assets in fixed-income
senior securities. Janus Capital Corporation serves as the investment
adviser to the Portfolio.
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO seeks long-term growth of capital in
a manner consistent with the preservation of capital. It is a diversified
portfolio that pursues its objective primarily through investments in
common stocks of any size throughout the world. Janus Aspen Worldwide
Growth portfolio normally invests in issuers from at least five different
countries, including the United States. The portfolio may at any time
invest in fewer than five countries or even a single country. Janus Capital
Corporation serves as the investment adviser to the Portfolio.
JANUS ASPEN MONEY MARKET PORTFOLIO seeks maximum current income to the
extent consistent with stability of capital. There can be no assurance that
the Portfolio will achieve its investment objective or be able to maintain
a stable net asset value of $1.00 per share. The portfolio will invest only
in eligible high quality, short-term money market instruments that present
minimal credit risks, as determined by Janus Capital Corporation, the
Portfolio's investment adviser, pursuant to procedures.
15
<PAGE>
Separate Account II
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The portfolio may invest only in United States dollar-denominated
instruments that have a remaining maturity of 397 days or less and will
maintain a dollar-weighted average portfolio maturity of 90 days or less.
Janus Capital Corporation serves as the investment adviser to the
Portfolio.
JPM INTERNATIONAL OPPORTUNITIES PORTFOLIO seeks to provide a high total
return from a portfolio of equity securities of foreign corporations. Total
return will consist of realized and unrealized capital gains and losses
plus income less expenses. The Portfolio is designed for investors with a
long-term investment horizon who want to diversify their investments by
adding international equities and take advantage of investment
opportunities outside the United States. The Portfolio seeks to achieve its
investment objective through country allocation and stock valuation and
selection. J.P. Morgan Investment Management Inc. is the investment adviser
to the Portfolio.
JPM BOND PORTFOLIO seeks to provide a high total return consistent with
moderate risk of capital and maintenance of liquidity. Total return will
consist of realized and unrealized capital gains and losses plus income
less expenses. Although the net asset value of the portfolio will
fluctuate, the portfolio attempts to preserve the value of its investments
to the extent consistent with its objective. J.P. Morgan Investment
Management Inc. is the investment adviser to the Portfolio.
MORGAN STANLEY ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of Asian issuers (excluding
Japan) using an approach that is oriented to the selection of individual
stocks that the adviser believes are undervalued. The portfolio intends to
invest primarily in equity securities that are traded on recognized stock
exchanges of countries in Asia and in equity securities of companies
organized under the laws of an Asian country whose business is conducted
principally in Asia. MSDW serves as the investment adviser to the
Portfolio.
MORGAN STANLEY EMERGING MARKETS DEBT PORTFOLIO seeks high total return by
investing primarily in fixed income securities of government and
government-related issuers located in emerging market countries, which
securities provide a high level of current income, while at the same time
striving for investment growth. MSDW serves as the investment adviser to
the Portfolio.
16
<PAGE>
Separate Account II
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MORGAN STANLEY HIGH YIELD PORTFOLIO seeks above-average total return over a
market cycle of three to five years by investing primarily in a diversified
portfolio of high yield securities, including corporate bonds and other
fixed income securities of both U.S. and non-U.S. issuers and derivatives.
High yield securities are rated below investment grade and are commonly
referred to as "junk bonds." The portfolio's average weighted maturity will
ordinarily exceed five years. Miller Anderson & Sherrerd, LLP serves as
the investment adviser to the Portfolio.
MORGAN STANLEY U.S. REAL ESTATE PORTFOLIO seeks above-average current
income and long-term capital appreciation by investing primarily in equity
securities of United States and non-United States companies principally
engaged in the United States real estate industry, including real estate
investment trusts ("REITs") and real estate operating companies. MSDW
serves as the investment adviser to the Portfolio.
The assets of the Separate Account are owned by National Integrity. The portion
of the Separate Account's assets supporting the contracts may not be used to
satisfy liabilities arising out of any other business of National Integrity.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for unit investment trusts.
INVESTMENTS
Investments in shares of the Funds are valued at the net asset values of the
respective portfolios, which approximates fair value. The difference between
cost and fair value is reflected as unrealized appreciation and depreciation of
investments.
Share transactions are recorded on the trade date. Realized gains and losses on
sales of the Funds' shares are determined based on the identified cost basis.
Dividends from income and capital gain distributions are recorded on the
ex-dividend date. Dividends and distributions from the Funds' portfolios are
reinvested in the respective portfolios and are reflected in the unit value of
the divisions of the Separate Account.
17
<PAGE>
Separate Account II
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
UNIT VALUE
Unit values for the Separate Account divisions are computed at the end of each
business day. The unit value is equal to the unit value for the preceding
business day multiplied by a net investment factor. This net investment factor
is determined based on the value of the underlying mutual fund portfolios of the
Separate Account, reinvested dividends and capital gains, new premium deposits
or withdrawals, and the daily asset charge for the mortality and expense risk
and administrative charges. Unit values are adjusted for all activity in the
Separate Account.
TAXES
Operations of the Separate Account are included in the income tax return of
National Integrity which is taxed as a life insurance company under the Internal
Revenue Code. The Separate Account will not be taxed as a regulated investment
company under Subchapter M of the Internal Revenue Code. Under the provisions of
the policies, National Integrity has the right to charge the Separate Account
for federal income tax attributable to the Separate Account. No charge is
currently being made against the Separate Account for such tax since, under
current tax law, National Integrity pays no tax on investment income and capital
gains reflected in variable life insurance policy reserves. However, National
Integrity retains the right to charge for any federal income tax incurred which
is attributable to the Separate Account if the law is changed. Charges for state
and local taxes, if any, attributable to the Separate Account may also be made.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
18
<PAGE>
Separate Account II
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
2. INVESTMENTS
The aggregate cost of portfolio shares purchased and proceeds from portfolio
shares sold during the year ended December 31, 1998 and the cost of shares held
at December 31, 1998 for each division were as follows:
<TABLE>
<CAPTION>
DIVISION PURCHASES SALES COST
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Zweig Asset Allocation $ 2,385,751 $ 997,181 $ 6,505,631
Harris Bretall Equity Growth 7,093,679 6,419,358 8,848,057
Scudder Kemper Value 4,815,208 2,055,171 9,787,145
Zweig Equity (Small Cap) 1,748,838 891,202 3,689,813
EAFE Equity Index 834,593 44,430 850,499
Equity 500 Index 6,849,165 263,320 7,402,012
Small Cap Index 3,390,376 137,998 3,646,123
VIP Equity-Income 6,499,765 360,776 6,784,273
VIP II Contrafund 6,552,889 272,577 6,924,630
VIP III Growth & Income 4,911,366 322,380 4,835,611
VIP III Growth Opportunities 3,664,614 353,156 4,103,922
Janus Aspen Capital Appreciation 6,587,890 247,463 6,962,080
Janus Aspen Balanced 6,895,199 6,868,299 18,500,359
Janus Aspen Worldwide Growth 4,027,392 318,615 3,924,296
Janus Aspen Money Market 17,638,712 14,852,738 4,394,634
JPM International Opportunities 224,512 53,135 226,951
JPM Bond 2,523,084 825,841 3,354,647
Morgan Stanley Emerging Markets Debt 308,068 570,607 598,386
Morgan Stanley High Yield 3,842,439 998,650 3,187,606
Morgan Stanley U.S. Real Estate 890,774 93,140 871,873
Morgan Stanley Asian Equity 508,115 402,863 1,487,619
$ 106,886,167
</TABLE>
3. EXPENSES
National Integrity assumes mortality and expense risks and incurs certain
administrative expenses related to the operations of the Separate Account and
deducts a charge from the assets of the Separate Account at an annual rate of
1.20% and 0.15% of net assets, respectively, to cover these risks and expenses.
In addition, an annual administrative charge of $30 per contract is assessed if
the participant's account value is less than $50,000 at the end of any
participation year prior to the participant's retirement date (as defined by the
participant's contract).
19
<PAGE>
Financial Statements
(Statutory Basis)
National Integrity Life
Insurance Company
YEARS ENDED DECEMBER 31, 1998 AND 1997
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
National Integrity Life Insurance Company
Financial Statements
(Statutory Basis)
Years Ended December 31, 1998 and 1997
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors............................................. 1
Audited Financial Statements
Balance Sheets (Statutory Basis)........................................... 2
Statements of Income (Statutory Basis)..................................... 4
Statements of Changes in Capital and Surplus (Statutory Basis)............. 5
Statements of Cash Flows (Statutory Basis)................................. 6
Notes to Financial Statements (Statutory Basis)............................ 8
</TABLE>
<PAGE>
Report of Independent Auditors
Board of Directors
National Integrity Life Insurance Company
We have audited the accompanying statutory basis balance sheets of National
Integrity Life Insurance Company as of December 31, 1998 and 1997, and the
related statutory basis statements of income, changes in capital and surplus,
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the New York Insurance Department, which practices differ from
generally accepted accounting principles. The variances between such practices
and generally accepted accounting principles and the effects on the accompanying
financial statements are described in Note 1.
In our opinion, because of the effects of the matter described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of National Integrity Life Insurance Company at December 31, 1998 and 1997, or
the results of its operations or its cash flows for the years then ended.
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of National Integrity
Life Insurance Company at December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting practices prescribed or permitted by the New York Insurance
Department.
/s/ Ernst & Young LLP
Louisville, Kentucky
February 9, 1999
1
<PAGE>
National Integrity Life Insurance Company
Balance Sheets (Statutory Basis)
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
-------------------------------------
(IN THOUSANDS)
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Bonds $ 360,012 $ 414,907
Preferred stocks 9,740 21,792
Mortgage loans 2,835 3,242
Policy loans 26,695 26,396
Cash and short-term investments 78,883 12,078
Receivable for securities - 1,941
Other invested assets 3,786 3,794
-------------------------------------
Total cash and invested assets 481,951 484,150
Separate account assets 771,953 617,327
Accrued investment income 5,062 5,735
Other admitted assets 718 2,143
-------------------------------------
Total admitted assets $ 1,259,684 $ 1,109,355
-------------------------------------
-------------------------------------
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
-------------------------------------
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Policy and contract liabilities:
Life and annuity reserves $ 437,286 $ 446,610
Unpaid claims 50 50
Deposits on policies to be issued 1,243 564
-------------------------------------
Total policy and contract liabilities 438,579 447,224
Separate account liabilities 771,953 617,327
Accounts payable and accrued expenses 13 151
Transfers to separate accounts due or accrued, net (27,297) (24,362)
Reinsurance balances payable 207 511
Federal income taxes 1,005 5,645
Asset valuation reserve 3,204 1,570
Interest maintenance reserve 8,443 7,240
Other liabilities 4,074 32
-------------------------------------
Total liabilities 1,200,181 1,055,338
Capital and surplus:
Common stock, $10 par value, 200,000 shares
authorized, issued, and outstanding 2,000 2,000
Paid-in surplus 59,244 59,244
Special surplus funds 750 750
Unassigned surplus (deficit) (2,491) (7,977)
-------------------------------------
Total capital and surplus 54,017 59,503
-------------------------------------
Total liabilities and capital and surplus $ 1,259,684 $ 1,109,355
-------------------------------------
-------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
National Integrity Life Insurance Company
Statements of Income (Statutory Basis)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
-------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Premiums and other revenues:
Premiums and annuity considerations $ 13,496 $ 11,533
Deposit-type funds 196,927 211,637
Net investment income 36,077 42,464
Amortization of the interest maintenance reserve 1,478 1,359
Other revenues 8,331 5,961
-------------------------------------
Total premiums and other revenues 256,309 272,954
Benefits paid or provided:
Death benefits 4,098 1,268
Annuity benefits 16,475 12,687
Surrender benefits 142,420 123,520
Payments on supplementary contracts 1,637 1,648
Decrease in insurance and annuity reserves (9,247) (66,954)
Other benefits 101 119
-------------------------------------
Total benefits paid or provided 155,484 72,288
Insurance and other expenses:
Commissions 8,904 10,088
General expenses 14,876 11,146
Taxes, licenses and fees 228 794
Net transfers to separate accounts 63,171 163,896
Other expenses 3,871 3,542
-------------------------------------
Total insurance and other expenses 91,050 189,466
-------------------------------------
Gain from operations before federal income taxes
and net realized capital gains (losses) 9,775 11,200
Federal income tax expense 31 3,621
-------------------------------------
Gain from operations before net realized
capital gains (losses) 9,744 7,579
Net realized capital gains (losses), excluding realized
capital gains (losses) net of tax transferred to the
interest maintenance reserve (1998-$2,681; 1997-$(314)) 147 (2,036)
-------------------------------------
Net income $ 9,891 $ 5,543
-------------------------------------
-------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
National Integrity Life Insurance Company
Statements of Changes in Capital and Surplus (Statutory Basis)
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
SPECIAL UNASSIGNED TOTAL
COMMON PAID-IN SURPLUS SURPLUS CAPITAL AND
STOCK SURPLUS FUNDS (DEFICIT) SURPLUS
------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $ 2,000 $ 59,244 $ 750 $ (13,723) $ 48,271
Net income 5,543 5,543
Decrease in asset
valuation reserve 203 203
-----------------------------------------------------------------------
Balance, December 31,
1997 2,000 59,244 750 (7,977) 54,017
Net income 9,891 9,891
Increase in asset
valuation reserve (1,634) (1,634)
Dividend to shareholder (2,771) (2,771)
-----------------------------------------------------------------------
Balance, December 31,
1998 $ 2,000 $ 59,244 $ 750 $ (2,491) $ 59,503
-----------------------------------------------------------------------
-----------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
National Integrity Life Insurance Company
Statements of Cash Flows (Statutory Basis)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
-------------------------------------
(IN THOUSANDS)
<S> <C> <C>
OPERATIONS:
Premiums, policy proceeds, and other
considerations received $ 210,424 $ 223,170
Net investment income received 36,344 42,944
Commission and expense allowances received on
reinsurance ceded 8 8
Benefits paid (164,730) (139,316)
Insurance expenses paid (24,148) (22,090)
Other income received net of other expenses paid 4,368 2,335
Net transfers to separate accounts (66,100) (167,010)
Federal income taxes (4,670) (4,479)
-------------------------------------
Net cash used in operations (8,504) (64,438)
INVESTMENT ACTIVITIES:
Proceeds from sales, maturities, or repayments of investments:
Bonds 291,759 368,167
Preferred stocks 38,672 55,948
Mortgage loans 407 687
Other invested assets 8 -
Net gains on cash and short-term investments 64 -
Miscellaneous proceeds - 4,254
-------------------------------------
Total investment proceeds 330,910 429,056
Benefits received (taxes paid) on capital gains (1,407) 6,921
-------------------------------------
Net proceeds from sales, maturities, or repayments
of investments 329,503 435,977
Cost of investments acquired:
Bonds 232,584 337,887
Preferred stocks 26,322 26,621
Other invested assets - 3,794
Miscellaneous applications - 405
-------------------------------------
Total cost of investments acquired 258,906 368,707
Net increase in policy loans and premium notes 299 1,415
-------------------------------------
Net cash provided by investment activities 70,298 65,855
</TABLE>
6
<PAGE>
National Integrity Life Insurance Company
Statements of Cash Flows (Statutory Basis) (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
-------------------------------------
(IN THOUSANDS)
<S> <C> <C>
FINANCING AND MISCELLANEOUS ACTIVITIES:
Other cash provided:
Other sources 8,644 2,588
-------------------------------------
Total other cash provided 8,644 2,588
-------------------------------------
Other cash applied:
Dividends to shareholder 2,771 -
Other applications, net 861 6,497
-------------------------------------
Total other cash applied 3,632 6,497
-------------------------------------
Net cash provided by (used in) financing and
miscellaneous activities 5,012 (3,909)
-------------------------------------
Net increase (decrease) in cash and short-term investments 66,805 (2,492)
Cash and short-term investments at beginning of year 12,078 14,570
-------------------------------------
Cash and short-term investments at end of year $ 78,883 $ 12,078
-------------------------------------
-------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
7
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)
December 31, 1998
1. ORGANIZATION AND ACCOUNTING POLICIES
ORGANIZATION
National Integrity Life Insurance Company (the "Company") is a wholly owned
subsidiary of Integrity Life Insurance Company ("Integrity") which is an
indirect wholly owned subsidiary of ARM Financial Group, Inc. ("ARM"). ARM
acquired Integrity and the Company from The National Mutual Life Association of
Australasia Limited. The Company is domiciled in the state of New York. The
Company, currently licensed in eight states and the District of Columbia,
specializes in the growing asset accumulation business with particular emphasis
on retirement savings and investment products.
BASIS OF PRESENTATION
The accompanying financial statements of the Company have been prepared in
conformity with accounting practices prescribed or permitted by the New York
Insurance Department. Such practices vary from generally accepted accounting
principles ("GAAP"). The more significant variances from GAAP are as follows:
INVESTMENTS
Investments in bonds and preferred stocks are reported at amortized cost or
fair value based on the National Association of Insurance Commissioners
("NAIC") rating; for GAAP, such fixed maturity investments are designated
at purchase as held-to-maturity, trading or available-for-sale.
Held-to-maturity fixed investments are reported at amortized cost, and the
remaining fixed maturity investments are reported at fair value with
unrealized holding gains and losses reported in operations for those
designated as trading and as a separate component of shareholder's equity
for those designated as available-for-sale. In addition, fair values of
certain investments in bonds and stocks are based on values specified by
the NAIC, rather than on actual or estimated fair values used for GAAP.
Realized gains and losses are reported in income net of income tax and
transfers to the interest maintenance reserve. Changes between cost and
admitted investment asset amounts are credited or charged directly to
unassigned surplus rather than to a separate surplus account. The Asset
Valuation Reserve is determined by an NAIC prescribed formula and is
reported as a liability rather than unassigned surplus. Under a formula
8
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
prescribed by the NAIC, the Company defers the portion of realized gains
and losses on sales of fixed income investments, principally bonds and
mortgage loans, attributable to changes in the general level of interest
rates and amortizes those deferrals over the remaining period to maturity
of the individual security sold using the seriatim method. The net deferral
is reported as the Interest Maintenance Reserve in the accompanying balance
sheets. Under GAAP, realized gains and losses are reported in the income
statement on a pretax basis in the period that the asset giving rise to the
gain or loss is sold and include provisions when there has been a decline
in asset values deemed other than temporary.
POLICY ACQUISITION COSTS
Costs of acquiring and renewing business are expensed when incurred. Under
GAAP, acquisition costs related to investment-type products, to the extent
recoverable from future gross profits, are amortized generally in
proportion to the emergence of gross profits over the estimated term of the
underlying policies.
NONADMITTED ASSETS
Certain assets designated as "nonadmitted," principally receivables greater
than 90 days past due, are excluded from the accompanying balance sheets
and are charged directly to unassigned surplus.
PREMIUMS AND BENEFITS
Revenues include premiums and deposits received and benefits include death
benefits paid and the change in policy reserves. Under GAAP, such premiums
and deposits received are accounted for as a deposit liability and
therefore not recognized as premium revenue; benefits paid equal to the
policy account value are accounted for as a return of deposit instead of
benefit expense.
BENEFIT RESERVES
Certain policy reserves are calculated using statutorily prescribed
interest and mortality assumptions rather than on estimated expected
experience or actual account balances as would be required under GAAP.
9
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
FEDERAL INCOME TAXES
Deferred federal income taxes are not provided for differences between the
financial statement amounts and tax bases of assets and liabilities.
STATEMENT OF CASH FLOWS
Cash and short-term investments in the statement of cash flows represent
cash balances and investments with initial maturities of one year or less.
Under GAAP, the corresponding captions of cash and cash equivalents include
cash balances and investments with initial maturities of three months or
less.
The effects of the foregoing variances from GAAP on the accompanying statutory
basis financial statements are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Net income as reported in the accompanying statutory
basis financial statements $ 9,891 $ 5,543
Deferred policy acquisition costs, net of amortization 9,940 10,157
Adjustments to customer deposits (4,560) (5,781)
Adjustments to invested asset carrying values at acquisition date
(32) (38)
Amortization of value of insurance in force (539) (870)
Amortization of interest maintenance reserve (1,478) (1,359)
Adjustments for realized investment gains 3,646 1,511
Adjustments for federal income tax expense (5,200) (3,320)
Other (107) 166
------------------------------------
Net income, GAAP basis $ 11,561 $ 6,009
------------------------------------
------------------------------------
</TABLE>
10
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Capital and surplus as reported in the accompanying
statutory basis financial statements $ 59,503 $ 54,017
Adjustments to customer deposits (37,356) (32,825)
Adjustments to invested asset carrying values at acquisition date
77 94
Asset valuation reserve and interest maintenance reserve 11,646 8,799
Value of insurance in force 4,159 4,810
Deferred policy acquisition costs 43,497 33,902
Net unrealized gains (losses) on available-for-sale securities
(7,076) 5,849
Other 3,474 7,413
------------------------------------
Shareholder's equity, GAAP basis $ 77,924 $ 82,059
------------------------------------
------------------------------------
</TABLE>
Other significant accounting practices are as follows:
INVESTMENTS
Bonds, preferred stocks and short-term investments are stated at values
prescribed by the NAIC, as follows:
Bonds and short-term investments are reported at cost or amortized cost.
The discount or premium on bonds is amortized using the interest method.
For loan-backed bonds and structured securities, anticipated prepayments
are considered when determining the amortization of discount or premium.
Prepayment assumptions for loan-backed bonds and structured securities are
obtained from broker-dealer survey values or internal estimates. These
assumptions are consistent with the current interest rate and economic
environment. The retrospective adjustment method is used to value all such
securities.
11
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
Preferred stocks are reported at cost.
Short-term investments includes investments with maturities of less than
one year at the date of acquisition.
Mortgage loans and policy loans are reported at unpaid principal balances.
Realized capital gains and losses are determined using the average cost method.
BENEFITS
Life and annuity reserves are developed by actuarial methods and are determined
based on published tables using statutorily specified interest rates and
valuation methods that will provide, in the aggregate, reserves that are greater
than or equal to the minimum or guaranteed policy cash values or the amounts
required by the New York Insurance Department. The Company waives deduction of
deferred fractional premiums upon the death of life and annuity policy insureds
and does not return any premium beyond the date of death. Surrender values on
policies do not exceed the corresponding benefit reserve. Policies issued
subject to multiple table substandard extra premiums are valued on the standard
reserve basis which recognizes the non-level incidence of the excess mortality
costs. Additional reserves are established when the results of cash flow testing
under various interest rate scenarios indicate the need for such reserves.
Tabular interest, tabular less actual reserve released, and tabular cost have
been determined by formula as prescribed by the NAIC.
REINSURANCE
Reinsurance premiums, benefits and expenses are accounted for on bases
consistent with those used in accounting for the original policies issued and
the terms of the reinsurance contracts. Premiums, benefits and expenses, and the
reserves for policy and contract liabilities are reported net, rather than
gross, of reinsured amounts.
12
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
SEPARATE ACCOUNTS
Separate account assets and liabilities reported in the accompanying financial
statements represent funds that are separately administered, principally for
variable annuity contracts. Separate account assets are reported at fair value.
Surrender charges collectible by the general account in the event of variable
annuity contract surrenders are reported as a negative liability rather than an
asset pursuant to prescribed NAIC accounting practices. Policy related activity
involving cashflows, such as premiums and benefits, are reported in the
accompanying financial statements of income in separate line items combined with
related general account amounts. Investment income and interest credited on
deposits held in guaranteed separate accounts are included in the accompanying
statements of income as a net amount included in net transfers to (from)
separate accounts. The Company receives administrative fees for managing the
nonguaranteed separate accounts and other fees for assuming mortality and
certain expense risks. Such fees are included in other revenues.
USE OF ESTIMATES
The preparation of financial statements in compliance with statutory accounting
practices requires management to make estimates and assumptions that affect
amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
presentation of the 1998 financial statements. These reclassifications had no
effect on previously reported net income or surplus.
2. PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory basis financial statements are prepared in accordance
with accounting practices prescribed or permitted by the New York Insurance
Department. "Prescribed" statutory accounting practices include state laws,
regulations, and general administrative rules, as well as a variety of
publications of the NAIC. "Permitted" statutory accounting practices encompass
all accounting practices that are not prescribed; such practices may differ from
state to state, may differ from company to company within a state, and may
change in the future. In 1998, the NAIC adopted codified statutory accounting
practices ("Codification"). Codification will likely change, to some extent,
prescribed statutory accounting practices and may result in changes to the
accounting practices that the
13
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
2. PERMITTED STATUTORY ACCOUNTING PRACTICES (CONTINUED)
Company uses to prepare its statutory basis financial statements. Codification
will require adoption by the various states before it becomes the prescribed
statutory basis of accounting for insurance companies domesticated within those
states. Accordingly, before Codification becomes effective for the Company, New
York must adopt Codification as the prescribed basis of accounting on which
domestic insurers must report their statutory basis results to the Insurance
Department. At this time it is unclear whether New York will adopt Codification.
The Company is monitoring developments related to codification and assessing the
potential effects any changes would have on the Company's statutory basis
financial statements.
3. INVESTMENTS
The cost or amortized cost and the fair value of investments in bonds are
summarized as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
At December 31, 1998:
Mortgage-backed securities $ 184,619 $ - $ - $ 184,619
Corporate securities 129,725 3,426 7,681 125,470
Asset-backed securities 26,483 - - 26,483
U.S. Treasury securities and
obligations of U.S. government
agencies 2,489 112 - 2,601
Foreign governments 16,696 - 2,471 14,225
--------------------------------------------------------------------
Total bonds $ 360,012 $ 3,538 $ 10,152 $ 353,398
--------------------------------------------------------------------
--------------------------------------------------------------------
At December 31, 1997:
Mortgage-backed securities $ 193,688 $ - $ - $ 193,688
Corporate securities 159,208 4,074 34 163,248
Asset-backed securities 27,370 - - 27,370
U.S. Treasury securities and
obligations of U.S. government
agencies 24,361 1,083 2 25,442
Foreign governments 10,280 - 437 9,843
--------------------------------------------------------------------
Total bonds $ 414,907 $ 5,157 $ 473 $ 419,591
--------------------------------------------------------------------
--------------------------------------------------------------------
</TABLE>
14
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
3. INVESTMENTS (CONTINUED)
Fair values are based on published quotations of the Securities Valuation Office
of the NAIC. Fair values generally represent quoted market value prices for
securities traded in the public marketplace, or analytically determined values
using bid or closing prices for securities not traded in the public marketplace.
However, for certain investments for which the NAIC does not provide a value,
the Company uses the amortized cost amount as a substitute for fair value in
accordance with prescribed guidance. As of December 31, 1998 and 1997, the fair
value of investments in bonds includes $256.2 million and $306.8 million,
respectively, of bonds that were valued at amortized cost.
A summary of the cost or amortized cost and fair value of the Company's
investments in bonds at December 31, 1998, by contractual maturity, is as
follows:
<TABLE>
<CAPTION>
COST OR FAIR VALUE
AMORTIZED COST
------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Years to maturity:
One or less $ 200 $ 200
After one through five 27,253 26,920
After five through ten 20,769 19,437
After ten 100,689 95,740
Asset-backed securities 26,483 26,483
Mortgage-backed securities 184,618 184,618
------------------------------------
Total $ 360,012 $ 353,398
------------------------------------
------------------------------------
</TABLE>
The expected maturities in the foregoing table may differ from the contractual
maturities because certain borrowers have the right to call or prepay
obligations with or without call or prepayment penalties and because
asset-backed and mortgage-backed securities (including floating-rate securities)
provide for periodic payments throughout their life.
Proceeds from the sales of investments in bonds during 1998 and 1997 were $262.0
million and $375.5 million; gross gains of $5.6 million and $8.6 million, and
gross losses of $1.4 million and $8.3 million were realized on those sales,
respectively.
15
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
3. INVESTMENTS (CONTINUED)
At December 31, 1998 and 1997, bonds with an admitted asset value of $1,218,000
and $1,235,000, respectively, were on deposit with state insurance departments
to satisfy regulatory requirements.
The Company's mortgage loan portfolio is primarily comprised of agricultural
loans. The Company has made no new investments in mortgage loans since 1988. The
maximum percentage of any one loan to the value of the security at the time of
the loan exclusive of any purchase money mortgages was 75%. Fire insurance is
required on all properties covered by mortgage loans. As of December 31, 1998,
the Company held no mortgages with interest more than one year past due. During
1998, no interest rates of outstanding mortgage loans were reduced. No amounts
have been advanced by the Company.
Major categories of the Company's net investment income are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Income:
Bonds $ 31,054 $ 34,854
Preferred stocks 1,328 4,205
Mortgage loans 245 291
Policy loans 2,014 2,072
Cash and short-term investments 2,147 1,506
Other 279 (3)
------------------------------------
Total investment income 37,067 42,925
Investment expenses (656) (461)
Interest expense on repurchase agreements (334) -
------------------------------------
Net investment income $ 36,077 $ 42,464
------------------------------------
------------------------------------
</TABLE>
16
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
4. REINSURANCE
Consistent with prudent business practices and the general practice of the
insurance industry, the Company reinsures risks under certain of its insurance
products with other insurance companies through reinsurance agreements. Through
these reinsurance agreements substantially all mortality risks associated with
single premium endowment and variable annuity deposits and substantially all
risks associated with variable life business have been reinsured with
non-affiliated insurance companies. A contingent liability exists with respect
to insurance ceded which would become a liability should the reinsurer be unable
to meet the obligations assumed under these reinsurance agreements. Reinsurance
is not significant to the Company's premiums, benefits or policy and contract
liabilities.
The effect of reinsurance on premiums, annuity considerations and deposit-type
funds is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Direct premiums and amounts assessed against
policyholders $ 199,389 $ 210,910
Reinsurance assumed 11,757 12,770
Reinsurance ceded (723) (510)
------------------------------------
Net premiums, annuity considerations and deposit-type funds
$ 210,423 $ 223,170
------------------------------------
------------------------------------
</TABLE>
5. FEDERAL INCOME TAXES
The Company files a consolidated return with Integrity. The method of allocation
between the companies is based on separate return calculations with current
benefit taken for the use of the Company's losses and credits in the
consolidated return.
Income before income taxes differs from taxable income principally due to value
of insurance in force, interest maintenance reserves and differences in policy
and contract liabilities and investment income for tax and financial reporting
purposes.
17
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
6. SURPLUS
The ability of the Company to pay dividends is limited by state insurance laws.
Under New York insurance laws, the Company may pay dividends only out of its
earnings and surplus, subject to at least thirty days prior notice to the New
York Insurance Superintendent and no disapproval from the Superintendent prior
to the date of such dividend. The Superintendent may disapprove a proposed
dividend if the Superintendent finds that the financial condition of the Company
does not warrant such distribution.
The NAIC's Risk-Based Capital ("RBC") requirements attempt to evaluate the
adequacy of a life insurance company's adjusted statutory capital and surplus in
relation to investment, insurance and other business risks. The RBC formula is
used by the states as an early warning tool to identify possible
under-capitalized companies for the purpose of initiating regulatory action and
is not designed to be a basis for ranking the financial strength of insurance
companies. In addition, the formula defines a new minimum capital standard which
supplements the previous system of low fixed minimum capital and surplus
requirements. The RBC requirements provide for four different levels of
regulatory attention depending on the ratio of the company's adjusted capital
and surplus to its RBC. As of December 31, 1998 and 1997, the adjusted capital
and surplus of the Company is substantially in excess of the minimum level of
RBC that would require regulatory response.
18
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
7. ANNUITY RESERVES
At December 31, 1998 and 1997, the Company's general and separate account
annuity reserves and deposit fund liabilities that are subject to discretionary
withdrawal (with adjustment), subject to discretionary withdrawal without
adjustment, and not subject to discretionary withdrawal provisions are
summarized as follows:
<TABLE>
<CAPTION>
AMOUNT PERCENT
-------------------------------------
(IN THOUSANDS)
<S> <C> <C>
At December 31, 1998:
Subject to discretionary withdrawal (with adjustment):
With market value adjustment $ 221,118 20.0%
At book value less surrender charge of 5% or more 71,502 6.5
At market value 523,230 47.4
-------------------------------------
Total with adjustment or at market value 815,850 73.9
Subject to discretionary withdrawal (without adjustment)
at book value with minimal or no charge or adjustment 228,629 20.7
Not subject to discretionary withdrawal 60,076 5.4
-------------------------------------
Total annuity reserves and deposit fund liabilities (before
reinsurance) 1,104,555 100.0%
-----------------
-----------------
Less reinsurance ceded -
-------------------
Net annuity reserves and deposit fund liabilities $ 1,104,555
-------------------
-------------------
At December 31, 1997:
Subject to discretionary withdrawal (with adjustment):
With market value adjustment $ 219,464 22.9%
At book value less surrender charge of 5% or more 5,760 0.6
At market value 372,550 38.9
-------------------------------------
Total with adjustment or at market value 597,774 62.4
Subject to discretionary withdrawal (without adjustment)
at book value with minimal or no charge or adjustment 299,314 31.2
Not subject to discretionary withdrawal 61,448 6.4
-------------------------------------
Total annuity reserves and deposit fund liabilities (before
reinsurance) 958,536 100.0%
-----------------
-----------------
Less reinsurance ceded -
-------------------
Net annuity reserves and deposit fund liabilities $ 958,536
-------------------
-------------------
</TABLE>
19
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
8. SEPARATE ACCOUNTS
The Company's guaranteed separate accounts include non-indexed products and
options (i.e., guaranteed rate options). The guaranteed rate options are sold as
a fixed annuity product or as an investment option within the Company's variable
annuity products.
The Company's nonguaranteed separate accounts primarily include variable
annuities. The net investment experience of variable annuities is credited
directly to the policyholder and can be positive or negative.
Assets held in separate accounts are carried at estimated fair values.
Information regarding the separate accounts of the Company as of and for the
year ended December 31, 1998 is as follows:
<TABLE>
<CAPTION>
*NONINDEXED NONGUARANTEED
GUARANTEED MORE SEPARATE
THAN 4% ACCOUNTS TOTAL
--------------------------------------------------------
--------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Premiums, deposits and other considerations $ 9,330 $ 110,020 $ 119,350
--------------------------------------------------------
--------------------------------------------------------
Reserves for separate accounts with assets at
fair value $ 221,118 $ 523,363 $ 744,481
--------------------------------------------------------
--------------------------------------------------------
Reserves for separate accounts by withdrawal
characteristics:
Subject to discretionary withdrawal(with
adjustment):
With market value adjustment $ 221,118 $ - $ 221,118
At book value without market value
adjustment and with current surrender
charge of 5% or more - - -
At market value - 523,363 523,363
--------------------------------------------------------
Total with adjustment or at market value 221,118 523,363 744,481
Not subject to discretionary withdrawal - - -
--------------------------------------------------------
Total separate accounts reserves $ 221,118 $ 523,363 $ 744,481
--------------------------------------------------------
--------------------------------------------------------
</TABLE>
* Separate accounts with guarantees.
20
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
8. SEPARATE ACCOUNTS (CONTINUED)
A reconciliation of the amounts transferred to and from the separate accounts
for the years ended December 31, 1998 and 1997 is presented below:
<TABLE>
<CAPTION>
1998 1997
------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Transfers as reported in the Summary of Operations of
the Separate Accounts Statement:
Transfers to separate accounts $ 119,350 $ 211,743
Transfers from separate accounts (56,316) (47,948)
------------------------------------
Net transfers to separate accounts 63,034 163,795
Reconciling adjustments:
Other revenues 137 101
------------------------------------
Transfers as reported in the Summary of Operations of the Life,
Accident and Health Annual Statement $ 63,171 $ 163,896
------------------------------------
------------------------------------
</TABLE>
9. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosures of fair value
information about all financial instruments, including insurance liabilities
classified as investment contracts, unless specifically exempted. The fair value
of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. Accordingly, the aggregate fair value amounts presented do not
necessarily represent the underlying value of such instruments. For financial
instruments not separately disclosed below, the carrying amount is a reasonable
estimate of fair value.
21
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
9. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------------------------------------------------------------
CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE
-------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Bonds $ 360,012 $ 348,766 $ 414,907 $ 424,642
Preferred stocks 9,740 7,981 21,792 22,252
Mortgage loans 2,835 2,835 3,242 3,242
Liabilities:
Life and annuity reserves for
investment-type contracts $ 360,606 $ 359,972 $ 367,124 $ 367,374
Separate accounts annuity
reserves 744,349 733,365 592,018 576,877
</TABLE>
BONDS AND PREFERRED STOCKS
Fair values for bonds and preferred stocks are based on quoted market prices
where available. For bonds and preferred stocks for which a quoted market price
is not available, fair values are estimated using internally calculated
estimates or quoted market prices of comparable investments.
MORTGAGE LOANS
The carrying amount of mortgage loans approximates their fair value.
LIFE AND ANNUITY RESERVES FOR INVESTMENT-TYPE CONTRACTS
The fair value of single premium immediate annuity reserves are based on
discounted cash flow calculations using a market yield rate for assets with
similar durations. The fair value of deposit fund liabilities and the remaining
annuity reserves are based on the cash surrender value of the underlying
contracts.
SEPARATE ACCOUNTS ANNUITY RESERVES
The fair value of separate accounts annuity reserves for investment-type
products equals the cash surrender values.
22
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
10. RELATED PARTY TRANSACTIONS
Effective January 1, 1994, the Company entered into an Administrative Services
Agreement and an Investment Advisory Agreement with ARM. Under these agreements,
ARM performs certain administrative investment advisory and special services for
the Company to assist with its business operations. The services include
policyholder services; accounting, tax and auditing; underwriting; marketing and
product development; functional support services; payroll functions; personnel
functions; administrative support services; and investment functions. During
1998 and 1997, the Company was charged $8.6 million and $5.9 million,
respectively, for these services in accordance with the requirements of
applicable insurance law and regulations.
11. YEAR 2000 (UNAUDITED)
ARM has undertaken a Year 2000 project that includes all of its subsidiaries,
including the Company. ARM's Year 2000 compliance project, as it relates to the
Company, is provided for under the Investment Services Agreement and
Administrative Services Agreement between ARM and the Company. The cost of ARM's
Year 2000 initiatives is not expected to be material to ARM's results of
operations or financial condition. Likewise, any cost to the Company related to
Year 2000 compliance is not expected to be material to the Company's results of
operations or financial condition.
ARM has completed the assessment phase of the project for all production
applications, hardware (personal computers and servers), system software,
vendors and business partners. Although ARM is still receiving information from
a few vendors and business partners and assessing various logistic concerns with
its facilities, ARM's major production systems are substantially Year 2000
compliant. Where Year 2000 problems were found, the necessary upgrades and
repairs have begun and are scheduled for completion no later than May 31, 1999.
23
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
11. YEAR 2000 (UNAUDITED) (CONTINUED)
As well as assessing its facilities, ARM is also in the repair and certification
testing phase of its project. The testing phase will serve to verify the results
of repairs and assessments. Steps needed to correct any problems uncovered
during testing will begin immediately at that time. ARM's Year 2000 project is
well underway and because management believes that it will be Year 2000
compliant by May 31, 1999, it currently has no contingency plans for system
issues in place beyond its normal disaster recovery procedures. As a precaution,
ARM is developing a contingency and business resumption plan to address various
logistic concerns with its facilities. The contingency and business resumption
plan is scheduled for completion no later than September 30, 1999.
Although ARM anticipates no major interruption of business activities, that will
depend, in part, upon the activity of third parties. Even though ARM has
assessed and continues to assess third party issues, it has no direct ability to
influence the compliance actions of such parties. Accordingly, while ARM
believes its actions in this regard should have the effect of reducing Year 2000
risks, it is unable to eliminate them or to estimate the ultimate effect Year
2000 risks will have on the Company's operations.
The estimated date on which ARM believes it will complete its Year 2000
compliance efforts, and the expenses related to ARM's Year 2000 compliance
efforts are based upon management's best estimates, which were based on
assumptions of future events, including the availability of certain resources,
third party modification plans and other factors. There can be no assurance that
these results and estimates will be achieved, and the actual results could
materially differ from those anticipated.
24
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS INCLUDED IN PART A:
Part 1 - Financial Information
FINANCIAL STATEMENTS INCLUDED IN PART B:
SEPARATE ACCOUNT II:
Report of Independent Auditors
Statement of Assets and Liabilities as of December 31, 1998
Statement of Operations for the Year Ended December 31, 1998
Statements of Changes in Net Assets for the Years Ended December 31,
1998 and 1997
Notes to Financial Statements
NATIONAL INTEGRITY LIFE INSURANCE COMPANY:
Report of Independent Auditors
Balance Sheets (Statutory Basis) as of December 31, 1998 and 1997
Statements of Income (Statutory Basis) for the Years Ended
December 31, 1998 and 1997
Statements of Changes in Capital and Surplus (Statutory Basis) for the
Years Ended
December 31, 1998 and 1997
Statements of Cash Flows (Statutory Basis) for the Years Ended
December 31, 1998 and 1997
Notes to Financial Statements (Statutory Basis)
(b) EXHIBITS:
The following exhibits are filed herewith:
1. Resolutions of the Board of Directors of National Integrity
Life Insurance Company (NATIONAL INTEGRITY) and
Certification of Chief Executive Officer authorizing the
establishment of the Separate Account II, the Registrant.
Incorporated by reference from Registrant's registration
statement filed on August 20, 1992.
2. Not applicable.
3.(a) Form of Selling/General Agent Agreement among National
Integrity, Integrity Financial Services, Inc. (IFS) and
Painewebber Incorporated, incorporated by reference to
Pre-Effective Amendment No. 1 to Registrant's registration
statement on Form N-4 filed October 23, 1992.
3.(b) Form of Variable Contract Principal Underwriter Agreement
with ARM Securities Corporation. Incorporated by reference
from Registrant's registration statement (File No. 33-51126)
filed on May 1, 1996.
4.(a) Form of trust agreement. Incorporated by reference from
Registrant's registration statement filed on August 20,
1992.
4.(b) Form of group variable annuity contract. Incorporated by
reference from Form N-4 registration statement (File No.
33-56658).
4.(c) Form of variable annuity certificate. Incorporated by
reference from Form N-4 registration
1
<PAGE>
statement (File No. 33-56658).
4.(d) Form of riders to certificate for qualified plans.
Incorporated by reference from pre-effective amendment no. 1
to Registrant's registration statement filed on October 23,
1992.
5. Form of application. Incorporated by reference from
post-effective amendment no.1to Registrant's Form S-1
registration statement (File No. 33-51122).
6.(a) Certificate of Incorporation of National Integrity.
Incorporated by reference from
Registrant's Form N-4 registration statement (File No. 33-33119).
6.(b) By-Laws of National Integrity. Incorporated by reference to
Registrant's Form N-4 registration statement (File No.
33-33119).
7.(a) Reinsurance Agreement between National Integrity and
Connecticut General Life Insurance Company (CIGNA).
Incorporated by reference to Registrant's Form N-4
registration statement (File No. 33-51126), filed on April
28, 1995.
7.(b) Reinsurance Agreement between National Integrity and
Connecticut General Life Insurance Company (CIGNA) effective
January 1, 1995. Incorporated by reference from
Registrant's registration statement (File No. 33-51126)
filed on May 1, 1996.
8.(a) Form of Participation Agreement among Integrity Series Fund,
Inc., National Integrity and IFS incorporated by reference
to Registrant's registration statement on Form N-4 filed
August 20, 1992.
8.(b) Participation Agreement Among Variable Insurance Products
Fund, Fidelity Distributors Corporation ("FDC") and National
Integrity, dated November 20, 1990. Incorporated by
reference from post-effective amendment no. 5 to Form N-4
registration statement of Separate Account I of National
Integrity (File No. 33-8905), filed on March 2, 1992.
8.(c) Participation Agreement Among Variable Insurance Products
Fund II, FDC and National Integrity, dated November 20,
1990. Incorporated by reference from post-effective
amendment no. 5 to Form N-4 registration statement of
Separate Account I of National Integrity (File No. 33-8905),
filed on March 2, 1992.
8.(d) Amendment No. 1 to Participation Agreements Among Variable
Insurance Products Fund, Variable Insurance Products Fund
II, FDC, and National Integrity. Incorporated by reference
from Form N-4 registration statement of Separate Account I
of National Integrity (File No. 33-56658), filed on May 1,
1996.
8.(e) Participation Agreement Among Variable Insurance Products
Fund III, FDC and National Integrity. Incorporated by
reference from Form N-4 registration statement of Separate
Account I of National Integrity (File No. 33-56658) filed on
May 6, 1998.
8.(f) Form of Participation Agreement Among BT Insurance Funds
Trust, Bankers Trust Company and National Integrity.
8.(g) Form of Participation Agreement Among Insurance Series,
Federated Securities Corp. and National Integrity.
8.(h) Form of Participation Agreement Between Janus Aspen Series
and National Integrity.
8.(i) Form of Participation Agreement Between JPM Series Trust II
and National Integrity.
8.(j) Form of Participation Agreement Between Morgan Stanley
Universal Funds, Inc., Morgan Stanley Asset Management Inc.,
Miller Anderson & Sherrerd, LLP and Integrity.
2
<PAGE>
8.(k) Form of Participation Agreement Between Select Ten Plus,
LLC, National Integrity and ARM Securities Corporation.
9. Opinion and Consent of Kevin L. Howard. Incorporated by
reference to Registrant's Form N-4 registration statement
(File No. 33-51126), filed on October 22, 1997.
10. Consents of Ernst & Young LLP
11. Not applicable.
12. Not applicable.
13. Schedule for computation of performance quotations.
Incorporated by reference from Registrant's registration
statement (File No. 33-51126) filed on May 1, 1996.
14. Not applicable.
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
Set forth below is information regarding the directors and
principal officers of National Integrity, the Depositor.
DIRECTORS:
Name and Principal Position and Offices with
Business Address National Integrity
- ------------------ -------------------------
David F. Babbel Director
The Wharton School at the
University of Pennsylvania
2300 Steinberg Hall - Dietrich Hall
Philadelphia, PA 19104
Dennis L. Carr Director, Executive Vice President
and
ARM Financial Group Inc. Chief Actuary
515 West Market Street
Louisville, KY 40202
Daniel J. Downing Director
National Integrity Life Insurance Company
15 Matthews Street, Suite 200
Goshen, NY 10924
Dudley J. Godfrey, Jr. Director
Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, Wisconsin 53202-3590
Donald B. Henderson, Jr. Director
LeBoeuf, Lamb, Greene & MacRae
125 West 55th Street
New York, New York 10019-4513
Michael F. Holland Director
Holland & Company, L.L.C.
375 Park Avenue
New York, NY 10152
3
<PAGE>
Mark V. Kaminski Director
Commonwealth Industries
500 West Jefferson Street
Citizens Plaza
Louisville, KY 40202
Edward D. Powers Director
6064 Shipyard Lane
Easton, Maryland 21601
Colin F. Raymond Director
Morgan Stanley & Company, Inc.
1221 Avenue of the Americas
New York, New York 10020
Martin H. Ruby Director, Chairman of the Board and
ARM Financial Group Inc. Chief
515 West Market Street Executive Officer
Louisville, Kentucky 40202
4
<PAGE>
Irwin T. Vanderhoof Director
18 Two Bridges Road
Towaco, New Jersey
John R. Lindholm Director and President
ARM Financial Group, Inc.
515 West Market Street
Louisville, Kentucky 40202
Edward L. Zeman Director, Executive Vice President
and
ARM Financial Group, Inc. Chief
515 West Market Street Financial Officer
Louisville, Kentucky 40202
SELECTED OFFICERS: (The business address for each of the principal officers
listed below is 515 West Market Street, Louisville, Kentucky
40202.)
<TABLE>
<CAPTION>
Name and Principal Business Address Position and Offices with National Integrity
- ----------------------------------- --------------------------------------------
<S> <C>
John R. McGeeney Executive Vice President, General Counsel
David E. Ferguson Executive Vice President and Chief Technology Officer
Michael A. Cochran Tax Officer
Peter S. Resnik Treasurer
Barry G. Ward Controller
</TABLE>
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH NATIONAL INTEGRITY
OR REGISTRANT
National Integrity, the depositor of Separate Account II, is a wholly owned
subsidiary of Integrity Life Insurance Company, an Ohio stock life insurance
corporation. Integrity Life Insurance Company is a wholly owned subsidiary of
Integrity Holdings, Inc., a Delaware corporation which is a holding company
engaged in no active business. All outstanding shares of Integrity Holdings,
Inc. are owned by ARM Financial Group, Inc. (ARM), a Delaware corporation which
is a financial services company focusing on the long-term savings and retirement
marketplace by providing retail and institutional products and services
throughout the United States. ARM owns 100% of the stock of (i) ARM Securities
Corporation (ARM SECURITIES), a Minnesota corporation registered with the SEC as
a broker-dealer and a member of the National Association of Securities Dealers,
Inc., (ii) Integrity Capital Advisors, Inc., a New York corporation registered
with the SEC as an investment adviser, (iii) SBM Certificate Company, a
Minnesota corporation registered with the SEC as an issuer of face-amount
certificates, and (iv) ARM Transfer Agency, Inc., a Delaware corporation
registered with the SEC as a transfer and disbursing agency.
In June 1997, ARM Financial completed an initial public offering (the
"IPO") of 9.2 million shares of common stock, of which 5.75 million shares were
sold by ARM Financial and 3.45 million shares were sold by investment funds
sponsored by Morgan Stanley, Dean Witter, Discover & Co. (the "MSDW Funds").
Following the IPO, the MSDW Funds owned in the aggregate approximately 53% of
the outstanding shares of common stock of ARM Financial. On May 8, 1998, the
MSDW Funds sold their entire remaining interest in ARM Financial pursuant to a
secondary public offering of shares of common stock. As a result, ARM Financial
is 100% publicly owned.
ITEM 27. NUMBER OF CONTRACT OWNERS
As of January 31, 1998 there were 1,750 contract owners of Separate Account
II of National Integrity.
5
<PAGE>
ITEM 28. INDEMNIFICATION
BY-LAWS OF NATIONAL INTEGRITY. National Integrity's By-Laws provide, in Article
VII, as follows:
7.1 INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND INCORPORATORS.
To the extent permitted by the law of the State of New York and subject to all
applicable requirements thereof:
(a) any person made or threatened to be made a party to any action or
proceeding, whether civil or criminal, by reason of the fact that he, his
testator or intestate, is or was a director, officer, employee or
incorporator of the Company shall be indemnified by the Company;
(b) any person made or threatened to be made a party to any action or
proceeding, whether civil or criminal, by reason of the fact that he, his
testator or intestate serves or served any other organization in any
capacity at the request of the Company may be indemnified by the Company;
and
(c) the related expenses of any such person in any other of said
categories may be advanced by the Company.
BY-LAWS OF ARM SECURITIES. ARM Securities' By-Laws provide, in Sections 4.01
and 4.02, as follows:
SECTION 4.01 INDEMNIFICATION. The Corporation shall indemnify its
officers and directors for such expenses and liabilities, in such manner, under
such circumstances, and to such extent, as required or permitted by Minnesota
Statutes, Section 302A.521, as amended from time to time, or as required or
permitted by other provisions of law.
SECTION 4.02 INSURANCE. The Corporation may purchase and maintain
insurance on behalf of any person in such person's official capacity against any
liability asserted against and incurred by such person in or arising from that
capacity, whether or not the Corporation would otherwise be required to
indemnify the person against the liability.
AGREEMENTS. National Integrity and ARM Securities, including each director,
officer, and controlling person of National Integrity and ARM Securities, are
entitled to indemnification against certain liabilities as described in Sections
5.2, 5.3 and 5.5 of the Selling Agreement and Section 9 of the Form of Variable
Contract Selling Agreement incorporated as Exhibit 3(a) to this Registration
Statement. Those sections are incorporated by reference into this response. In
addition, National Integrity and ARM Securities, including each director,
officer and controlling person of National Integrity and ARM Securities, are
entitled to indemnification against certain liabilities as described in Article
VIII of the Participation Agreements incorporated as Exhibits 8(a) and 8(b) to
this Registration Statement. That article is incorporated by reference into
this response. Certain officers and directors of National Integrity are
officers and directors of ARM Securities (see Item 25 and Item 29 of this Part
C).
INSURANCE. The directors and officers of National Integrity and ARM Securities
are insured under a policy, issued by National Union. The total annual limit on
such policy is $10 million, and the policy insures the officers and directors
against certain liabilities arising out of their conduct in such capacities.
UNDERTAKING. Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
6
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) ARM Securities is the principal underwriter for Separate Account
II. ARM Securities also serves as an underwriter for Separate Account I of
National Integrity, Separate Accounts I and II of Integrity, and The Legends
Fund, Inc. National Integrity is the Depositor of Separate Accounts I, II and
VUL.
(b) The names and business addresses of the officers and directors
of, and their positions with, ARM Securities, are as follows:
Name and Principal Business Address Position and Offices with Arm Securities
- ----------------------------------- ----------------------------------------
Edward J. Haines Director and President
515 West Market Street
Louisville, Kentucky 40202
John R. McGeeney Director, Secretary, General Counsel and
Compliance Officer
515 West Market Street
Louisville, Kentucky 40202
Peter S. Resnik Treasurer
515 West Market Street
Louisville, Kentucky 40202
Dale C. Bauman Vice President
100 North Minnesota Street
New Ulm, Minnesota 56073
Robert Bryant Vice President
1550 East Shaw #120
Fresno, California 93710
Ronald Geiger Vice President
100 North Minnesota Street
New Ulm, Minnesota 56073
Barry G. Ward Controller
515 West Market Street
Louisville, Kentucky 40202
Michael A. Cochran Tax Officer
515 West Market Street
Louisville, Kentucky 40202
William H. Guth Operations Officer
515 West Market Street
Louisville, Kentucky 40202
David L. Anders Marketing Officer
515 West Market Street
Louisville, Kentucky 40202
(c) Not applicable.
7
<PAGE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The records required to be maintained by Section 31(a) of the Investment
Company Act of 1940 and Rules 31a-1 to 31a-3 promulgated thereunder, are
maintained by National Integrity at 515 West Market Street, Louisville, Kentucky
40202 or 15 Matthews Street, Suite 200, Goshen, New York 10924.
ITEM 31. MANAGEMENT SERVICES
The contract under which management-related services are provided to
National Integrity is discussed under Part 1 of Part B.
ITEM 32. UNDERTAKINGS
The Registrant hereby undertakes:
(a) to file a post-effective amendment to this registration statement
as frequently as is necessary to ensure that the audited financial
statements in the registration statement are never more than 16 months
old for so long as payments under the variable annuity contracts may
be accepted;
(b) to include either (1) as part of any application to purchase a
contract offered by the prospectus, a space that an applicant can
check to request a Statement of Additional Information, or (2) a
postcard or similar written communication affixed to or included in
the prospectus that the applicant can remove to send for a Statement
of Additional Information; and
(c) to deliver any Statement of Additional Information and any
financial statements required to be made available under this Form
promptly upon written or oral request.
National Integrity represents that aggregate charges under variable annuity
contracts described in this Registration Statement are reasonable in relation to
the services rendered, the expenses expected to be incurred, and the risks
assumed by National Integrity.
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant and the Depositor have duly caused this amendment to the
Registration Statement to be signed on their behalf, in the City of Louisville
and State of Kentucky on the 21st day of April, 1999.
SEPARATE ACCOUNT II OF
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
(Registrant)
By: National Integrity Life Insurance Company
(Depositor)
By: /s/ John R. Lindholm
------------------------------------
John R. Lindholm
President
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
(Depositor)
By: /s/ John R. Lindholm
--------------------
John R. Lindholm
President
8
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Depositor has duly caused this amendment to the Registration Statement
to be signed on its behalf, in the City of Louisville and State of Kentucky on
this 21st day of April, 1999
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
(Depositor)
By: /s/ John R. Lindholm
--------------------
John R. Lindholm
President
As required by the Securities Act of 1933, this amendment to the Registration
Statement has been signed by the following persons in the capacities and on the
date indicated.
PRINCIPAL EXECUTIVE OFFICER: /s/ John R. Lindholm
--------------------
John R. Lindholm, President
Date: 04/21/99
PRINCIPAL FINANCIAL OFFICER: /s/ Edward L. Zeman
--------------------
Edward L. Zeman, Executive Vice President-
Chief Financial Officer
Date: 04/21/99
PRINCIPAL ACCOUNTING OFFICER: /s/ Barry G. Ward
------------------------
Barry G. Ward, Controller
Date: 04/21/99
DIRECTORS:
/s/ John R. Lindholm /s/ Edward L. Zeman
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John R. Lindholm Edward L. Zeman
Date: 04/21/99 Date: 04/21/99
/s/ Martin H. Ruby /s/ Donald B. Henderson, Jr.
- ------------------------------- -------------------------------
Martin H. Ruby Donald B. Henderson, Jr.
Date: 04/21/99 Date: 04/21/99
/s/ Irwin T. Vanderhoof /s/ Edward D. Powers
- ------------------------------- -------------------------------
Irwin T. Vanderhoof Edward D. Powers
Date: 04/21/99 Date: 04/21/99
/s/ Dudley J. Godfrey, Jr. /s/ David F. Babbel
- ------------------------------- -------------------------------
Dudley J. Godfrey, Jr. David F. Babbel
Date: 04/21/99 Date: 04/21/99
/s/ Dennis L. Carr /s/ Daniel J. Downing
- ------------------------------- -------------------------------
Dennis L. Carr Daniel J. Downing
Date: 04/21/99 Date: 04/21/99
/s/ Michael F. Holland /s/ Mark V. Kaminski
- ------------------------------- -------------------------------
Michael F. Holland Mark V. Kaminski
Date: 04/21/99 Date: 04/21/99
/s/ Colin F. Raymond
- -------------------------------
Colin F. Raymond
Date: 04/21/99
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Exhibit Index
8.(f) Form of Participation Agreement Among BT Insurance Funds
Trust, Bankers Trust Company and National Integrity.
8.(g) Form of Participation Agreement Among Insurance Series,
Federated Securities Corp. and National Integrity.
8.(h) Form of Participation Agreement Between Janus Aspen Series
and National Integrity.
8.(i) Form of Participation Agreement Between JPM Series Trust II
and National Integrity.
8.(j) Form of Participation Agreement Between Morgan Stanley
Universal Funds, Inc., Morgan Stanley Asset Management Inc.,
Miller Anderson & Sherrerd, LLP and Integrity.
8.(k) Form of Participation Agreement Between Select Ten Plus,
LLC, National Integrity and ARM Securities Corporation.
10. Consents of Ernst & Young LLP
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FUND PARTICIPATION AGREEMENT
THIS AGREEMENT made as of the ____ day of _____________, 199__ by and among
BT Insurance Funds Trust ("TRUST"), a Massachusetts business trust, Bankers
Trust Company ("ADVISER"), a New York banking corporation, and ______________
("LIFE COMPANY"), a life insurance company organized under the laws of the State
of _____________.
WHEREAS, TRUST is registered with the Securities and Exchange Commission
("SEC") under the Investment Company Act of 1940, as amended (the "'40 Act"), as
an open-end, diversified management investment company; and
WHEREAS, TRUST is comprised of several series funds (each a "Portfolio"),
with those Portfolios currently available being listed on Appendix A hereto; and
WHEREAS, TRUST was organized to act as the funding vehicle for certain
variable life insurance and/or variable annuity contracts ("Variable Contracts")
offered by life insurance companies through separate accounts ("Separate
Accounts") of such life insurance companies ("Participating Insurance
Companies"); and
WHEREAS, TRUST may also offer its shares to certain qualified pension and
retirement plans ("Qualified Plans"); and
WHEREAS, TRUST has received an order from the SEC, granting Participating
Insurance Companies and their separate accounts exemptions from the provisions
of Sections 9(a), 13(a), 15(a) and 15(b) of the '40 Act, and Rules 6e-2(b)(15)
and 6e-3(T)(b)(15) thereunder, to the extent necessary to permit shares of the
Portfolios of the TRUST to be sold to and held by Variable Contract Separate
Accounts of both affiliated and unaffiliated Participating Insurance Companies
and Qualified Plans ("Exemptive Order"); and
WHEREAS, LIFE COMPANY has established or will establish one or more
Separate Accounts to offer Variable Contracts and is desirous of having TRUST as
one of the underlying funding vehicles for such Variable Contracts; and
WHEREAS, ADVISER is a "bank" as defined in the Investment Advisers Act of
1940, as amended (the "Advisers Act") and as such is excluded from the
definition of "Investment Adviser" and is not required to register as an
investment adviser pursuant to the Advisers Act; and
WHEREAS, ADVISER serves as the TRUST's investment adviser; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, LIFE COMPANY intends to purchase shares of TRUST to fund the
aforementioned Variable Contracts and TRUST is authorized to sell such shares to
LIFE COMPANY at such shares' net asset value;
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NOW, THEREFORE, in consideration of their mutual promises, LIFE COMPANY,
TRUST, and ADVISER agree as follows:
Article I. SALE OF TRUST SHARES
1.1 TRUST agrees to make available to the Separate Accounts of LIFE
COMPANY shares of the selected Portfolios as listed on Appendix B for investment
of purchase payments of Variable Contracts allocated to the designated Separate
Accounts as provided in TRUST's Registration Statement.
1.2 TRUST agrees to sell to LIFE COMPANY those shares of the selected
Portfolios of TRUST which LIFE COMPANY orders, executing such orders on a daily
basis at the net asset value next computed after receipt by TRUST or its
designee of the order for the shares of TRUST. For purposes of this Section
1.2, LIFE COMPANY shall be the designee of TRUST for receipt of such orders from
the designated Separate Account and receipt by such designee shall constitute
receipt by TRUST; provided that LIFE COMPANY receives the order by 4:00 p.m. New
York time and TRUST receives notice from LIFE COMPANY by telephone or facsimile
(or by such other means as TRUST and LIFE COMPANY may agree in writing) of such
order by 8:00 a.m. New York time on the next Business Day. "Business Day"
shall mean any day on which the New York Stock Exchange is open for trading and
on which TRUST calculates its net asset value pursuant to the rules of the SEC.
1.3 TRUST agrees to redeem on LIFE COMPANY's request, any full or
fractional shares of TRUST held by LIFE COMPANY, executing such requests on a
daily basis at the net asset value next computed after receipt by TRUST or its
designee of the request for redemption, in accordance with the provisions of
this Agreement and TRUST's Registration Statement. (In the event of a conflict
between the provisions of this Agreement and the Trust's Registration Statement,
the provisions of the Registration Statement shall govern.) For purposes of
this Section 1.3, LIFE COMPANY shall be the designee of TRUST for receipt of
requests for redemption from the designated Separate Account and receipt by such
designee shall constitute receipt by TRUST; provided that LIFE COMPANY receives
the request for redemption by 4:00 p.m. New York time and TRUST receives notice
from LIFE COMPANY by telephone or facsimile (or by such other means as TRUST and
LIFE COMPANY may agree in writing) of such request for redemption by 9:00 a.m.
New York time on the next Business Day.
1.4 TRUST shall furnish, on or before each ex-dividend date, notice to
LIFE COMPANY of any income dividends or capital gain distributions payable on
the shares of any Portfolio of TRUST. LIFE COMPANY hereby elects to receive all
such income dividends and capital gain distributions as are payable on a
Portfolio's shares in additional shares of the Portfolio. TRUST shall notify
LIFE COMPANY or its designee of the number of shares so issued as payment of
such dividends and distributions.
1.5 TRUST shall make the net asset value per share for the selected
Portfolio(s) available to LIFE COMPANY on a daily basis as soon as reasonably
practicable after the net asset value per share is calculated but shall use its
best efforts to make such net asset value available by 6:30
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p.m. New York time. If TRUST provides LIFE COMPANY with materially incorrect
share net asset value information through no fault of LIFE COMPANY, LIFE COMPANY
on behalf of the Separate Accounts, shall be entitled to an adjustment to the
number of shares purchased or redeemed to reflect the correct share net asset
value. Any material error in the calculation of net asset value per share,
dividend or capital gain information shall be reported promptly upon discovery
to LIFE COMPANY.
1.6 At the end of each Business Day, LIFE COMPANY shall use the
information described in Section 1.5 to calculate Separate Account unit values
for the day. Using these unit values, LIFE COMPANY shall process each such
Business Day's Separate Account transactions based on requests and premiums
received by it by the close of trading on the floor of the New York Stock
Exchange (currently 4:00 p.m. New York time) to determine the net dollar amount
of TRUST shares which shall be purchased or redeemed at that day's closing net
asset value per share. The net purchase or redemption orders so determined
shall be transmitted to TRUST by LIFE COMPANY by 8:00 a.m. New York Time on the
Business Day next following LIFE COMPANY's receipt of such requests and premiums
in accordance with the terms of Sections 1.2 and 1.3 hereof.
1.7 If LIFE COMPANY's order requests the purchase of TRUST shares, LIFE
COMPANY shall pay for such purchase by wiring federal funds to TRUST or its
designated custodial account on the day the order is transmitted by LIFE
COMPANY. If LIFE COMPANY's order requests a net redemption resulting in a
payment of redemption proceeds to LIFE COMPANY, TRUST shall use its best efforts
to wire the redemption proceeds to LIFE COMPANY by the next Business Day, unless
doing so would require TRUST to dispose of Portfolio securities or otherwise
incur additional costs. In any event, proceeds shall be wired to LIFE COMPANY
within the time period permitted by the '40 Act or the rules, orders or
regulations thereunder, and TRUST shall notify the person designated in writing
by LIFE COMPANY as the recipient for such notice of such delay by 3:00 p.m. New
York Time on the same Business Day that LIFE COMPANY transmits the redemption
order to TRUST. If LIFE COMPANY's order requests the application of redemption
proceeds from the redemption of shares to the purchase of shares of another Fund
advised by ADVISER, TRUST shall so apply such proceeds on the same Business Day
that LIFE COMPANY transmits such order to TRUST.
1.8 TRUST agrees that all shares of the Portfolios of TRUST will be sold
only to Participating Insurance Companies which have agreed to participate in
TRUST to fund their Separate Accounts and/or to Qualified Plans, all in
accordance with the requirements of Section 817(h)(4) of the Internal Revenue
Code of 1986, as amended ("Code") and Treasury Regulation 1.817-5. Shares of the
TRUST's Portfolios will not be sold directly to the general public.
1.9 TRUST may refuse to sell shares of any Portfolio to any person, or
suspend or terminate the offering of the shares of or liquidate any Portfolio of
TRUST if such action is required by law or by regulatory authorities having
jurisdiction or is, in the sole discretion of the Board of Trustees of the TRUST
(the "Board"), acting in good faith and in light of its duties under federal and
any applicable state laws, deemed necessary, desirable or appropriate and in the
best interests of the shareholders of such Portfolios.
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1.10 Issuance and transfer of Portfolio shares will be by book entry only.
Stock certificates will not be issued to LIFE COMPANY or the Separate Accounts.
Shares ordered from Portfolio will be recorded in appropriate book entry titles
for the Separate Accounts.
Article II. REPRESENTATIONS AND WARRANTIES
2.1 LIFE COMPANY represents and warrants that it is an insurance company
duly organized and in good standing under the laws of ___________________ and
that it has legally and validly established each Separate Account as a
segregated asset account under such laws, and that ___________________, the
principal underwriter for the Variable Contracts, is registered as a
broker-dealer under the Securities Exchange Act of 1934 (the "'34 Act").
2.2 LIFE COMPANY represents and warrants that it has registered or, prior
to any issuance or sale of the Variable Contracts, will register each Separate
Account as a unit investment trust ("UIT") in accordance with the provisions of
the '40 Act and cause each Separate Account to remain so registered to serve as
a segregated asset account for the Variable Contracts, unless an exemption from
registration is available.
2.3 LIFE COMPANY represents and warrants that the Variable Contracts will
be registered under the Securities Act of 1933 (the "'33 Act") unless an
exemption from registration is available prior to any issuance or sale of the
Variable Contracts, and that the Variable Contracts will be issued and sold in
compliance in all material respects with all applicable federal and state laws
(including all applicable blue sky laws) and further that the sale of the
Variable Contracts shall comply in all material respects with applicable state
insurance law suitability requirements.
2.4 LIFE COMPANY represents and warrants that the Variable Contracts are
currently and at the time of issuance will be treated as life insurance,
endowment or annuity contracts under applicable provisions of the Code, that it
will maintain such treatment and that it will notify TRUST immediately upon
having a reasonable basis for believing that the Variable Contracts have ceased
to be so treated or that they might not be so treated in the future.
2.5 TRUST represents and warrants that the Fund shares offered and sold
pursuant to this Agreement will be registered under the '33 Act and sold in
accordance with all applicable federal laws, and TRUST shall be registered under
the '40 Act prior to and at the time of any issuance or sale of such shares.
TRUST, subject to Section 1.9 above, shall amend its registration statement
under the '33 Act and the '40 Act from time to time as required in order to
effect the continuous offering of its shares. TRUST shall register and qualify
its shares for sale in accordance with the laws of the various states only if
and to the extent deemed advisable by TRUST.
2.6 TRUST represents and warrants that each Portfolio will comply with the
diversification requirements set forth in Section 817(h) of the Code, and the
rules and regulations thereunder, including without limitation Treasury
Regulation 1.817-5, and will notify LIFE COMPANY immediately upon having a
reasonable basis for believing any Portfolio has ceased to comply and
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will immediately take all reasonable steps to adequately diversify the Portfolio
to achieve compliance.
2.7 TRUST represents and warrants that each Portfolio invested in by the
Separate Account will be treated as a "regulated investment company" under
Subchapter M of the Code, and will notify LIFE COMPANY immediately upon having a
reasonable basis for believing it has ceased to so qualify or might not so
qualify in the future.
2.8 ADVISER represents and warrants that it shall perform its obligations
hereunder in compliance in all material respects with any applicable state and
federal laws.
Article III. PROSPECTUS AND PROXY STATEMENTS
3.1 TRUST shall prepare and be responsible for filing with the SEC and any
state regulators requiring such filing all shareholder reports, notices, proxy
materials (or similar materials such as voting instruction solicitation
materials), prospectuses and statements of additional information of TRUST.
TRUST shall bear the costs of registration and qualification of shares of the
Portfolios, preparation and filing of the documents listed in this Section 3.1
and all taxes and filing fees to which an issuer is subject on the issuance and
transfer of its shares.
3.2 TRUST or its designee shall provide LIFE COMPANY, free of charge,
with as many copies of the current prospectus (or prospectuses), statements
of additional information, annual and semi-annual reports and proxy
statements for the shares of the Portfolios as LIFE COMPANY may reasonably
request for distribution to existing Variable Contract owners whose Variable
Contracts are funded by such shares. TRUST or its designee shall provide LIFE
COMPANY, at LIFE COMPANY's expense, with as many copies of the current
prospectus (or prospectuses) for the shares as LIFE COMPANY may reasonably
request for distribution to prospective purchasers of Variable Contracts. If
requested by LIFE COMPANY, TRUST or its designee shall provide such
documentation (including a "camera ready" copy of the current prospectus (or
prospectuses) as set in type or, at the request of LIFE COMPANY, as a
diskette in the form sent to the financial printer) and other assistance as
is reasonably necessary in order for the parties hereto once a year (or more
frequently if the prospectus (or prospectuses) for the shares is supplemented
or amended) to have the prospectus for the Variable Contracts and the
prospectus (or prospectuses) for the TRUST shares printed together in one
document. The expenses of such printing will be apportioned between LIFE
COMPANY and TRUST in proportion to the number of pages of the Variable
Contract and TRUST prospectus, taking account of other relevant factors
affecting the expense of printing, such as covers, columns, graphs and
charts; TRUST shall bear the cost of printing the TRUST prospectus portion of
such document for distribution only to owners of existing Variable Contracts
funded by the TRUST shares and LIFE COMPANY shall bear the expense of
printing the portion of such documents relating to the Separate Account;
provided, however, LIFE COMPANY shall bear all printing expenses of such
combined documents where used for distribution to prospective purchasers or
to owners of existing Variable Contracts not funded by the shares. In the
event that LIFE COMPANY requests that TRUST or its designee provide TRUST's
prospectus in a "camera ready" or diskette format, TRUST shall be responsible
for providing the rospectus (or
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prospectuses) in the format in which it is accustomed to formatting prospectuses
and shall bear the expense of providing the prospectus (or prospectuses) in such
format (e.g. typesetting expenses), and LIFE COMPANY shall bear the expense of
adjusting or changing the format to conform with any of its prospectuses.
3.3 TRUST will provide LIFE COMPANY with at least one complete copy of all
prospectuses, statements of additional information, annual and semi-annual
reports, proxy statements, exemptive applications and all amendments or
supplements to any of the above that relate to the Portfolios promptly after the
filing of each such document with the SEC or other regulatory authority. LIFE
COMPANY will provide TRUST with at least one complete copy of all prospectuses,
statements of additional information, annual and semi-annual reports, proxy
statements, exemptive applications and all amendments or supplements to any of
the above that relate to a Separate Account promptly after the filing of each
such document with the SEC or other regulatory authority.
Article IV. SALES MATERIALS
4.1 LIFE COMPANY will furnish, or will cause to be furnished, to TRUST and
ADVISER, each piece of sales literature or other promotional material in which
TRUST or ADVISER is named, at least fifteen (15) Business Days prior to its
intended use. No such material will be used if TRUST or ADVISER objects to its
use in writing within ten (10) Business Days after receipt of such material.
4.2 TRUST and ADVISER will furnish, or will cause to be furnished, to LIFE
COMPANY, each piece of sales literature or other promotional material in which
LIFE COMPANY or its Separate Accounts are named, at least fifteen (15) Business
Days prior to its intended use. No such material will be used if LIFE COMPANY
objects to its use in writing within ten (10) Business Days after receipt of
such material.
4.3 TRUST and its affiliates and agents shall not give any information or
make any representations on behalf of LIFE COMPANY or concerning LIFE COMPANY,
the Separate Accounts, or the Variable Contracts issued by LIFE COMPANY, other
than the information or representations contained in a registration statement or
prospectus for such Variable Contracts, as such registration statement and
prospectus may be amended or supplemented from time to time, or in reports of
the Separate Accounts or reports prepared for distribution to owners of such
Variable Contracts, or in sales literature or other promotional material
approved by LIFE COMPANY or its designee, except with the written permission of
LIFE COMPANY.
4.4 LIFE COMPANY and its affiliates and agents shall not give any
information or make any representations on behalf of TRUST or concerning TRUST
other than the information or representations contained in a registration
statement or prospectus for TRUST, as such registration statement and prospectus
may be amended or supplemented from time to time, or in sales literature or
other promotional material approved by TRUST or its designee, except with the
written permission of TRUST.
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4.5 For purposes of this Agreement, the phrase "sales literature or other
promotional material" or words of similar import include, without limitation,
advertisements (such as material published, or designed for use, in a newspaper,
magazine or other periodical, radio, television, telephone or tape recording,
videotape display, signs or billboards, motion pictures or other public media),
sales literature (such as any written communication distributed or made
generally available to customers or the public, including brochures, circulars,
research reports, market letters, form letters, seminar texts, or reprints or
excerpts of any other advertisement, sales literature, or published article),
educational or training materials or other communications distributed or made
generally available to some or all agents or employees, registration statements,
prospectuses, statements of additional information, shareholder reports and
proxy materials, and any other material constituting sales literature or
advertising under National Association of Securities Dealers, Inc. ("NASD")
rules, the '40 Act, the '33 Act or rules thereunder.
Article V. POTENTIAL CONFLICTS
5.1 The parties acknowledge that TRUST has received an order from the SEC
granting relief from various provisions of the '40 Act and the rules thereunder
to the extent necessary to permit TRUST shares to be sold to and held by
Variable Contract separate accounts of both affiliated and unaffiliated
Participating Insurance Companies and Qualified Plans. The Exemptive Order
requires TRUST and each Participating Insurance Company to comply with
conditions and undertakings substantially as provided in this Section 5. The
TRUST will not enter into a participation agreement with any other Participating
Insurance Company unless it imposes the same conditions and undertakings as are
imposed on LIFE COMPANY hereby.
5.2 The Board will monitor TRUST for the existence of any material
irreconcilable conflict between the interests of Variable Contract owners of all
separate accounts and with participants of Qualified Plans investing in TRUST.
An irreconcilable material conflict may arise for a variety of reasons, which
may include: (a) an action by any state insurance regulatory authority; (b) a
change in applicable federal or state insurance, tax, or securities laws or
regulations, or a public ruling, private letter ruling or any similar action by
insurance, tax or securities regulatory authorities; (c) an administrative or
judicial decision in any relevant proceeding; (d) the manner in which the
investments of TRUST are being managed; (e) a difference in voting instructions
given by Variable Contract owners; (f) a decision by a Participating Insurance
Company to disregard the voting instructions of Variable Contract owners and (g)
if applicable, a decision by a Qualified Plan to disregard the voting
instructions of plan participants.
5.3 LIFE COMPANY will report any potential or existing conflicts of which
it becomes aware to the Board. LIFE COMPANY will be responsible for assisting
the Board in carrying out its duties in this regard by providing the Board with
all information reasonably necessary for the Board to consider any issues
raised. The responsibility includes, but is not limited to, an obligation by
the LIFE COMPANY to inform the Board whenever it has determined to disregard
Variable Contract owner voting instructions. These responsibilities of LIFE
COMPANY will be carried out with a view only to the interests of the Variable
Contract owners.
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5.4 If a majority of the Board or majority of its disinterested Trustees,
determines that a material irreconcilable conflict exists affecting LIFE
COMPANY, LIFE COMPANY, at its expense and to the extent reasonably practicable
(as determined by a majority of the Board's disinterested Trustees), will take
any steps necessary to remedy or eliminate the irreconcilable material conflict,
including; (a) withdrawing the assets allocable to some or all of the Separate
Accounts from TRUST or any Portfolio thereof and reinvesting those assets in a
different investment medium, which may include another Portfolio of TRUST, or
another investment company; (b) submitting the question as to whether such
segregation should be implemented to a vote of all affected Variable Contract
owners and as appropriate, segregating the assets of any appropriate group
(i.e., variable annuity or variable life insurance Contract owners of one or
more Participating Insurance Companies) that votes in favor of such segregation,
or offering to the affected Variable Contract owners the option of making such a
change; and (c) establishing a new registered management investment company (or
series thereof) or managed separate account. If a material irreconcilable
conflict arises because of LIFE COMPANY's decision to disregard Variable
Contract owner voting instructions, and that decision represents a minority
position or would preclude a majority vote, LIFE COMPANY may be required, at the
election of TRUST, to withdraw the Separate Account's investment in TRUST, and
no charge or penalty will be imposed as a result of such withdrawal. The
responsibility to take such remedial action shall be carried out with a view
only to the interests of the Variable Contract owners.
For the purposes of this Section 5.4, a majority of the disinterested
members of the Board shall determine whether or not any proposed action
adequately remedies any irreconcilable material conflict, but in no event will
TRUST or ADVISER (or any other investment adviser of TRUST) be required to
establish a new funding medium for any Variable Contract. Further, LIFE COMPANY
shall not be required by this Section 5.4 to establish a new funding medium for
any Variable Contracts if any offer to do so has been declined by a vote of a
majority of Variable Contract owners materially and adversely affected by the
irreconcilable material conflict.
5.5 The Board's determination of the existence of an irreconcilable
material conflict and its implications shall be made known promptly and in
writing to LIFE COMPANY.
5.6 No less than annually, LIFE COMPANY shall submit to the Board such
reports, materials or data as the Board may reasonably request so that the Board
may fully carry out its obligations. Such reports, materials, and data shall be
submitted more frequently if deemed appropriate by the Board.
Article VI. VOTING
6.1 LIFE COMPANY will provide pass-through voting privileges to all
Variable Contract owners so long as the SEC continues to interpret the '40 Act
as requiring pass-through voting privileges for Variable Contract owners.
Accordingly, LIFE COMPANY, where applicable, will vote shares of the Portfolio
held in its Separate Accounts in a manner consistent with voting instructions
timely received from its Variable Contract owners. LIFE COMPANY will be
responsible for assuring that each of its Separate Accounts that participates in
TRUST calculates
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voting privileges in a manner consistent with other Participating Insurance
Companies. LIFE COMPANY will vote shares for which it has not received timely
voting instructions, as well as shares it owns, in the same proportion as its
votes those shares for which it has received voting instructions.
6.2 If and to the extent Rule 6e-2 and Rule 6e-3(T) are amended, or if
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the '40
Act or the rules thereunder with respect to mixed and shared funding on terms
and conditions materially different from any exemptions granted in the Exemptive
Order, then TRUST, and/or the Participating Insurance Companies, as
appropriate, shall take such steps as may be necessary to comply with Rule 6e-2
and Rule 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such
Rules are applicable.
Article VII. INDEMNIFICATION
7.1 INDEMNIFICATION BY LIFE COMPANY. LIFE COMPANY agrees to indemnify and
hold harmless TRUST, ADVISER and each of their Trustees, directors, principals,
officers, employees and agents and each person, if any, who controls TRUST or
ADVISER within the meaning of Section 15 of the '33 Act (collectively, the
"Indemnified Parties") against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of LIFE COMPANY,
which consent shall not be unreasonably withheld) or litigation or threatened
litigation (including legal and other expenses), to which the Indemnified
Parties may become subject under any statute, regulation, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) or settlements are related to the sale or
acquisition of TRUST's shares or the Variable Contracts and:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the Registration
Statement or prospectus for the Variable Contracts or contained in the
Variable Contracts (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided that this
agreement to indemnify shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission was made in
reliance upon and in conformity with information furnished in writing to
LIFE COMPANY by or on behalf of TRUST for use in the registration statement
or prospectus for the Variable Contracts or in the Variable Contracts or
sales literature (or any amendment or supplement) or otherwise for use in
connection with the sale of the Variable Contracts or TRUST shares; or
(b) arise out of or result from (i) statements or representations
(other than statements or representations contained in the registration
statement, prospectus or sales literature of TRUST not supplied by LIFE
COMPANY, or persons under its control) or (ii) wrongful conduct of LIFE
COMPANY or persons under its control, with respect to the sale or
distribution of the Variable Contracts or TRUST shares; or
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(c) arise out of any untrue statement or alleged untrue statement of a
material fact contained in a registration statement, prospectus, or sales
literature of TRUST or any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not
misleading if such statement or omission or such alleged statement or
omission was made in reliance upon and in conformity with information
furnished in writing to TRUST by or on behalf of LIFE COMPANY; or
(d) arise as a result of any failure by LIFE COMPANY to provide
substantially the services and furnish the materials under the terms of
this Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by LIFE COMPANY in this Agreement or
arise out of or result from any other material breach of this Agreement by
LIFE COMPANY.
7.2 LIFE COMPANY shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation incurred
or assessed against an Indemnified Party to the extent that such losses, claims,
damages, liabilities or litigation are attributable to such Indemnified Party's
willful misfeasance, bad faith, or gross negligence in the performance of such
Indemnified Party's duties or by reason of such Indemnified Party's reckless
disregard of obligations or duties under this Agreement.
7.3 LIFE COMPANY shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified LIFE COMPANY in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify LIFE COMPANY of any
such claim shall not relieve LIFE COMPANY from any liability which it may have
to the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against an Indemnified Party, LIFE COMPANY shall be entitled to participate at
its own expense in the defense of such action. LIFE COMPANY also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action. After notice from LIFE COMPANY to such party of LIFE
COMPANY's election to assume the defense thereof, the Indemnified Party shall
bear the fees and expenses of any additional counsel retained by it, and LIFE
COMPANY will not be liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
7.4 INDEMNIFICATION BY TRUST. TRUST agrees to indemnify and hold harmless
LIFE COMPANY and each of its directors, officers, employees, and agents and each
person, if any, who controls LIFE COMPANY within the meaning of Section 15 of
the '33 Act (collectively, the "Indemnified Parties") against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of TRUST which consent shall not be unreasonably withheld)
or litigation or threatened litigation (including legal and other expenses)
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<PAGE>
to which the Indemnified Parties may become subject under any statute, or
regulation, at common law or otherwise, insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof) or settlements are
related to the sale or acquisition of TRUST's shares or the Variable Contracts
and:
(a) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the registration
statement or prospectus or sales literature of TRUST (or any amendment or
supplement to any of the foregoing), or arise out of or are based upon the
omission or the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify shall not apply as to
any Indemnified Party if such statement or omission or such alleged
statement or omission was made in reliance upon and in conformity with
information furnished in writing to ADVISER or TRUST by or on behalf of
LIFE COMPANY for use in the registration statement or prospectus for TRUST
or in sales literature (or any amendment or supplement) or otherwise for
use in connection with the sale of the Variable Contracts or TRUST shares;
or
(b) arise out of or result from (i) statements or representations
(other than statements or representations contained in the
registration statement, prospectus or sales literature for the
Variable Contracts not supplied by ADVISER or TRUST or persons under
its control) or (ii) gross negligence or wrongful conduct or willful
misfeasance of TRUST or persons under its control, with respect to the
sale or distribution of the Variable Contracts or TRUST shares; or
(c) arise out of any untrue statement or alleged untrue statement
of a material fact contained in a registration statement, prospectus,
or sales literature covering the Variable Contracts, or any amendment
thereof or supplement thereto or the omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, if such
statement or omission or such alleged statement or omission was made
in reliance upon and in conformity with information furnished in
writing to LIFE COMPANY for inclusion therein by or on behalf of
TRUST; or
(d) arise as a result of (i) a failure by TRUST to provide
substantially the services and furnish the materials under the terms
of this Agreement; or (ii) a failure by a Portfolio(s) invested in by
the Separate Account to comply with the diversification requirements
of Section 817(h) of the Code; or (iii) a failure by a Portfolio(s)
invested in by the Separate Account to qualify as a "regulated
investment company" under Subchapter M of the Code; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by TRUST in this Agreement or
arise out of or result from any other material breach of this
Agreement by TRUST.
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<PAGE>
7.5 TRUST shall not be liable under this indemnification provision with
respect to any losses, claims, damages, liabilities or litigation incurred or
assessed against an Indemnified Party to the extent that such losses, claims,
damages, liabilities or litigation are attributable to such Indemnified Party's
willful misfeasance, bad faith, or gross negligence in the performance of such
Indemnified Party's duties or by reason of such Indemnified Party's reckless
disregard of obligations and duties under this Agreement.
7.6 TRUST shall not be liable under this indemnification provision with
respect to any claim made against an Indemnified Party unless such Indemnified
Party shall have notified TRUST in writing within a reasonable time after the
summons or other first legal process giving information of the nature of the
claim shall have been served upon such Indemnified Party (or after such
Indemnified Party shall have received notice of such service on any designated
agent), but failure to notify TRUST of any such claim shall not relieve TRUST
from any liability which it may have to the Indemnified Party against whom such
action is brought otherwise than on account of this indemnification provision.
In case any such action is brought against the Indemnified Parties, TRUST shall
be entitled to participate at its own expense in the defense thereof. TRUST
also shall be entitled to assume the defense thereof, with counsel satisfactory
to the party named in the action. After notice from TRUST to such party of
TRUST's election to assume the defense thereof, the Indemnified Party shall bear
the fees and expenses of any additional counsel retained by it, and TRUST will
not be liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
Article VIII. TERM; TERMINATION
8.1 This Agreement shall be effective as of the date hereof and shall
continue in force until terminated in accordance with the provisions herein.
8.2 This Agreement shall terminate in accordance with the following
provisions:
(a) At the option of LIFE COMPANY or TRUST at any time from the date
hereof upon 180 days' notice, unless a shorter time is agreed to by the
parties;
(b) At the option of LIFE COMPANY, if TRUST shares are not reasonably
available to meet the requirements of the Variable Contracts as determined
by LIFE COMPANY. Prompt notice of election to terminate shall be furnished
by LIFE COMPANY, said termination to be effective ten days after receipt of
notice unless TRUST makes available a sufficient number of shares to
reasonably meet the requirements of the Variable Contracts within said
ten-day period;
(c) At the option of LIFE COMPANY, upon the institution of formal
proceedings against TRUST by the SEC, the NASD, or any other regulatory
body, the expected or anticipated ruling, judgment or outcome of which
would, in LIFE COMPANY's reasonable judgment, materially impair TRUST's
ability to meet and perform TRUST's obligations and duties hereunder.
Prompt notice of election to terminate
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<PAGE>
shall be furnished by LIFE COMPANY with said termination to be effective
upon receipt of notice;
(d) At the option of TRUST, upon the institution of formal proceedings
against LIFE COMPANY and/or its broker-dealer affiliates by the SEC, the
NASD, or any other regulatory body, the expected or anticipated ruling,
judgment or outcome of which would, in TRUST's reasonable judgment,
materially impair LIFE COMPANY's ability to meet and perform its
obligations and duties hereunder. Prompt notice of election to terminate
shall be furnished by TRUST with said termination to be effective upon
receipt of notice;
(e) In the event TRUST's shares are not registered, issued or sold in
accordance with applicable state or federal law, or such law precludes the
use of such shares as the underlying investment medium of Variable
Contracts issued or to be issued by LIFE COMPANY. Termination shall be
effective upon such occurrence without notice;
(f) At the option of TRUST if the Variable Contracts cease to qualify
as annuity contracts or life insurance contracts, as applicable, under the
Code, or if TRUST reasonably believes that the Variable Contracts may fail
to so qualify. Termination shall be effective upon receipt of notice by
LIFE COMPANY;
(g) At the option of LIFE COMPANY, upon TRUST's breach of any material
provision of this Agreement, which breach has not been cured to the
satisfaction of LIFE COMPANY within ten days after written notice of such
breach is delivered to TRUST;
(h) At the option of TRUST, upon LIFE COMPANY's breach of any material
provision of this Agreement, which breach has not been cured to the
satisfaction of TRUST within ten days after written notice of such breach
is delivered to LIFE COMPANY;
(i) At the option of TRUST, if the Variable Contracts are not
registered, issued or sold in accordance with applicable federal and/or
state law. Termination shall be effective immediately upon such occurrence
without notice;
In the event this Agreement is assigned without the prior written consent
of LIFE COMPANY, TRUST, and ADVISER, termination shall be effective immediately
upon such occurrence without notice.
8.3 Notwithstanding any termination of this Agreement pursuant to
Section 8.2 hereof, TRUST at its option may elect to continue to make available
additional TRUST shares, as provided below, for so long as TRUST desires
pursuant to the terms and conditions of this Agreement, for all Variable
Contracts in effect on the effective date of termination of this Agreement
(hereinafter referred to as "Existing Contracts"). Specifically, without
limitation, if
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<PAGE>
TRUST so elects to make additional TRUST shares available, the owners of the
Existing Contracts or LIFE COMPANY, whichever shall have legal authority to do
so, shall be permitted to reallocate investments in TRUST, redeem investments in
TRUST and/or invest in TRUST upon the payment of additional premiums under the
Existing Contracts. In the event of a termination of this Agreement pursuant to
Section 8.2 hereof, TRUST and ADVISER, as promptly as is practicable under the
circumstances, shall notify LIFE COMPANY whether TRUST elects to continue to
make TRUST shares available after such termination. If TRUST shares continue to
be made available after such termination, the provisions of this Agreement shall
remain in effect and thereafter either TRUST or LIFE COMPANY may terminate the
Agreement, as so continued pursuant to this Section 8.3, upon sixty (60) days'
prior written notice to the other party.
8.4 Except as necessary to implement Variable Contract owner initiated
transactions, or as required by state insurance laws or regulations, LIFE
COMPANY shall not redeem the shares attributable to the Variable Contracts (as
opposed to the shares attributable to LIFE COMPANY's assets held in the Separate
Accounts), and LIFE COMPANY shall not prevent Variable Contract owners from
allocating payments to a Portfolio that was otherwise available under the
Variable Contracts until thirty (30) days after the LIFE COMPANY shall have
notified TRUST of its intention to do so.
Article IX. NOTICES
Any notice hereunder shall be given by registered or certified mail return
receipt requested to the other party at the address of such party set forth
below or at such other address as such party may from time to time specify in
writing to the other party.
If to TRUST:
BT Insurance Funds Trust
c/o First Data Investor Services Group, Inc.
One Exchange Place
53 State Street, Mail Stop BOS 865
Boston, MA 02109
Attn: Elizabeth Russell, Legal Dep't
AND
c/o BT Alex. Brown
One South Street, Mail Stop 1-18-6
Baltimore, MD 21202
Attn: Brian Wixsted, Mutual Fund Services
If to ADVISER:
Bankers Trust Company - U.S. Investment Management
14
<PAGE>
130 Liberty Street
New York, NY 10006
Attn.: Vinay Mendiratta, Mail Stop 2355
If to LIFE COMPANY:
Notice shall be deemed given on the date of receipt by the addressee as
evidenced by the return receipt.
Article X. MISCELLANEOUS
10.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
10.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
10.3 If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement shall
not be affected thereby.
10.4 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of New York. It
shall also be subject to the provisions of the federal securities laws and the
rules and regulations thereunder and to any orders of the SEC granting exemptive
relief therefrom and the conditions of such orders.
10.5 It is understood and expressly stipulated that neither the
shareholders of shares of any Portfolio nor the Trustees or officers of TRUST or
any Portfolio shall be personally liable hereunder. No Portfolio shall be
liable for the liabilities of any other Portfolio. All persons dealing with
TRUST or a Portfolio must look solely to the property of TRUST or that
Portfolio, respectively, for enforcement of any claims against TRUST or that
Portfolio. It is also understood that each of the Portfolios shall be deemed to
be entering into a separate Agreement with LIFE COMPANY so that it is as if each
of the Portfolios had signed a separate Agreement with LIFE COMPANY and that a
single document is being signed simply to facilitate the execution and
administration of the Agreement.
10.6 Each party shall cooperate with each other party and all appropriate
governmental authorities (including without limitation the SEC, the NASD and
state insurance regulators) and shall permit such authorities reasonable access
to its books and records in connection with any investigation or inquiry
relating to this Agreement or the transactions contemplated hereby.
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<PAGE>
10.7 The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
10.8 If the Agreement terminates, the parties agree that Article 7 and
Sections 10.5, 10.6 and 10.7 shall remain in effect after termination.
10.9 No provision of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by TRUST,
ADVISER and the LIFE COMPANY.
10.10 No failure or delay by a party in exercising any right or remedy
under this Agreement will operate as a waiver thereof and no single or partial
exercise of rights shall preclude a further or subsequent exercise. The rights
and remedies provided in this Agreement are cumulative and not exclusive of any
rights or remedies provided by law.
IN WITNESS WHEREOF, the parties have caused their duly authorized officers
to execute this Fund Participation Agreement as of the date and year first above
written.
BT INSURANCE FUNDS TRUST
By:
---------------------------------------
Name:
Title:
BANKERS TRUST COMPANY
By:
---------------------------------------
Name:
Title:
[Insert Name of LIFE COMPANY]
By:
---------------------------------------
Name:
Title:
16
<PAGE>
APPENDIX A
To Participation Agreement by and among _______________, ________________ and
______________________.
List of portfolios:
<PAGE>
APPENDIX B
To Participation Agreement by and among ________________, _______________ and
______________________.
List of variable separate accounts:
<PAGE>
FUND PARTICIPATION AGREEMENT
This AGREEMENT is made this day of ____________, 199_, by and between
_______________________(the "Insurer"), a life insurance company domiciled in
_________________, on its behalf and on behalf of the segregated asset accounts
of the Insurer listed on Exhibit A to this Agreement (the "Separate Accounts");
Insurance Series (the "Fund"), a Massachusetts business trust; and Federated
Securities Corp. (the "Distributor"), a Pennsylvania corporation.
W I T N E S S E T H
WHEREAS, the Fund is registered with the Securities and Exchange Commission
("SEC") as an open-end management investment company under the Investment
Company Act of 1940, as amended ("1940 Act") and the Fund is authorized to issue
separate classes of shares of beneficial interest ("shares"), each representing
an interest in a separate portfolio of assets known as a "portfolio" and each
portfolio has its own investment objective, policies, and limitations; and
WHEREAS, the Fund is available to offer shares of one or more of its
portfolios to separate accounts of insurance companies that fund variable
annuity contracts ("Variable Contracts") and to serve as an investment medium
for Variable Contracts offered by insurance companies that have entered into
participation agreements substantially similar to this agreement ("Participating
Insurance Companies"), and the Fund will be made available in the future to
offer shares of one or more of its portfolios to separate accounts of insurance
companies that fund variable life insurance policies (at which time such
policies would also be "Variable Contracts" hereunder), and
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<PAGE>
WHEREAS, the Fund is currently comprised of eight separate portfolios, and
other portfolios may be established in the future; and
WHEREAS, the Fund has obtained an order from the SEC dated December 29,
1993 (File No. 812-8620), granting Participating Insurance Companies and
variable annuity and variable life insurance separate accounts exemptions from
the provisions of sections 9(a), 13(a), 15(a), and 15(b) of the 1940 Act and
Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to
permit shares of the Fund to be sold to and held by variable annuity and
variable life insurance separate accounts of life insurance companies that may
or may not be affiliated with one another (hereinafter the "Mixed and Shared
Funding Exemptive Order"); and
WHEREAS, the Distributor is registered as a broker-dealer with the SEC
under the Securities Exchange Act of 1934, as amended ("1934 Act"), and is a
member in good standing of the National Association of Securities Dealers, Inc.
("NASD"); and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Insurer wishes to purchase shares of one or more of the Fund's
portfolios on behalf of its Separate Accounts to serve as an investment medium
for Variable Contracts funded by the Separate Accounts, and the Distributor is
authorized to sell shares of the Fund's portfolios;
NOW, THEREFORE, in consideration of the foregoing and the mutual promises
and covenants hereinafter set forth, the parties hereby agree as follows:
ARTICLE I. SALE OF FUND SHARES
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<PAGE>
1.1 The Distributor agrees to sell to the Insurer those shares of the
portfolios offered and made available by the Fund and identified on Exhibit B
("Portfolios") that the Insurer orders on behalf of its Separate Accounts, and
agrees to execute such orders on each day on which the Fund calculates its net
asset value pursuant to rules of the SEC ("business day") at the net asset value
next computed after receipt and acceptance by the Fund or its agent of the order
for the shares of the Fund.
1.2 The Fund agrees to make available on each business day shares of the
Portfolios for purchase at the applicable net asset value per share by the
Insurer on behalf of its Separate Accounts; provided, however, that the Board of
Trustees of the Fund may refuse to sell shares of any Portfolio to any person,
or suspend or terminate the offering of shares of any Portfolio, if such action
is required by law or by regulatory authorities having jurisdiction or is, in
the sole discretion of the Trustees, acting in good faith and in light of the
Trustees' fiduciary duties under applicable law, necessary in the best interests
of the shareholders of any Portfolio.
1.3 The Fund and the Distributor agree that shares of the Portfolios of
the Fund will be sold only to Participating Insurance Companies, their separate
accounts, and other persons consistent with each Portfolio being adequately
diversified pursuant to Section 817(h) of the Internal Revenue Code of 1986, as
amended ("Code"), and the regulations thereunder. No shares of any Portfolio
will be sold directly to the general public to the extent not permitted by
applicable tax law.
1.4 The Fund and the Distributor will not sell shares of the Portfolios to
any insurance company or separate account unless an agreement containing
provisions
3
<PAGE>
substantially the same as the provisions in Article IV of this Agreement is in
effect to govern such sales.
1.5 Upon receipt of a request for redemption in proper form from the
Insurer, the Fund agrees to redeem any full or fractional shares of the
Portfolios held by the Insurer, ordinarily executing such requests on each
business day at the net asset value next computed after receipt and acceptance
by the Fund or its agent of the request for redemption, except that the Fund
reserves the right to suspend the right of redemption, consistent with Section
22(e) of the 1940 Act and any rules thereunder. Such redemption shall be paid
consistent with applicable rules of the SEC and procedures and policies of the
Fund as described in the current prospectus.
1.6 For purposes of Sections 1.2 and 1.5, the Insurer shall be the agent
of the Fund for the limited purpose of receiving and accepting purchase and
redemption orders from each Separate Account and receipt of such orders by 4:00
p.m. Eastern time by the Insurer shall be deemed to be receipt by the Fund for
purposes of Rule 22c-1 of the 1940 Act; provided that the Fund receives notice
of such orders on the next following business day prior to 4:00 p.m. Eastern
time on such day, although the Insurer will use its best efforts to provide such
notice by 9:00 a.m. Eastern time.
1.7 The Insurer agrees to purchase and redeem the shares of each Portfolio
in accordance with the provisions of the current prospectus for the Fund.
1.8 The Insurer shall pay for shares of the Portfolio on the next business
day after it places an order to purchase shares of the Portfolio. Payment shall
be in federal funds transmitted by wire.
4
<PAGE>
1.9 Issuance and transfer of shares of the Portfolios will be by book
entry only unless otherwise agreed by the Fund. Stock certificates will not be
issued to the Insurer or the Separate Accounts unless otherwise agreed by the
Fund. Shares ordered from the Fund will be recorded in an appropriate title for
the Separate Accounts or the appropriate subaccounts of the Separate Accounts.
1.10 The Fund shall furnish same day notice (by wire or telephone, followed
by written confirmation) to the Insurer of any income dividends or capital gain
distributions payable on the shares of the Portfolios. The Insurer hereby
elects to reinvest in the Portfolio all such dividends and distributions as are
payable on a Portfolio's shares and to receive such dividends and distributions
in additional shares of that Portfolio. The Insurer reserves the right to
revoke this election in writing and to receive all such dividends and
distributions in cash. The Fund shall notify the Insurer of the number of
shares so issued as payment of such dividends and distributions.
1.11 The Fund shall instruct its recordkeeping agent to advise the Insurer
on each business day of the net asset value per share for each Portfolio as soon
as reasonably practical after the net asset value per share is calculated and
shall use its best efforts to make such net asset value per share available by
7:00 p.m. Eastern time.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1 The Insurer represents and warrants that it is an insurance company
duly organized and in good standing under applicable law and that it is taxed as
an insurance company under Subchapter L of the Code.
5
<PAGE>
2.2 The Insurer represents and warrants that it has legally and validly
established each of the Separate Accounts as a segregated asset account under
the ____________________ Insurance Code, and that each of the Separate Accounts
is a validly existing segregated asset account under applicable federal and
state law.
2.3 The Insurer represents and warrants that the Variable Contracts issued
by the Insurer or interests in the Separate Accounts under such Variable
Contracts (1) are or, prior to issuance, will be registered as securities under
the Securities Act of 1933 ("1933 Act") or, alternatively, (2) are not
registered because they are properly exempt from registration under the 1933 Act
or will be offered exclusively in transactions that are properly exempt from
registration under the 1933 Act.
2.4 The Insurer represents and warrants that each of the Separate Accounts
(1) has been registered as a unit investment trust in accordance with the
provisions of the 1940 Act or, alternatively, (2) has not been registered in
proper reliance upon an exclusion from registration under the 1940 Act.
2.5 The Insurer represents that it believes, in good faith, that the
Variable Contracts issued by the Insurer are currently treated as annuity
contracts or life insurance policies (which may include modified endowment
contracts), whichever is appropriate, under applicable provisions of the Code.
2.6 The Fund represents and warrants that it is duly organized as a
business trust under the laws of the Commonwealth of Massachusetts, and is in
good standing under applicable law.
6
<PAGE>
2.7 The Fund represents and warrants that the shares of the Portfolios are
duly authorized for issuance in accordance with applicable law and that the Fund
is registered as an open-end management investment company under the 1940 Act.
2.8 The Fund represents that it believes, in good faith, that the
Portfolios currently comply with the diversification provisions of Section
817(h) of the Code and the regulations issued thereunder relating to the
diversification requirements for variable life insurance policies and variable
annuity contracts.
2.9 The Distributor represents and warrants that it is a member in good
standing of the NASD and is registered as a broker-dealer with the SEC.
ARTICLE III. GENERAL DUTIES
3.1 The Fund shall take all such actions as are necessary to permit the
sale of the shares of each Portfolio to the Separate Accounts, including
maintaining its registration as an investment company under the 1940 Act, and
registering the shares of the Portfolios sold to the Separate Accounts under the
1933 Act for so long as required by applicable law. The Fund shall amend its
Registration Statement filed with the SEC under the 1933 Act and the 1940 Act
from time to time as required in order to effect the continuous offering of the
shares of the Portfolios. The Fund shall register and qualify the shares for
sale in accordance with the laws of the various states to the extent deemed
necessary by the Fund or the Distributor.
3.2 The Fund shall make every effort to maintain qualification of each
Portfolio as a Regulated Investment Company under Subchapter M of the Code (or
any successor or similar provision) and shall notify the Insurer immediately
upon having a
7
<PAGE>
reasonable basis for believing that a Portfolio has ceased to so qualify or that
it might not so qualify in the future.
3.3 The Fund shall make every effort to enable each Portfolio to comply
with the diversification provisions of Section 817(h) of the Code and the
regulations issued thereunder relating to the diversification requirements for
variable life insurance policies and variable annuity contracts and any
prospective amendments or other modifications to Section 817 or regulations
thereunder, and shall notify the Insurer immediately upon having a reasonable
basis for believing that any Portfolio has ceased to comply.
3.4 The Insurer shall take all such actions as are necessary under
applicable federal and state law to permit the sale of the Variable Contracts
issued by the Insurer, including registering each Separate Account as an
investment company to the extent required under the 1940 Act, and registering
the Variable Contracts or interests in the Separate Accounts under the Variable
Contracts to the extent required under the 1933 Act, and obtaining all necessary
approvals to offer the Variable Contracts from state insurance commissioners.
3.5 The Insurer shall make every effort to maintain the treatment of the
Variable Contracts issued by the Insurer as annuity contracts or life insurance
policies, whichever is appropriate, under applicable provisions of the Code, and
shall notify the Fund and the Distributor immediately upon having a reasonable
basis for believing that such Variable Contracts have ceased to be so treated or
that they might not be so treated in the future.
8
<PAGE>
3.6 The Insurer shall offer and sell the Variable Contracts issued by the
Insurer in accordance with applicable provisions of the 1933 Act, the 1934 Act,
the 1940 Act, the NASD Rules of Fair Practice, and state law respecting the
offering of variable life insurance policies and variable annuity contracts.
3.7 The Distributor shall sell and distribute the shares of the Portfolios
of the Fund in accordance with the applicable provisions of the 1933 Act, the
1934 Act, the 1940 Act, the NASD Rules of Fair Practice, and state law.
3.8 During such time as the Fund engages in Mixed Funding or Shared
Funding, a majority of the Board of Trustees of the Fund shall consist of
persons who are not "interested persons" of the Fund ("disinterested Trustees"),
as defined by Section 2(a)(19) of the 1940 Act and the rules thereunder, and as
modified by any applicable orders of the SEC, except that if this provision of
this Section 3.8 is not met by reason of the death, disqualification, or bona
fide resignation of any Trustee or Trustees, then the operation of this
provision shall be suspended (a) for a period of 45 days if the vacancy or
vacancies may be filled by the Fund's Board; (b) for a period of 60 days if a
vote of shareholders is required to fill the vacancy or vacancies; or (c) for
such longer period as the SEC may prescribe by order upon application.
3.9 The Insurer and its agents will not in any way recommend any proposal
or oppose or interfere with any proposal submitted by the Fund at a meeting of
owners of Variable Contracts or shareholders of the Fund, and will in no way
recommend, oppose, or interfere with the solicitation of proxies for Fund shares
held by Contract Owners, without the prior written consent of the Fund, which
consent may be withheld in the Fund's sole discretion.
9
<PAGE>
3.10 Each party hereto shall cooperate with each other party and all
appropriate governmental authorities having jurisdiction (including, without
limitation, the SEC, the NASD, and state insurance regulators) and shall permit
such authorities reasonable access to its books and records in connection with
any investigation or inquiry relating to this Agreement or the transactions
contemplated hereby.
ARTICLE IV. POTENTIAL CONFLICTS
4.1 During such time as the Fund engages in Mixed Funding or Shared
Funding, the parties hereto shall comply with the conditions in this Article IV.
4.2 The Fund's Board of Trustees shall monitor the Fund for the existence
of any material irreconcilable conflict (1) between the interests of owners of
variable annuity contracts and variable life insurance policies, and (2) between
the interests of owners of Variable Contracts ("Variable Contract Owners")
issued by different Participating Life Insurance Companies that invest in the
Fund. A material irreconcilable conflict may arise for a variety of reasons,
including: (a) an action by any state insurance regulatory authority; (b) a
change in applicable federal or state insurance, tax, or securities laws or
regulations, or a public ruling, private letter ruling, no-action or
interpretive letter, or any similar action by insurance, tax, or securities
regulatory authorities; (c) an administrative or judicial decision in any
relevant proceeding; (d) the manner in which the investments of any Portfolio of
the Fund are being managed; (e) a difference in voting instructions given by
variable annuity and variable life insurance contract owners; or (f) a decision
by a Participating Insurance Company to disregard the voting instructions of
Variable Contract Owners.
10
<PAGE>
4.3 The Insurer agrees that it shall report any potential or existing
conflicts of which it is aware to the Fund's Board of Trustees. The Insurer
will be responsible for assisting the Board of Trustees of the Fund in carrying
out its responsibilities under the Mixed and Shared Funding Exemptive Order, or,
if the Fund is engaged in Mixed Funding or Shared Funding in reliance on Rule
6e-2, 6e-3(T), or any other regulation under the 1940 Act, the Insurer will be
responsible for assisting the Board of Trustees of the Fund in carrying out its
responsibilities under such regulation, by providing the Board with all
information reasonably necessary for the Board to consider any issues raised.
This includes, but is not limited to, an obligation by the Insurer to inform the
Board whenever Variable Contract Owner voting instructions are disregarded. The
Insurer shall carry out its responsibility under this Section 4.3 with a view
only to the interests of the Variable Contract Owners.
4.4 The Insurer agrees that in the event that it is determined by a
majority of the Board of Trustees of the Fund or a majority of the Fund's
disinterested Trustees that a material irreconcilable conflict exists, the
Insurer shall, at its expense and to the extent reasonably practicable (as
determined by a majority of the disinterested Trustees of the Board of the
Fund), take whatever steps are necessary to remedy or eliminate the
irreconcilable material conflict, up to and including: (1) withdrawing the
assets allocable to some or all of the Separate Accounts from the Fund or any
Portfolio and reinvesting such assets in a different investment medium,
including another portfolio of the Fund, or submitting the question as to
whether such segregation should be implemented to a vote of all affected
Variable Contract Owners and, as appropriate, segregating the assets of any
appropriate group (I.E., annuity contract owners or life insurance contract
owners of contracts issued by one or more Participating Insurance Companies),
that votes in favor of such segregation, or offering to the affected Variable
Contract Owners the option of making such a change; and (2) establishing a
11
<PAGE>
new registered management investment company or managed separate account. If a
material irreconcilable conflict arises because of the Insurer's decision to
disregard Variable Contract Owners' voting instructions and that decision
represents a minority position or would preclude a majority vote, the Insurer
shall be required, at the Fund's election, to withdraw the Separate Accounts'
investment in the Fund, provided, however, that such withdrawal and termination
shall be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested Trustees, and no
charge or penalty will be imposed as a result of such withdrawal. These
responsibilities shall be carried out with a view only to the interests of the
Variable Contract Owners. A majority of the disinterested Trustees of the Fund
shall determine whether or not any proposed action adequately remedies any
material irreconcilable conflict, but in no event will the Fund or its
investment adviser or the Distributor be required to establish a new funding
medium for any Variable Contract. The Insurer shall not be required by this
Section 4.4 to establish a new funding medium for any Variable Contract if any
offer to do so has been declined by vote of a majority of Variable Contract
Owners materially adversely affected by the material irreconcilable conflict.
4.5 The Insurer, at least annually, shall submit to the Fund's Board of
Trustees such reports, materials, or data as the Board reasonably may request so
that the Trustees of the Fund may fully carry out the obligations imposed upon
the Board by the conditions contained in the application for the Mixed and
Shared Funding Exemptive Order and said reports, materials, and data shall be
submitted more frequently if deemed appropriate by the Board.
4.6 All reports of potential or existing conflicts received by the Fund's
Board of Trustees, and all Board action with regard to determining the existence
of a
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conflict, notifying Participating Insurance Companies of a conflict, and
determining whether any proposed action adequately remedies a conflict, shall be
properly recorded in the minutes of the Board of Trustees of the Fund or other
appropriate records, and such minutes or other records shall be made available
to the SEC upon request.
4.7 The Board of Trustees of the Fund shall promptly notify the Insurer in
writing of its determination of the existence of an irreconcilable material
conflict and its implications.
ARTICLE V. PROSPECTUSES AND PROXY STATEMENTS; VOTING
5.1 The Insurer shall distribute such prospectuses, proxy statements and
periodic reports of the Fund to the owners of Variable Contracts issued by the
Insurer as required to be distributed to such Variable Contract Owners under
applicable federal or state law.
5.2 The Distributor shall provide the Insurer with as many copies of the
current prospectus of the Fund as the Insurer may reasonably request. If
requested by the Insurer in lieu thereof, the Fund shall provide such
documentation (including a final copy of the Fund's prospectus as set in type or
in camera-ready copy) and other assistance as is reasonably necessary in order
for the Insurer to either print a stand-alone document or print together in one
document the current prospectus for the Variable Contracts issued by the
Insurer and the current prospectus for the Fund, or a document combining the
Fund prospectus with prospectuses of other funds in which the Variable Contracts
may be invested. The Fund shall bear the expense of printing copies of its
current prospectus that will be distributed to existing Variable Contract
Owners, and the Insurer shall bear the expense of printing copies of the Fund's
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prospectus that are used in connection with offering the Variable Contracts
issued by the Insurer.
5.3 The Fund and the Distributor shall provide, at the Fund's expense,
such copies of the Fund's current Statement of Additional Information ("SAI") as
may reasonably be requested, to the Insurer and to any owner of a Variable
Contract issued by the Insurer who requests such SAI.
5.4 The Fund, at its expense, shall provide the Insurer with copies of its
proxy materials, periodic reports to shareholders, and other communications to
shareholders in such quantity as the Insurer shall reasonably require for
purposes of distributing to owners of Variable Contracts issued by the Insurer.
The Fund, at the Insurer's expense, shall provide the Insurer with copies of its
periodic reports to shareholders and other communications to shareholders in
such quantity as the Insurer shall reasonably request for use in connection with
offering the Variable Contracts issued by the Insurer. If requested by the
Insurer in lieu thereof, the Fund shall provide such documentation (including a
final copy of the Fund's proxy materials, periodic reports to shareholders, and
other communications to shareholders, as set in type or in camera-ready copy)
and other assistance as reasonably necessary in order for the Insurer to print
such shareholder communications for distribution to owners of Variable Contracts
issued by the Insurer.
5.5 For so long as the SEC interprets the 1940 Act to require pass-through
voting by Participating Insurance Companies whose Separate Accounts are
registered as investment companies under the 1940 Act, the Insurer shall vote
shares of each Portfolio of the Fund held in a Separate Account or a subaccount
thereof, whether or not registered under the 1940 Act, at regular and special
meetings of the Fund in
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accordance with instructions timely received by the Insurer (or its designated
agent) from owners of Variable Contracts funded by such Separate Account or
subaccount thereof having a voting interest in the Portfolio. The Insurer shall
vote shares of a Portfolio of the Fund held in a Separate Account or a
subaccount thereof that are attributable to the Variable Contracts as to which
no timely instructions are received, as well as shares held in such Separate
Account or subaccount thereof that are not attributable to the Variable
Contracts and owned beneficially by the Insurer (resulting from charges against
the Variable Contracts or otherwise), in the same proportion as the votes cast
by owners of the Variable Contracts funded by that Separate Account or
subaccount thereof having a voting interest in the Portfolio from whom
instructions have been timely received. The Insurer shall vote shares of each
Portfolio of the Fund held in its general account, if any, in the same
proportion as the votes cast with respect to shares of the Portfolio held in all
Separate Accounts of the Insurer or subaccounts thereof, in the aggregate.
5.6 During such time as the Fund engages in Mixed Funding or Shared
Funding, the Fund shall disclose in its prospectus that (1) the Fund is intended
to be a funding vehicle for variable annuity and variable life insurance
contracts offered by various insurance companies, (2) material irreconcilable
conflicts possibly may arise, and (3) the Board of Trustees of the Fund will
monitor events in order to identify the existence of any material irreconcilable
conflicts and to determine what action, if any, should be taken in response to
any such conflict. The Fund hereby notifies the Insurer that prospectus
disclosure may be appropriate regarding potential risks of offering shares of
the Fund to separate accounts funding both variable annuity contracts and
variable life insurance policies and to separate accounts funding Variable
Contracts of unaffiliated life insurance companies.
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<PAGE>
ARTICLE VI. SALES MATERIAL AND INFORMATION
6.1 The Insurer shall furnish, or shall cause to be furnished, to the Fund
or its designee, each piece of sales literature or other promotional material in
which the Fund (or any Portfolio thereof) or its investment adviser or the
Distributor is named at least 15 days prior to the anticipated use of such
material, and no such sales literature or other promotional material shall be
used unless the Fund and the Distributor or the designee of either approve the
material or do not respond with comments on the material within 10 days from
receipt of the material.
6.2 The Insurer agrees that neither it nor any of its affiliates or agents
shall give any information or make any representations or statements on behalf
of the Fund or concerning the Fund other than the information or representations
contained in the Registration Statement or prospectus for the Fund shares, as
such registration statement and prospectus may be amended or supplemented from
time to time, or in reports or proxy statements for the Fund, or in sales
literature or other promotional material approved by the Fund or its designee
and by the Distributor or its designee, except with the permission of the Fund
or its designee and the Distributor or its designee.
6.3 The Fund or the Distributor or the designee of either shall furnish to
the Insurer or its designee, each piece of sales literature or other promotional
material in which the Insurer or its Separate Accounts are named at least 15
days prior to the anticipated use of such material, and no such material shall
be used unless the Insurer or its designee approves the material or does not
respond with comments on the material within 10 days from receipt of the
material.
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6.4 The Fund and the Distributor agree that each and the affiliates and
agents of each shall not give any information or make any representations on
behalf of the Insurer or concerning the Insurer, the Separate Accounts, or the
Variable Contracts issued by the Insurer, other than the information or
representations contained in a registration statement or prospectus for such
Variable Contracts, as such registration statement and prospectus may be amended
or supplemented from time to time, or in reports for the Separate Accounts or
prepared for distribution to owners of such Variable Contracts, or in sales
literature or other promotional material approved by the Insurer or its
designee, except with the permission of the Insurer.
6.5 The Fund will provide to the Insurer at least one complete copy of the
Mixed and Shared Funding Exemptive Application and any amendments thereto, all
prospectuses, Statements of Additional Information, reports, proxy statements
and other voting solicitation materials, and all amendments and supplements to
any of the above, that relate to the Fund or its shares, promptly after the
filing of such document with the SEC or other regulatory authorities.
6.6 The Insurer will provide to the Fund all prospectuses (which shall
include an offering memorandum if the Variable Contracts issued by the Insurer
or interests therein are not registered under the 1933 Act), Statements of
Additional Information, reports, solicitations for voting instructions relating
to the Fund, and all amendments or supplements to any of the above that relate
to the Variable Contracts issued by the Insurer or the Separate Accounts which
utilize the Fund as an underlying investment medium, promptly after the filing
of such document with the SEC or other regulatory authority.
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6.7 For purposes of this Article VI, the phrase "sales literature or other
promotional material" includes, but is not limited to, advertisements (such as
material published, or designed for use, in a newspaper, magazine, or other
periodical, radio, television, telephone or tape recording, videotape display,
signs or billboards, motion pictures, computerized media, or other public
media), sales literature (I.E., any written communication distributed or made
generally available to customers or the public, including brochures, circulars,
research reports, market letters, form letters, seminar texts, reprints or
excerpts of any other advertisement, sales literature, or published article),
educational or training materials or other communications distributed or made
generally available to some or all agents or employees.
ARTICLE VII. INDEMNIFICATION
7.1 INDEMNIFICATION BY THE INSURER
7.1(a) The Insurer agrees to indemnify and hold harmless the Fund,
each of its Trustees and officers, any affiliated person of the Fund within the
meaning of Section 2(a)(3) of the 1940 Act, and the Distributor (collectively,
the "Indemnified Parties" for purposes of this Section 7.1) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Insurer) or litigation expenses (including legal and
other expenses), to which the Indemnified Parties may become subject under any
statute or regulation, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or litigation expenses are related to the sale or
acquisition of the Fund's shares or the Variable Contracts issued by the Insurer
and:
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the
registration statement or prospectus (which shall include an offering
memorandum) for the Variable Contracts issued by the Insurer or sales
literature for
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such Variable Contracts (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify shall not apply
as to any Indemnified Party if such statement or omission or such
alleged statement or omission was made in reliance upon and in
conformity with information furnished to the Insurer by or on behalf
of the Fund for use in the registration statement or prospectus for
the Variable Contracts issued by the Insurer or sales literature (or
any amendment or supplement) or otherwise for use in connection with
the sale of such Variable Contracts or Fund shares; or
(ii) arise out of or as a result of any statement or
representation (other than statements or representations contained in
the registration statement, prospectus or sales literature of the Fund
not supplied by the Insurer or persons under its control) or wrongful
conduct of the Insurer or any of its affiliates, employees or agents
with respect to the sale or distribution of the Variable Contracts
issued by the Insurer or the Fund shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a registration statement,
prospectus, or sales literature of the Fund or any amendment thereof
or supplement thereto or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not misleading if such a statement or
omission was made in reliance upon information furnished to the Fund
by or on behalf of the Insurer; or
(iv) arise out of or result from any material breach of any
representation and/or warranty made by the Insurer in this Agreement
or arise out of or result from any other material breach of this
Agreement by the Insurer;
except to the extent provided in Sections 7.1(b) and 7.1(c) hereof.
7.1(b) The Insurer shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation expenses to which an Indemnified
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Party would otherwise be subject by reason of willful misfeasance, bad
faith, or gross negligence in the performance of the Indemnified Party's
duties or by reason of the Indemnified Party's reckless disregard of
obligations or duties under this Agreement or to the Fund.
7.1(c) The Insurer shall not be liable under this
indemnification provision with respect to any claim made against an
Indemnified Party unless such Party shall have notified the Insurer in
writing within a reasonable time after the summons or other first legal
process giving information of the nature of the claim shall have been
served upon such Indemnified Party (or after such Party shall have received
notice of such service on any designated agent), but failure to notify the
Insurer of any such claim shall not relieve the Insurer from any liability
which it may have to the Indemnified Party against whom such action is
brought otherwise than on account of this indemnification provision. In
case any such action is brought against the Indemnified Parties, the
Insurer shall be entitled to participate, at its own expense, in the
defense of such action. The Insurer also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Insurer to such party of the Insurer's
election to assume the defense thereof, the Indemnified Party shall bear
the fees and expenses of any additional counsel retained by it, and the
Insurer will not be liable to such party under this Agreement for any legal
or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
7.1(d) The Indemnified Parties shall promptly notify the Insurer
of the commencement of any litigation or proceedings against them in
connection with the issuance or sale of the Fund shares or the Variable
Contracts issued by the Insurer or the operation of the Fund.
7.2 INDEMNIFICATION BY THE DISTRIBUTOR
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7.2(a) The Distributor agrees to indemnify and hold harmless the
Insurer, its affiliated principal underwriter of the Variable Contracts,
and each of their directors and officers and any affiliated person of the
Insurer within the meaning of Section 2(a)(3) of the 1940 Act
(collectively, the "Indemnified Parties" for purposes of this Section 7.2)
against any and all losses, claims, damages, liabilities (including amounts
paid in settlement with the written consent of the Distributor) or
litigation expenses (including legal and other expenses) to which the
Indemnified Parties may become subject under any statute or regulation, at
common law or otherwise, insofar as such losses, claims, damages,
liabilities or litigation expenses are related to the sale or acquisition
of the Fund's shares or the Variable Contracts issued by the Insurer and:
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the
registration statement or prospectus or sales literature of the
Fund (or any amendment or supplement to any of the foregoing), or
arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify shall not
apply as to any Indemnified Party if such statement or omission
or such alleged statement or omission was made in reliance upon
and in conformity with information furnished to the Distributor
or the Fund or the designee of either by or on behalf of the
Insurer for use in the registration statement or prospectus for
the Fund or in sales literature (or any amendment or supplement)
or otherwise for use in the registration statement or prospectus
for the Fund or in sales literature (or any amendment or
supplement) or otherwise for use in connection with the sale of
the Variable Contracts issued by the Insurer or Fund shares; or
(ii) arise out of or as a result of any statement or
representations (other than statements or representations
contained in the registration statement, prospectus or sales
literature for the Variable Contracts not supplied by the
Distributor or any employees or agents thereof) or wrongful
conduct of the Fund or Distributor, or the affiliates, employees,
or agents of the Fund or the Distributor with respect to the sale
or distribution of the Variable Contracts issued by the Insurer
or Fund shares; or
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(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a registration
statement, prospectus, or sales literature covering the Variable
Contracts issued by the Insurer, or any amendment thereof or
supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or
necessary to make the statement or statements therein not
misleading, if such statement or omission was made in reliance
upon information furnished to the Insurer by or on behalf of the
Fund; or
(iv) arise out of or result from any material breach of any
representation and/or warranty made by the Distributor in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Distributor;
except to the extent provided in Sections 7.2(b) and 7.2(c) hereof.
7.2(b) The Distributor shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation expenses to which an Indemnified Party would otherwise
be subject by reason of willful misfeasance, bad faith, or gross negligence in
the performance of the Indemnified Party's duties or by reason of the
Indemnified Party's reckless disregard of obligations or duties under this
Agreement or to the Insurer or the Separate Accounts.
7.2(c) The Distributor shall not be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless such Party shall have notified the Distributor in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Party shall have received notice of such
service on any designated agent), but failure to notify the Distributor of any
such claim shall not relieve the Distributor from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise than
on account of this indemnification provision. In case any such action is
brought against the
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Indemnified Parties, the Distributor will be entitled to participate, at is own
expense, in the defense thereof. The Distributor also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Distributor to such party of the Distributor's
election to assume the defense thereof, the Indemnified Party shall bear the
fees and expenses of any additional counsel retained by it, and the Distributor
will not be liable to such party under this Agreement for any legal or other
expense subsequently incurred by such party independently in connection with the
defense thereof other than reasonable costs of investigation.
7.2(d) The Insurer shall promptly notify the Distributor of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Variable Contracts
issued by the Insurer or the operation of the Separate Accounts.
7.3 INDEMNIFICATION BY THE FUND
7.3(a) The Fund agrees to indemnify and hold harmless the Insurer,
its affiliated principal underwriter of the Variable Contracts, and each of
their directors and officers and any affiliated person of the Insurer within the
meaning of Section 2(a)(3) of the 1940 Act (collectively, the "Indemnified
Parties" for purposes of this Section 7.3) against any and all losses, claims,
damages, liabilities (including amounts paid in settlement with the written
consent of the Fund) or litigation expenses (including legal and other expenses)
to which the Indemnified Parties may become subject under any statute or
regulation, at common law or otherwise, insofar as such losses, claims, damages,
liabilities or litigation expenses are related to the sale or acquisition of the
Fund's shares or the Variable Contracts issued by the Insurer and:
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the
registration statement or prospectus or sales literature of the Fund
(or any
23
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amendment or supplement to any of the foregoing), or arise out of or
are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, provided that this agreement to
indemnify shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission was made
in reliance upon and in conformity with information furnished to the
Distributor or the Fund or the designee of either by or on behalf of
the Insurer for use in the registration statement or prospectus for
the Fund or in sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the Variable
Contracts issued by the Insurer or Fund shares; or
(ii) arise out of or as a result of any statement or
representation (other than statements or representations contained in
the registration statement, prospectus or sales literature for the
Variable Contracts not supplied by the Distributor or any employees or
agents thereof) or wrongful conduct of the Fund, or the affiliates,
employees, or agents of the Fund, with respect to the sale or
distribution of the Variable Contracts issued by the Insurer or Fund
shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a registration statement,
prospectus or sales literature covering the Variable Contracts issued
by the Insurer, or any amendment thereof or supplement thereto, or the
omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statement or statements
therein not misleading, if such statement or omission was made in
reliance upon information furnished to the Insurer by or on behalf of
the Fund; or
(iv) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this Agreement or
arise out of or result from any other material breach of this
Agreement by the Fund;
except to the extent provided in Sections 7.3(b) and 7.3(c) hereof.
7.3(b) The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
expenses to which an Indemnified Party would otherwise be subject by reason of
willful misfeasance, bad faith, or gross negligence in the performance of the
Indemnified Party's duties or by
24
<PAGE>
reason of the Indemnified Party's reckless disregard of obligations or duties
under this Agreement or to the Insurer or the Separate Accounts.
7.3(c) The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such party shall have notified the Fund in writing within a reasonable time
after the summons or other first legal process giving information of the nature
of the claim shall have been served upon such Indemnified Party (or after such
Party shall have received notice of such service on any designated agent), but
failure to notify the Fund of any such claim shall not relieve the Fund from any
liability which it may have to the Indemnified Party against whom such action is
brought otherwise than on account of this indemnification provision. In case
any such action is brought against the Indemnified Parties, the Fund will be
entitled to participate, at its own expense, in the defense thereof. The Fund
also shall be entitled to assume the defense thereof, with counsel satisfactory
to the party named in the action. After notice from the Fund to such party of
the Fund's election to assume the defense thereof, the Indemnified Party shall
bear the fees and expenses of any additional counsel retained by it, and the
Fund will not be liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
7.3(d) The Insurer shall promptly notify the Fund of the
com-mencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Variable Contracts
issued by the Insurer or the sale of the Fund's shares.
ARTICLE VIII. APPLICABLE LAW
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8.1 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of Pennsylvania.
8.2 This Agreement shall be subject to the provisions of the 1933, 1934,
and 1940 Acts, and the rules and regulations and rulings thereunder, including
such exemptions from those statutes, rules and regulations as the SEC may grant
(including, but not limited to, the Mixed and Shared Funding Exemptive Order),
and the terms hereof shall be interpreted and construed in accordance therewith.
ARTICLE IX. TERMINATION
9.1 This Agreement shall terminate:
(a) at the option of any party upon 180 days advance written notice
to the other parties; or
(b) at the option of the Insurer if shares of the Portfolios are not
reasonably available to meet the requirements of the Variable Contracts issued
by the Insurer, as determined by the Insurer, and upon prompt notice by the
Insurer to the other parties; or
(c) at the option of the Fund or the Distributor upon institution of
formal proceedings against the Insurer or its agent by the NASD, the SEC, or any
state securities or insurance department or any other regulatory body regarding
the Insurer's duties under this Agreement or related to the sale of the Variable
Contracts issued by the Insurer, the operation of the Separate Accounts, or the
purchase of the Fund shares; or
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(d) at the option of the Insurer upon institution of formal
proceedings against the Fund or the Distributor by the NASD, the SEC, or any
state securities or insurance department or any other regulatory body; or
(e) upon requisite vote of the Variable Contract Owners having an
interest in the Separate Accounts (or any subaccounts thereof) to substitute the
shares of another investment company for the corresponding shares of the Fund or
a Portfolio in accordance with the terms of the Variable Contracts for which
those shares had been selected or serve as the underlying investment media; or
(f) in the event any of the shares of a Portfolio are not registered,
issued or sold in accordance with applicable state and/or federal law, or such
law precludes the use of such shares as the underlying investment media of the
Variable Contracts issued or to be issued by the Insurer; or
(g) by any party to the Agreement upon a determination by a majority
of the Trustees of the Fund, or a majority of its disinterested Trustees, that
an irreconcilable conflict, as described in Article IV hereof, exists; or
(h) at the option of the Insurer if the Fund or a Portfolio fails to
meet the requirements under Subchapter M of the Code for qualification as a
Regulated Investment Company specified in Section 3.2 hereof or the
diversi-fication requirements specified in Section 3.3 hereof.
9.2 Each party to this Agreement shall promptly notify the other parties
to the Agreement of the institution against such party of any such formal
proceedings as
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described in Sections 9.1(c) and (d) hereof. The Insurer shall give 60 days
prior written notice to the Fund of the date of any proposed vote of Variable
Contract Owners to replace the Fund's shares as described in Section 9.1(e)
hereof.
9.3 Except as necessary to implement Variable Contract Owner initiated
transactions, or as required by state insurance laws or regulations, the Insurer
shall not redeem Fund shares attributable to the Variable Contracts issued by
the Insurer (as opposed to Fund shares attributable to the Insurer's assets held
in the Separate Accounts), and the Insurer shall not prevent Variable Contract
Owners from allocating payments to a Portfolio, until 60 days after the Insurer
shall have notified the Fund or Distributor of its intention to do so.
9.4 Notwithstanding any termination of this Agreement, the Fund and the
Distributor shall at the option of the Insurer continue to make available
additional shares of the Fund pursuant to the terms and conditions of this
Agreement, for all Variable Contracts in effect on the effective date of
termination of this Agreement (hereinafter referred to as "Existing Contracts").
Specifically, without limitation, based upon instructions from the owners of the
Existing Contracts, the Separate Accounts shall be permitted to reallocate
investments in the Portfolios of the Fund and redeem investments in the
Portfolios, and shall be permitted to invest in the Portfolios in the event that
owners of the Existing Contracts make additional purchase payments under the
Existing Contracts. If this Agreement terminates, the parties agree that
Sections 3.10, 7.1, 7.2, 7.3, 8.1, and 8.2, and, to the extent that all or a
portion of the assets of the Separate Accounts continue to be invested in the
Fund or any Portfolio of the Fund, Articles I, II, and IV and Sections 5.5 and
5.6 will remain in effect after termination.
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ARTICLE X. NOTICES
Any notice shall be sufficiently given when sent by registered or certified
mail to the other party at the address of such party set forth below or at such
other address as such party may from time to time specify in writing to the
other party.
If to the Fund:
Insurance Series
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3779
Attn.: John W. McGonigle
If to the Distributor:
Federated Securities Corp.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3779
Attn.: John W. McGonigle
If to the Insurer:
ARTICLE XI: MISCELLANEOUS
11.1 The Fund and the Insurer agree that if and to the extent Rule 6e-2 or
Rule 6e-3(T) under the 1940 Act is amended or if Rule 6e-3 is adopted in final
form, to the extent applicable, the Fund and the Insurer shall each take such
steps as may be necessary to comply with the Rule as amended or adopted in final
form.
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11.2 A copy of the Fund's Agreement and Declaration of Trust is on file
with the Secretary of the Commonwealth of Massachusetts and notice is hereby
given that any agreements that are executed on behalf of the Fund by any Trustee
or officer of the Fund are executed in his or her capacity as Trustee or officer
and not individually. The obligations of this Agreement shall only be binding
upon the assets and property of the Fund and shall not be binding upon any
Trustee, officer or shareholder of the Fund individually.
11.3 Nothing in this Agreement shall impede the Fund's Trustees or
shareholders of the shares of the Fund's Portfolios from exercising any of the
rights provided to such Trustees or shareholders in the Fund's Agreement and
Declaration of Trust, as amended, a copy of which will be provided to the
Insurer upon request.
11.4 Administrative services to Variable Contract Owners shall be the
responsibility of Insurer. Insurer, on behalf of its separate accounts will be
the sole shareholder of record of Fund shares. Fund and Distributor recognize
that they will derive a substantial savings in administrative expense by virtue
of having a sole shareholder rather than multiple shareholders. In
consideration of the administrative savings resulting from having a sole
shareholder rather than multiple shareholders, Distributor agrees to pay to
Insurer an amount computed at an annual rate of .25 of 1% of the average daily
net asset value of shares held in subaccounts for which Insurer provides
administrative services. Distributor's payments to Insurer are for
administrative services only and do not constitute payment in any manner for
investment advisory services.
11.5 It is understood that the name "Federated" or any derivative thereof
or logo associated with that name is the valuable property of the Distributor
and its
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affiliates, and that the Insurer has the right to use such name (or derivative
or logo) only so long as this Agreement is in effect. Upon termination of this
Agreement the Insurer shall forthwith cease to use such name (or derivative or
logo).
11.6 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
11.7 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
11.8 If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement shall
not be affected thereby.
11.9 This Agreement may not be assigned by any party to the Agree-ment
except with the written consent of the other parties to the Agreement.
31
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
INSURANCE SERIES
ATTEST: BY:
---------------------------- --------------------------------
Name: Name:
------------------------------ ------------------------------
Title: Title:
------------------------------ -----------------------------
FEDERATED SECURITIES CORP.
ATTEST: BY:
---------------------------- --------------------------------
Name: Name:
------------------------------ ------------------------------
Title: Title:
------------------------------ -----------------------------
[INSURER NAME]
ATTEST: BY:
---------------------------- --------------------------------
Name: Name:
------------------------------ ------------------------------
Title: Title:
------------------------------ -----------------------------
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<PAGE>
JANUS ASPEN SERIES
FUND PARTICIPATION AGREEMENT
THIS AGREEMENT is made this ___ day of _______, 199_, between JANUS ASPEN
SERIES, an open-end management investment company organized as a Delaware
business trust (the "Trust"), and ___________ Life Insurance Company, a life
insurance company organized under the laws of the State of ________ (the
"Company"), on its own behalf and on behalf of each segregated asset account of
the Company set forth on Schedule A, as may be amended from time to time (the
"Accounts").
W I T N E S S E T H:
WHEREAS, the Trust has registered with the Securities and Exchange
Commission as an open-end management investment company under the Investment
Company Act of 1940, as amended (the "1940 Act"), and has registered the offer
and sale of its shares under the Securities Act of 1933, as amended (the "1933
Act"); and
WHEREAS, the Trust desires to act as an investment vehicle for separate
accounts established for variable life insurance policies and variable annuity
contracts to be offered by insurance companies that have entered into
participation agreements with the Trust (the "Participating Insurance
Companies"); and
WHEREAS, the beneficial interest in the Trust is divided into several
series of shares, each series representing an interest in a particular managed
portfolio of securities and other assets (the "Portfolios"); and
WHEREAS, the Trust has received an order from the Securities and Exchange
Commission granting Participating Insurance Companies and their separate
accounts exemptions from the provisions of Sections 9(a), 13(a), 15(a) and 15(b)
of the 1940 Act, and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the
extent necessary to permit shares of the Trust to be sold to and held by
variable annuity and variable life insurance separate accounts of both
affiliated and unaffiliated life insurance companies and certain qualified
pension and retirement plans (the "Exemptive Order"); and
WHEREAS, the Company has registered or will register (unless registration
is not required under applicable law) certain variable life insurance policies
and/or variable annuity contracts under the 1933 Act (the "Contracts"); and
WHEREAS, the Company has registered or will register (unless registration
is not required under applicable law) each Account as a unit investment trust
under the 1940 Act; and
WHEREAS, the Company desires to utilize shares of one or more Portfolios as
an investment vehicle of the Accounts;
<PAGE>
NOW, THEREFORE, in consideration of their mutual promises, the parties
agree as follows:
ARTICLE I
SALE OF TRUST SHARES
1.1 The Trust shall make shares of its Portfolios available to the
Accounts at the net asset value next computed after receipt of such purchase
order by the Trust (or its agent), as established in accordance with the
provisions of the then current prospectus of the Trust. Shares of a particular
Portfolio of the Trust shall be ordered in such quantities and at such times as
determined by the Company to be necessary to meet the requirements of the
Contracts. The Trustees of the Trust (the "Trustees") may refuse to sell shares
of any Portfolio to any person, or suspend or terminate the offering of shares
of any Portfolio if such action is required by law or by regulatory authorities
having jurisdiction or is, in the sole discretion of the Trustees acting in good
faith and in light of their fiduciary duties under federal and any applicable
state laws, necessary in the best interests of the shareholders of such
Portfolio.
1.2 The Trust will redeem any full or fractional shares of any Portfolio
when requested by the Company on behalf of an Account at the net asset value
next computed after receipt by the Trust (or its agent) of the request for
redemption, as established in accordance with the provisions of the then current
prospectus of the Trust. The Trust shall make payment for such shares in the
manner established from time to time by the Trust, but in no event shall payment
be delayed for a greater period than is permitted by the 1940 Act.
1.3 For the purposes of Sections 1.1 and 1.2, the Trust hereby appoints
the Company as its agent for the limited purpose of receiving and accepting
purchase and redemption orders resulting from investment in and payments under
the Contracts. Receipt by the Company shall constitute receipt by the Trust
provided that i) such orders are received by the Company in good order prior to
the time the net asset value of each Portfolio is priced in accordance with its
prospectus and ii) the Trust receives notice of such orders by 11:00 a.m. New
York time on the next following Business Day. "Business Day" shall mean any day
on which the New York Stock Exchange is open for trading and on which the Trust
calculates its net asset value pursuant to the rules of the Securities and
Exchange Commission.
1.4 Purchase orders that are transmitted to the Trust in accordance with
Section 1.3 shall be paid for no later than 12:00 noon New York time on the same
Business Day that the Trust receives notice of the order. Payments shall be
made in federal funds transmitted by wire.
1.5 Issuance and transfer of the Trust's shares will be by book entry
only. Stock certificates will not be issued to the Company or the Account.
Shares ordered from the Trust will be recorded in the appropriate title for each
Account or the appropriate subaccount of each Account.
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1.6 The Trust shall furnish prompt notice to the Company of any income
dividends or capital gain distributions payable on the Trust's shares. The
Company hereby elects to receive all such income dividends and capital gain
distributions as are payable on a Portfolio's shares in additional shares of
that Portfolio. The Trust shall notify the Company of the number of shares so
issued as payment of such dividends and distributions.
1.7 The Trust shall make the net asset value per share for each Portfolio
available to the Company on a daily basis as soon as reasonably practical after
the net asset value per share is calculated and shall use its best efforts to
make such net asset value per share available by 6 p.m. New York time.
1.8 The Trust agrees that its shares will be sold only to Participating
Insurance Companies and their separate accounts and to certain qualified pension
and retirement plans to the extent permitted by the Exemptive Order. No shares
of any Portfolio will be sold directly to the general public. The Company
agrees that Trust shares will be used only for the purposes of funding the
Contracts and Accounts listed in Schedule A, as amended from time to time.
1.9 The Trust agrees that all Participating Insurance Companies shall have
the obligations and responsibilities regarding pass-through voting and conflicts
of interest corresponding to those contained in Section 2.8 and Article IV of
this Agreement.
ARTICLE II
OBLIGATIONS OF THE PARTIES
2.1 The Trust shall prepare and be responsible for filing with the
Securities and Exchange Commission and any state regulators requiring such
filing all shareholder reports, notices, proxy materials (or similar materials
such as voting instruction solicitation materials), prospectuses and statements
of additional information of the Trust. The Trust shall bear the costs of
registration and qualification of its shares, preparation and filing of the
documents listed in this Section 2.1 and all taxes to which an issuer is subject
on the issuance and transfer of its shares.
2.2 At the option of the Company, the Trust shall either (a) provide the
Company (at the Company's expense) with as many copies of the Trust's current
prospectus, annual report, semi-annual report and other shareholder
communications, including any amendments or supplements to any of the foregoing,
as the Company shall reasonably request; or (b) provide the Company with a
camera ready copy of such documents in a form suitable for printing. The Trust
shall provide the Company with a copy of its statement of additional information
in a form suitable for duplication by the Company. The Trust (at its expense)
shall provide the Company with copies of any Trust-sponsored proxy materials in
such quantity as the Company shall reasonably require for distribution to
Contract owners.
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<PAGE>
2.3 The Company shall bear the costs of printing and distributing the
Trust's prospectus, statement of additional information, shareholder reports and
other shareholder communications to owners of and applicants for policies for
which the Trust is to serve as an investment vehicle. The Company shall bear the
costs of distributing proxy materials (or similar materials such as voting
solicitation instructions) to Contract owners. The Company assumes sole
responsibility for ensuring that such materials are delivered to Contract owners
in accordance with applicable federal and state securities laws, provided that
Trust provides such materials in a prompt manner and in a form and format in
accordance with applicable federal and state securities laws.
2.4 The Company agrees and acknowledges that the Trust's adviser, Janus
Capital Corporation ("Janus Capital"), is the sole owner of the name and mark
"Janus" and that all use of any designation comprised in whole or part of Janus
(a "Janus Mark") under this Agreement shall inure to the benefit of Janus
Capital. Except as provided in Section 2.5, the Company shall not use any Janus
Mark on its own behalf or on behalf of the Accounts or Contracts in any
registration statement, advertisement, sales literature or other materials
relating to the Accounts or Contracts without the prior written consent of Janus
Capital. Upon termination of this Agreement for any reason, the Company shall
cease all use of any Janus Mark(s) as soon as reasonably practicable.
2.5 The Company shall furnish, or cause to be furnished, to the Trust or
its designee, a copy of each Contract prospectus or statement of additional
information in which the Trust or its investment adviser is named prior to the
filing of such document with the Securities and Exchange Commission. The
Company shall furnish, or shall cause to be furnished, to the Trust or its
designee, each piece of sales literature or other promotional material in which
the Trust or its investment adviser is named, at least fifteen Business Days
prior to its use. No such material shall be used if the Trust or its designee
reasonably objects to such use within fifteen Business Days after receipt of
such material.
2.6 The Company shall not give any information or make any representations
or statements on behalf of the Trust or concerning the Trust or its investment
adviser in connection with the sale of the Contracts other than information or
representations contained in and accurately derived from the registration
statement or prospectus for the Trust shares (as such registration statement and
prospectus may be amended or supplemented from time to time), reports of the
Trust, Trust-sponsored proxy statements, or in sales literature or other
promotional material approved by the Trust or its designee, except as required
by legal process or regulatory authorities or with the written permission of the
Trust or its designee.
2.7 The Trust shall not give any information or make any representations
or statements on behalf of the Company or concerning the Company or its
affiliates, the Accounts or the Contracts other than information or
representations contained in and accurately derived from the registration
statement or prospectus for the Contracts (as such registration statement and
prospectus may be amended or supplemented from time to time), or in materials
approved by the
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<PAGE>
Company for distribution including sales literature or other promotional
materials, except as required by legal process or regulatory authorities or with
the written permission of the Company.
2.8 So long as, and to the extent that the Securities and Exchange
Commission interprets the 1940 Act to require pass-through voting privileges for
variable policyowners, the Company will provide pass-through voting privileges
to owners of policies whose cash values are invested, through the Accounts, in
shares of the Trust. The Trust shall require all Participating Insurance
Companies to calculate voting privileges in the same manner and the Company
shall be responsible for assuring that the Accounts calculate voting privileges
in the manner as reasonably established by the Trust. With respect to each
Account, the Company will vote shares of the Trust held by the Account and for
which no timely voting instructions from policyowners are received as well as
shares it owns that are held by that Account, in the same proportion as those
shares for which voting instructions are received. The Company and its agents
will in no way recommend or oppose or interfere with the solicitation of proxies
for Trust shares held by Contract owners without the prior written consent of
the Trust, which consent may be withheld in the Trust's sole discretion.
2.9 The Company shall notify the Trust of any applicable state insurance
laws that restrict the Portfolios' investments or otherwise affect the operation
of the Trust and shall notify the Trust of any changes in such laws.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 The Company represents and warrants that it is an insurance company
duly organized and in good standing under the laws of the State of _________ and
that it has legally and validly established each Account as a segregated asset
account under such law on the date set forth in Schedule A.
3.2 The Company represents and warrants that each Account (1) has been
registered or, prior to any issuance or sale of the Contracts, will be
registered as a unit investment trust in accordance with the provisions of the
1940 Act or, alternatively (2) has not been registered in proper reliance upon
an exclusion from registration under the 1940 Act.
3.3 The Company represents and warrants that the Contracts or interests in
the Accounts (1) are or, prior to issuance, will be registered as securities
under the 1933 Act or, alternatively (2) are not registered because they are
properly exempt from registration under the 1933 Act or will be offered
exclusively in transactions that are properly exempt from registration under the
1933 Act. The Company further represents and warrants that the Contracts will
be issued and sold in compliance in all material respects with all applicable
federal and state laws; and the sale of the Contracts shall comply in all
material respects with state insurance suitability requirements.
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3.4 The Trust represents and warrants that it is duly organized and
validly existing under the laws of the State of Delaware.
3.5 The Trust represents and warrants that the Trust shares offered and
sold pursuant to this Agreement will be registered under the 1933 Act and the
Trust shall be registered under the 1940 Act prior to any issuance or sale of
such shares. The Trust shall amend its registration statement under the 1933
Act and the 1940 Act from time to time as required in order to effect the
continuous offering of its shares. The Trust shall register and qualify its
shares for sale in accordance with the laws of the various states only if and to
the extent deemed advisable by the Trust.
3.6 The Trust represents and warrants that the investments of each
Portfolio will comply with the diversification requirements set forth in Section
817(h) of the Internal Revenue Code of 1986, as amended, and the rules and
regulations thereunder.
ARTICLE IV
POTENTIAL CONFLICTS
4.1 The parties acknowledge that the Trust's shares may be made available
for investment to other Participating Insurance Companies. In such event, the
Trustees will monitor the Trust for the existence of any material irreconcilable
conflict between the interests of the contract owners of all Participating
Insurance Companies. An irreconcilable material conflict may arise for a
variety of reasons, including: (a) an action by any state insurance regulatory
authority; (b) a change in applicable federal or state insurance, tax, or
securities laws or regulations, or a public ruling, private letter ruling,
no-action or interpretative letter, or any similar action by insurance, tax, or
securities regulatory authorities; (c) an administrative or judicial decision in
any relevant proceeding; (d) the manner in which the investments of any
Portfolio are being managed; (e) a difference in voting instructions given by
variable annuity contract and variable life insurance contract owners; or (f) a
decision by an insurer to disregard the voting instructions of contract owners.
The Trustees shall promptly inform the Company if they determine that an
irreconcilable material conflict exists and the implications thereof.
4.2 The Company agrees to promptly report any potential or existing
conflicts of which it is aware to the Trustees. The Company will assist the
Trustees in carrying out their responsibilities under the Exemptive Order by
providing the Trustees with all information reasonably necessary for the
Trustees to consider any issues raised including, but not limited to,
information as to a decision by the Company to disregard Contract owner voting
instructions.
4.3 If it is determined by a majority of the Trustees, or a majority of
its disinterested Trustees, that a material irreconcilable conflict exists that
affects the interests of Contract owners, the Company shall, in cooperation with
other Participating Insurance Companies whose contract owners are also affected,
at its expense and to the extent reasonably practicable (as determined
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by the Trustees) take whatever steps are necessary to remedy or eliminate the
irreconcilable material conflict, which steps could include: (a) withdrawing
the assets allocable to some or all of the Accounts from the Trust or any
Portfolio and reinvesting such assets in a different investment medium,
including (but not limited to) another Portfolio of the Trust, or submitting the
question of whether or not such segregation should be implemented to a vote of
all affected Contract owners and, as appropriate, segregating the assets of any
appropriate group (I.E., annuity contract owners, life insurance contract
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
Contract owners the option of making such a change; and (b) establishing a new
registered management investment company or managed separate account.
4.4 If a material irreconcilable conflict arises because of a decision by
the Company to disregard Contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Trust's election, to withdraw the affected Account's
investment in the Trust and terminate this Agreement with respect to such
Account; provided, however that such withdrawal and termination shall be limited
to the extent required by the foregoing material irreconcilable conflict as
determined by a majority of the disinterested Trustees. Any such withdrawal and
termination must take place within six (6) months after the Trust gives written
notice that this provision is being implemented. Until the end of such six (6)
month period, the Trust shall continue to accept and implement orders by the
Company for the purchase and redemption of shares of the Trust.
4.5 If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's investment in the Trust and terminate this Agreement with
respect to such Account within six (6) months after the Trustees inform the
Company in writing that it has determined that such decision has created an
irreconcilable material conflict; provided, however, that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested
Trustees. Until the end of such six (6) month period, the Trust shall continue
to accept and implement orders by the Company for the purchase and redemption of
shares of the Trust.
4.6 For purposes of Sections 4.3 through 4.6 of this Agreement, a majority
of the disinterested Trustees shall determine whether any proposed action
adequately remedies any irreconcilable material conflict, but in no event will
the Company be required to establish a new funding medium for the Contracts if
an offer to do so has been declined by vote of a majority of Contract owners
materially adversely affected by the irreconcilable material conflict. In the
event that the Trustees determine that any proposed action does not adequately
remedy any irreconcilable material conflict, then the Company will withdraw the
Account's investment in the Trust and terminate this Agreement within six (6)
months after the Trustees inform the Company in writing of the foregoing
determination; provided, however, that such withdrawal and
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<PAGE>
termination shall be limited to the extent required by any such material
irreconcilable conflict as determined by a majority of the disinterested
Trustees.
4.7 The Company shall at least annually submit to the Trustees such
reports, materials or data as the Trustees may reasonably request so that the
Trustees may fully carry out the duties imposed upon them by the Exemptive
Order, and said reports, materials and data shall be submitted more frequently
if deemed appropriate as reasonably determined by the Trustees.
4.8 If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940
Act or the rules promulgated thereunder with respect to mixed or shared funding
(as defined in the Exemptive Order) on terms and conditions materially different
from those contained in the Exemptive Order, then the Trust and/or the
Participating Insurance Companies, as appropriate, shall take such steps as may
be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3,
as adopted, to the extent such rules are applicable.
ARTICLE V
INDEMNIFICATION
5.1 INDEMNIFICATION BY THE COMPANY. The Company agrees to indemnify and
hold harmless the Trust and each of its Trustees, officers, employees and agents
and each person, if any, who controls the Trust within the meaning of Section 15
of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this
Article V) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Company) or expenses
(including the reasonable costs of investigating or defending any alleged loss,
claim, damage, liability or expense and reasonable legal counsel fees incurred
in connection therewith) (collectively, "Losses"), to which the Indemnified
Parties may become subject under any statute or regulation, or at common law or
otherwise, insofar as such Losses:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in a registration
statement or prospectus for the Contracts or in the Contracts themselves or
in sales literature generated or approved by the Company on behalf of the
Contracts or Accounts (or any amendment or supplement to any of the
foregoing) (collectively, "Company Documents" for the purposes of this
Article V), or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided that this
indemnity shall not apply as to any Indemnified Party if such statement or
omission or such alleged statement or omission was made in reliance upon
and was accurately derived from written information furnished to the
Company by or on behalf of the Trust for use in Company Documents or
otherwise for use in connection with the sale of the Contracts or Trust
shares; or
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(b) arise out of or result from statements or representations (other
than statements or representations contained in and accurately derived from
Trust Documents as defined in Section 5.2(a)) or wrongful conduct of the
Company or persons under its control, with respect to the sale or
acquisition of the Contracts or Trust shares; or
(c) arise out of or result from any untrue statement or alleged
untrue statement of a material fact contained in Trust Documents as defined
in Section 5.2(a) or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading if such statement or omission was made in
reliance upon and accurately derived from written information furnished to
the Trust by or on behalf of the Company; or
(d) arise out of or result from any failure by the Company to provide
the services or furnish the materials required under the terms of this
Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this Agreement or
arise out of or result from any other material breach of this Agreement by
the Company.
5.2 INDEMNIFICATION BY THE TRUST. The Trust agrees to indemnify and hold
harmless the Company and each of its directors, officers, employees and agents
and each person, if any, who controls the Company within the meaning of Section
15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this
Article V) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Trust) or expenses
(including the reasonable costs of investigating or defending any alleged loss,
claim, damage, liability or expense and reasonable legal counsel fees incurred
in connection therewith) (collectively, "Losses"), to which the Indemnified
Parties may become subject under any statute or regulation, or at common law or
otherwise, insofar as such Losses:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the registration
statement or prospectus for the Trust or in sales literature generated or
approved by the Trust or its investment adviser on behalf of the Trust (or
any amendment or supplement thereto), (collectively, "Trust Documents" for
the purposes of this Article V), or arise out of or are based upon the
omission or the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, provided that this indemnity shall not apply as to any
Indemnified Party if such statement or omission or such alleged statement
or omission was made in reliance upon and was accurately derived from
written information furnished to the Trust by or on behalf of the Company
for use in Trust Documents or otherwise for use in connection with the sale
of the Contracts or Trust shares; or
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(b) arise out of or result from statements or representations (other
than statements or representations contained in and accurately derived from
Company Documents) or wrongful conduct of the Trust or persons under its
control, with respect to the sale or acquisition of the Contracts or Trust
shares; or
(c) arise out of or result from any untrue statement or alleged
untrue statement of a material fact contained in Company Documents or the
omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not
misleading if such statement or omission was made in reliance upon and
accurately derived from written information furnished to the Company by or
on behalf of the Trust; or
(d) arise out of or result from any failure by the Trust to provide
the services or furnish the materials required under the terms of this
Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Trust in this Agreement or arise
out of or result from any other material breach of this Agreement by the
Trust.
5.3 Neither the Company nor the Trust shall be liable under the
indemnification provisions of Sections 5.1 or 5.2, as applicable, with respect
to any Losses incurred or assessed against an Indemnified Party that arise from
such Indemnified Party's willful misfeasance, bad faith or gross negligence in
the performance of such Indemnified Party's duties or by reason of such
Indemnified Party's reckless disregard of obligations or duties under this
Agreement.
5.4 Neither the Company nor the Trust shall be liable under the
indemnification provisions of Sections 5.1 or 5.2, as applicable, with respect
to any claim made against an Indemnified Party unless such Indemnified Party
shall have notified the other party in writing within a reasonable time after
the summons, or other first written notification, giving information of the
nature of the claim shall have been served upon or otherwise received by such
Indemnified Party (or after such Indemnified Party shall have received notice of
service upon or other notification to any designated agent), but failure to
notify the party against whom indemnification is sought of any such claim shall
not relieve that party from any liability which it may have to the Indemnified
Party in the absence of Sections 5.1 and 5.2.
5.5 In case any such action is brought against the Indemnified Parties,
the indemnifying party shall be entitled to participate, at its own expense, in
the defense of such action. The indemnifying party also shall be entitled to
assume the defense thereof, with counsel reasonably satisfactory to the party
named in the action. After notice from the indemnifying party to the
Indemnified Party of an election to assume such defense, the Indemnified Party
shall bear the fees and expenses of any additional counsel retained by it, and
the indemnifying party will not be liable to the Indemnified Party under this
Agreement for any legal or other expenses subsequently
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incurred by such party independently in connection with the defense thereof
other than reasonable costs of investigation.
ARTICLE VI
TERMINATION
6.1 This Agreement may be terminated by either party for any reason by one
hundred eighty (180) days advance written notice delivered to the other party.
6.2 Notwithstanding any termination of this Agreement, the Trust shall, at
the option of the Company, continue to make available additional shares of the
Trust (or any Portfolio) pursuant to the terms and conditions of this Agreement
for all Contracts in effect on the effective date of termination of this
Agreement, provided that the Company continues to pay the costs set forth in
Section 2.3.
6.3 The provisions of Article V shall survive the termination of this
Agreement, and the provisions of Article IV and Section 2.8 shall survive the
termination of this Agreement as long as shares of the Trust are held on behalf
of Contract owners in accordance with Section 6.2.
ARTICLE VII
NOTICES
Any notice shall be sufficiently given when sent by registered or certified
mail to the other party at the address of such party set forth below or at such
other address as such party may from time to time specify in writing to the
other party.
If to the Trust:
Janus Aspen Series
100 Fillmore Street
Denver, Colorado 80206
Attention: General Counsel
If to the Company:
____________ Life Insurance Company
515 West Market Street, 8th Floor
Louisville, KY 40202
Attention: General Counsel - Retail Business Division
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ARTICLE VIII
MISCELLANEOUS
8.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
8.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
8.3 If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement shall
not be affected thereby.
8.4 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of State of Colorado.
8.5 The parties to this Agreement acknowledge and agree that all
liabilities of the Trust and/or the Accounts arising, directly or indirectly,
under this Agreement, of any and every nature whatsoever, shall be satisfied
solely out of the assets of the Trust and/or the Accounts and that no Trustee,
officer, agent or holder of shares of beneficial interest of the Trust or the
Accounts shall be personally liable for any such liabilities.
8.6 Each party shall cooperate with each other party and all appropriate
governmental authorities (including without limitation the Securities and
Exchange Commission, the National Association of Securities Dealers, Inc., and
state insurance regulators) and shall permit such authorities reasonable access
to its books and records in connection with any investigation or inquiry
relating to this Agreement or the transactions contemplated hereby.
8.7 The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
8.8 The parties to this Agreement acknowledge and agree that this
Agreement shall not be exclusive in any respect.
8.9 Neither this Agreement nor any rights or obligations hereunder may be
assigned by either party without the prior written approval of the other party.
8.10 No provisions of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by both
parties.
-12-
<PAGE>
IN WITNESS WHEREOF, the parties have caused their duly authorized officers
to execute this Participation Agreement as of the date and year first above
written.
JANUS ASPEN SERIES
By: /s/ Bonnie Howe
-----------------------------
Name: Bonnie Howe
---------------------------
Title: Assistant Vice President
--------------------------
LIFE INSURANCE COMPANY
By: /s/ John R. Lindholm
-----------------------------
Name: John R. Lindholm
---------------------------
Title: President
--------------------------
-13-
<PAGE>
SCHEDULE A
SEPARATE ACCOUNTS AND ASSOCIATED CONTRACTS
Name of Separate Account and Contracts Funded
Date Established by Board of Directors By Separate Account
- -------------------------------------- -------------------
Separate Account II Pinnacle Flexible Premium Variable
May 21, 1992 Annuity
-14-
<PAGE>
FUND PARTICIPATION AGREEMENT
This Agreement is entered into as of the ___ day of ______, 199_, between
__________ ("Insurance Company"), a life insurance company organized under the
laws of the State of __________, and JPM Series Trust II ("Fund"), a business
trust organized under the laws of Delaware, with respect to the Fund's portfolio
or portfolios set forth on Schedule 1 hereto, as such Schedule may be revised
from time to time (the "Series"; if there are more than one Series to which this
Agreement applies, the provisions herein shall apply severally to each such
Series).
ARTICLE I 1.
DEFINITIONS
1.1 "Act" shall mean the Investment Company Act of 1940, as amended.
1.2 "Board" shall mean the Board of Trustees of the Fund having the
responsibility for management and control of the Fund.
1.3 "Business Day" shall mean any day for which the Fund calculates net asset
value per share as described in the Fund's Prospectus.
1.4 "Commission" shall mean the Securities and Exchange Commission.
1.5 "Contract" shall mean a variable annuity or variable life insurance
contract that uses the Fund as an underlying investment medium.
Individuals who participate under a group Contract are "Participants".
1.6 "Contractholder" shall mean any entity that is a party to a Contract with
a Participating Company.
1.7 "Disinterested Board Members" shall mean those members of the Board that
are not deemed to be "interested persons" of the Fund, as defined by the
Act.
1.8 "Participating Companies" shall mean any insurance company (including
Insurance Company), which offers variable annuity and/or variable life
insurance contracts to the public and which has entered into an agreement
with the Fund for the purpose of making Fund shares available to serve as
the underlying investment medium for the aforesaid Contracts.
1.9 "Plans" shall mean qualified pension and retirement benefit plans.
1.10 "Prospectus" shall mean the Fund's current prospectus and statement of
additional information, as most recently filed with the Commission, with
respect to the Series.
1.11 "Separate Account" shall mean Separate Account II Company Variable
Annuity Separate Account, a separate account established by Insurance
Company in accordance with the laws of the State of __________.
1.12 "Software Program" shall mean the software program used by the Fund for
providing Fund and account balance information including net asset value
per share.
1.13 "Insurance Company's General Account(s)" shall mean the general
account(s) of Insurance Company and its affiliates which invest in the
Fund.
<PAGE>
ARTICLE II 2.
REPRESENTATIONS
1.14 Insurance Company represents and warrants that (a) it is an insurance
company duly organized and in good standing under applicable law; (b) it
has legally and validly established the Separate Account pursuant to the
______________ Insurance Code for the purpose of offering to the public
certain individual variable annuity contracts; (c) it has registered the
Separate Account as a unit investment trust under the Act to serve as the
segregated investment account for the Contracts; (d) each Separate
Account is eligible to invest in shares of the Fund without such
investment disqualifying the Fund as an investment medium for insurance
company separate accounts supporting variable annuity contracts or
variable life insurance contracts; and (e) each Separate Account shall
comply with all applicable legal requirements.
1.15 Insurance Company represents and warrants that (a) the Contracts will be
described in a registration statement filed under the Securities Act of
1933, as amended ("1933 Act"); (b) the Contracts will be issued and sold
in compliance in all material respects with all applicable federal and
state laws; and (c) the sale of the Contracts shall comply in all
material respects with state insurance law requirements. Insurance
Company agrees to inform the Fund promptly of any investment restrictions
imposed by state insurance law and applicable to the Fund.
1.16 Insurance Company represents and warrants that the income, gains and
losses, whether or not realized, from assets allocated to the Separate
Account are, in accordance with the applicable Contracts, to be credited
to or charged against such Separate Account without regard to other
income, gains or losses from assets allocated to any other accounts of
Insurance Company. Insurance Company represents and warrants that the
assets of the Separate Account are and will be kept separate from
Insurance Company's General Account and any other separate accounts
Insurance Company may have, and will not be charged with liabilities from
any business that Insurance Company may conduct or the liabilities of any
companies affiliated with Insurance Company.
1.17 Fund represents and warrants that the Fund is registered with the
Commission under the Act as an open-end management investment company and
possesses, and shall maintain, all legal and regulatory licenses,
approvals, consents and/or exemptions required for the Fund to operate
and offer its shares as an underlying investment medium for Participating
Companies. The Fund has established five portfolios and may in the
future establish other portfolios.
1.18 Fund represents and warrants that it is currently qualified as a
Regulated Investment Company under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), and that it will make every effort
to maintain such qualification (under Subchapter M or any successor or
similar provision) and that it will notify Insurance Company immediately
upon having a reasonable basis for believing that it has ceased to so
qualify or that it might not so qualify in the future.
1.19 Insurance Company represents and agrees that the Contracts are currently,
and at the time of issuance will be, treated as life insurance policies
or annuity contracts, whichever is appropriate, under applicable
provisions of the Code, and that it will make every effort to maintain
such treatment and that it will notify the Fund and its investment
adviser immediately upon having a reasonable basis for believing that
the Contracts have ceased to be so treated or that they might not be so
treated in the future. Insurance Company agrees that any prospectus
offering a Contract that is a "modified endowment contract," as that term
is defined in Section 7702A of the Code, will identify such Contract as a
modified endowment contract (or policy).
1.20 Fund represents and warrants that the Fund's assets shall be managed and
invested in a manner that complies with the requirements of Section
817(h) of the Code.
1.21 Insurance Company agrees that the Fund shall be permitted (subject to the
other terms of this Agreement) to make Series' shares available to other
Participating Companies and contractholders and to Plans.
<PAGE>
1.22 Fund represents and warrants that any of its trustees, officers,
employees, investment advisers, and other individuals/entities who deal
with the money and/or securities of the Fund are and shall continue to be
at all times covered by a blanket fidelity bond or similar coverage in an
amount not less than that required by Rule 17g-1 under the Act. The
aforesaid Bond shall include coverage for larceny and embezzelement and
shall be issued by a reputable bonding company.
1.23 Insurance Company represents and warrants that all of its employees and
agents who deal with the money and/or securities of the Fund are and
shall continue to be at all times covered by a blanket fidelity bond or
similar coverage in an amount not less than $5,000,000. The aforesaid
Bond shall include coverage for larceny and embezzlement and shall be
issued by a reputable bonding company.
1.24 Insurance Company agrees that the Fund's investment adviser shall be
deemed a third party beneficiary under this Agreement and may enforce any
and all rights conferred by virtue of this Agreement.
ARTICLE III 3.
FUND SHARES
1.25 The Contracts funded through the Separate Account will provide for the
investment of certain amounts in the Series' shares.
1.26 Fund agrees to make the shares of its Series available for purchase at
the then applicable net asset value per share by Insurance Company and
the Separate Account on each Business Day pursuant to rules of the
Commission. Notwithstanding the foregoing, the Fund may refuse to sell
the shares of any Series to any person, or suspend or terminate the
offering of the shares of any Series if such action is required by law or
by regulatory authorities having jurisdiction or is, in the sole
discretion of the Board, acting in good faith and in light of its
fiduciary duties under federal and any applicable state laws, necessary
and in the best interests of the shareholders of such Series.
1.27 Fund agrees that shares of the Fund will be sold only to Participating
Companies and their separate accounts and to the general accounts of
those Participating Companies and their affiliates and to Plans. No
shares of any Series will be sold to the general public.
1.28 Fund shall use its best efforts to provide closing net asset value,
dividend and capital gain information for each Series available on a
per-share and Series basis to Insurance Company by 6:30 p.m. Eastern Time
on each Business Day. Any material errors in the calculation of net
asset value, dividend and capital gain information shall be reported
immediately upon discovery to Insurance Company. Non-material errors
will be corrected in the next Business Day's net asset value per share
for the Series in question.
1.29 At the end of each Business Day, Insurance Company will use the
information described in Sections 3.2 and 3.4 to calculate the Separate
Account unit values for the day. Using this unit value, Insurance
Company will process the day's Separate Account transactions received by
it by the close of trading on the floor of the New York Stock Exchange
(currently 4:00 p.m. Eastern time) to determine the net dollar amount of
Series shares which will be purchased or redeemed at that day's closing
net asset value per share for such Series. The net purchase or
redemption orders will be transmitted to the Fund by Insurance Company by
9:00 a.m. Eastern Time on the Business Day next following Insurance
Company's receipt of that information. Subject to Sections 3.6 and 3.8,
all purchase and redemption orders for Insurance Company's General
Accounts shall be effected at the net asset value per share of the
relevant Series next calculated after receipt of the order by the Fund or
its Transfer Agent.
1.30 Fund appoints Insurance Company as its agent for the limited purpose of
accepting orders for the purchase and redemption of shares of each Series
for the Separate Account. Fund will execute orders for any Series at the
applicable net asset value per share determined as of the close of
trading on the day of receipt of such orders by Insurance Company acting
as agent ("effective trade date"), provided that the Fund receives notice
of such orders by 9:00 a.m. Eastern Time on the next following Business
Day and, if such orders request the purchase of Series shares, the
conditions specified in Section 3.8, as applicable, are satisfied. A
redemption or purchase request for any Series that does not satisfy the
conditions specified above and in Section 3.8, as applicable, will be
effected at the net asset value computed for such Series on the Business
Day immediately preceding the next following Business Day upon which such
conditions have been satisfied.
<PAGE>
1.31 Insurance Company will make all reasonable efforts to notify Fund in
advance of any unusually large purchase or redemption orders.
1.32 If Insurance Company's order requests the purchase of Series shares,
Insurance Company will pay for such purchases by wiring Federal Funds to
Fund or its designated custodial account on the day the order is
transmitted. Insurance Company shall make all reasonable efforts to
transmit to the Fund payment in Federal Funds by 12:00 noon Eastern Time
on the Business Day the Fund receives the notice of the order pursuant to
Section 3.5. Fund will execute such orders at the applicable net asset
value per share determined as of the close of trading on the effective
trade date if Fund receives payment in Federal Funds by 12:00 midnight
Eastern Time on the Business Day the Fund receives the notice of the
order pursuant to Section 3.5. If payment in Federal Funds for any
purchase is not received or is received by the Fund after 12:00 noon
Eastern Time on such Business Day, Insurance Company shall promptly upon
the Fund's request, reimburse the Fund for any charges, costs, fees,
interest or other expenses incurred by the Fund in connection with any
advances to, or borrowings or overdrafts by, the Fund, or any similar
expenses incurred by the Fund, as a result of portfolio transactions
effected by the Fund based upon such purchase request. If Insurance
Company's order requests the redemption of Series shares valued at or
greater than $1 million dollars, the Fund may wire such amount to
Insurance Company within seven days of the order or as required by law,
whichever is sooner.
1.33 Fund has the obligation to ensure that Series shares are registered with
applicable federal and state agencies at all times.
1.34 Fund will confirm each purchase or redemption order made by Insurance
Company. Transfer of Series shares will be by book entry only. No share
certificates will be issued to Insurance Company. Insurance Company will
record shares ordered from Fund in an appropriate title for the
corresponding account.
1.35 Fund shall credit Insurance Company with the appropriate number of
shares.
1.36 On each ex-dividend date of the Fund or, if not a Business Day, on the
first Business Day thereafter, Fund shall communicate to Insurance
Company the amount of dividend and capital gain, if any, per share of
each Series. All dividends and capital gains of any Series shall be
automatically reinvested in additional shares of the relevant Series at
the applicable net asset value per share of such Series on the payable
date. Fund shall, on the day after the payable date or, if not a
Business Day, on the first Business Day thereafter, notify Insurance
Company of the number of shares so issued.
ARTICLE IV 4.
STATEMENTS AND REPORTS
1.37 Fund shall provide monthly statements of account as of the end of each
month for all of Insurance Company's accounts by the fifteenth (15th)
Business Day of the following month.
1.38 Fund shall distribute to Insurance Company copies of the Fund's
Prospectuses, proxy materials, notices, periodic reports and other
printed materials (which the Fund customarily provides to its
shareholders) in quantities as Insurance Company may reasonably request
for distribution to each Contractholder and Participant.
1.39 Fund will provide to Insurance Company at least one complete copy of all
registration statements, Prospectuses, reports, proxy statements, sales
literature and other promotional materials, applications for exemptions,
requests for no-action letters, and all amendments to any of the above,
that relate to the Fund or its shares, contemporaneously with the filing
of such document with the Commission or other regulatory authorities.
1.40 Insurance Company will provide to the Fund at least one copy of all
registration statements, Prospectuses, reports, proxy statements, sales
literature and other promotional materials, applications for exemptions,
requests for no-action letters, and all amendments to any of the above,
that relate to the Contracts or the Separate Account, contemporaneously
with the filing of such document with the Commission.
<PAGE>
ARTICLE V 5.
EXPENSES
1.41 The charge to the Fund for all expenses and costs of the Series,
including but not limited to management fees, administrative expenses and
legal and regulatory costs, will be made in the determination of the
relevant Series' daily net asset value per share so as to accumulate to
an annual charge at the rate set forth in the Fund's Prospectus.
Excluded from the expense limitation described herein shall be brokerage
commissions and transaction fees and extraordinary expenses.
1.42 Except as provided in this Article V and, in particular in the next
sentence, Insurance Company shall not be required to pay directly any
expenses of the Fund or expenses relating to the distribution of its
shares. Insurance Company shall pay the following expenses or costs:
a. Such amount of the production expenses of any Fund materials,
including the cost of printing the Fund's Prospectus, or
marketing materials for prospective Insurance Company
Contractholders and Participants as the Fund's investment
adviser and Insurance Company shall agree from time to time.
b. Distribution expenses of any Fund materials or marketing
materials for prospective Insurance Company Contractholders
and Participants.
c. Distribution expenses of Fund materials or marketing materials
for Insurance Company Contractholders and Participants.
2. Except as provided herein, all other Fund expenses shall not be borne by
Insurance Company.
ARTICLE VI 6.
EXEMPTIVE RELIEF
2.1 Insurance Company has reviewed a copy of the order dated December, 1996
of the Securities and Exchange Commission under Section 6(c) of the Act
and, in particular, has reviewed the conditions to the relief set forth
in the related Notice. As set forth therein, Insurance Company agrees to
report any potential or existing conflicts promptly to the Board, and in
particular whenever contract voting instructions are disregarded, and
recognizes that it will be responsible for assisting the Board in
carrying out its responsibilities under such application. Insurance
Company agrees to carry out such responsibilities with a view to the
interests of existing Contractholders.
2.2 If a majority of the Board, or a majority of Disinterested Board Members,
determines that a material irreconcilable conflict exists with regard to
Contractholder investments in the Fund, the Board shall give prompt
notice to all Participating Companies. If the Board determines that
Insurance Company is responsible for causing or creating said conflict,
Insurance Company shall at its sole cost and expense, and to the extent
reasonably practicable (as determined by a majority of the Disinterested
Board Members), take such action as is necessary to remedy or eliminate
the irreconcilable material conflict. Such necessary action may include,
but shall not be limited to:
a. Withdrawing the assets allocable to the Separate Account from
the Series and reinvesting such assets in a different
investment medium, or submitting the question of whether such
segregation should be implemented to a vote or all affected
Contractholders; and/or
b. Establishing a new registered management investment company.
2.3 If a material irreconcilable conflict arises as a result of a decision by
Insurance Company to disregard Contractholder voting instructions and
said decision represents a minority position or would preclude a majority
vote by all Contractholders having an interest in the Fund, Insurance
Company may be required, at the Board's election, to withdraw the
Separate Account's investment in the Fund.
<PAGE>
2.4 For the purpose of this Article, a majority of the Disinterested Board
Members shall determine whether or not any proposed action adequately
remedies any irreconcilable material conflict, but in no event will the
Fund be required to bear the expense of establishing a new funding medium
for any Contract. Insurance Company shall not be required by this
Article to establish a new funding medium for any Contract if an offer to
do so has been declined by vote of a majority of the Contractholders
materially adversely affected by the irreconcilable material conflict.
2.5 No action by Insurance Company taken or omitted, and no action by the
Separate Account or the Fund taken or omitted as a result of any act or
failure to act by Insurance Company pursuant to this Article VI shall
relieve Insurance Company of its obligations under, or otherwise affect
the operation of, Article V.
ARTICLE VII 7.
VOTING OF FUND SHARES
2.6 Fund shall provide Insurance Company with copies at no cost to Insurance
Company, of the Fund's proxy material, reports to shareholders and other
communications to shareholders in such quantity as Insurance Company
shall reasonably require for distributing to Contractholders or
Participants.
Insurance Company shall:
(a) solicit voting instructions from Contractholders or
Participants on a timely basis and in accordance with
applicable law;
(b) vote the Series shares in accordance with instructions
received from Contractholders or Participants; and
(c) vote Series shares for which no instructions have been
received in the same proportion as Series shares for which
instructions have been received.
Insurance Company agrees at all times to vote its General Account
shares in the same proportion as Series shares for which
instructions have been received from Contractholders or
Participants. Insurance Company further agrees to be responsible
for assuring that voting Series shares for the Separate Account is
conducted in a manner reasonably consistent with other
Participating Companies.
2.7 Insurance Company agrees that it shall not, without the prior written
consent of the Fund and its investment adviser, solicit, induce or
encourage Contractholders to (a) change or supplement the Fund's current
investment adviser or (b) change, modify, substitute, add to or delete
the Fund from the current investment media for the Contracts.
ARTICLE VIII 8.
MARKETING AND REPRESENTATIONS
2.8 The Fund or its underwriter shall periodically furnish Insurance Company
with the following documents, in quantities as Insurance Company may
reasonably request:
a. Current Prospectus and any supplements thereto;
b. other marketing materials, including (to the extent available)
but not limited to performance summaries, market outlooks and
portfolio highlight sheets.
Expenses for the production of such documents shall be borne by
Insurance Company in accordance with Section 5.2 of this
Agreement.
<PAGE>
2.9 Insurance Company shall designate certain persons or entities which shall
have the requisite licenses to solicit applications for the sale of
Contracts. No representation is made as to the number or amount of
Contracts that are to be sold by Insurance Company. Insurance Company
shall make reasonable efforts to market the Contracts and shall comply in
all material respects with all applicable federal and state laws in
connection therewith.
2.10 Insurance Company shall furnish, or shall cause to be furnished, to the
Fund, each piece of sales literature or other promotional material in
which the Fund, its investment adviser or the administrator is named, at
least fifteen Business Days prior to its use. No such material shall be
used unless the Fund approves such material. Such approval (if given)
must be in writing and shall be presumed not given if not received within
ten Business Days after receipt of such material. The Fund shall use all
reasonable efforts to respond within ten days of receipt.
2.11 Insurance Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the
Fund or any Series in connection with the sale of the Contracts other
than the information or representations contained in the registration
statement or Prospectus, as may be amended or supplemented from time to
time, or in reports or proxy statements for the Fund, or in sales
literature or other promotional material approved by the Fund.
2.12 Fund shall furnish, or shall cause to be furnished, to Insurance Company,
each piece of the Fund's sales literature or other promotional material
in which Insurance Company or the Separate Account is named, at least
fifteen Business Days prior to its use. No such material shall be used
unless Insurance Company approves such material. Such approval (if
given) must be in writing and shall be presumed not given if not received
within ten Business Days after receipt of such material. Insurance
Company shall use all reasonable efforts to respond within ten days of
receipt.
2.13 Fund shall not, in connection with the sale of Series shares, give any
information or make any representations on behalf of Insurance Company or
concerning Insurance Company, the Separate Account, or the Contracts
other than the information or representations contained in a registration
statement or prospectus for the Contracts, as may be amended or
supplemented from time to time, or in published reports for the Separate
Account which are in the public domain or approved by Insurance Company
for distribution to Contractholders or Participants, or in sales
literature or other promotional material approved by Insurance Company.
2.14 For purposes of this Agreement, the phrase "sales literature or other
promotional material" or words of similar import include, without
limitation, advertisements (such as material published, or designed for
use, in a newspaper, magazine or other periodical, radio, television,
telephone or tape recording, videotape display, signs or billboards,
motion pictures or other public media), sales literature (such as any
written communication distributed or made generally available to
customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, or reprints or
excerpts of any other advertisement, sales literature, or published
article), educational or training materials or other communications
distributed or made generally available to some or all agents or
employees, registration statements, prospectuses, statements of
additional information, shareholder reports and proxy materials, and any
other material constituting sales literature or advertising under
National Association of Securities Dealers, Inc. rules, the Act or the
1933 Act.
<PAGE>
ARTICLE IX 9.
INDEMNIFICATION
2.15 Insurance Company agrees to indemnify and hold harmless the Fund, its
investment adviser, any sub-investment adviser of a Series, and their
affiliates, and each of their directors, trustees, officers, employees,
agents and each person, if any, who controls or is associated with any of
the foregoing entities or persons within the meaning of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of Section 9.1),
against any and all losses, claims, damages or liabilities joint or
several (including any investigative, legal and other expenses reasonably
incurred in connection with, and any amounts paid in settlement of, any
action, suit or proceeding or any claim asserted) for which the
Indemnified Parties may become subject, under the 1933 Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in
respect to thereof) (i) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in
information furnished by Insurance Company for use in the registration
statement or Prospectus or sales literature or advertisements of the Fund
or with respect to the Separate Account or Contracts, or arise out of or
are based upon the omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not
misleading; (ii) arise out of Insurance Company's incorrect calculation
and/or untimely reporting of net purchase or redemption orders; provided
that Insurance Company shall have no obligation to indemnify and hold
harmless the Indemnified Parties if the incorrect calculation or
incorrect or untimely reporting was the result of incorrect information
furnished by the Indemnified Parties or information furnished untimely by
the Indemnified Parties or otherwise as a result of or relating to a
breach of this Agreement by the Indemnified Parties; and provided,
further, that Insurance Company shall not be liable for special,
consequential or incidental damages; or (iii) arise out of any breach by
Insurance Company of a material term of this Agreement or as a result of
any failure by Insurance Company to provide the services and furnish the
materials or to make any payments provided for in this Agreement.
Insurance Company will reimburse any legal or other expenses reasonably
incurred in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that Insurance
Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon any
untrue statement or omission or alleged omission made in such
registration statement, prospectus, sales literature, or advertisement in
conformity with written information furnished to Insurance Company by the
Fund specifically for use therein. This indemnity agreement will be in
addition to any liability which Insurance Company may otherwise have.
2.16 The Fund agrees to indemnify and hold harmless Insurance Company and each
of its affiliates, directors, officers, employees, agents and each
person, if any, who controls or is associated with any of the foregoing
entities and persons within the meaning of the 1933 Act against any and
all losses, claims, damages or liabilities to which Insurance Company or
any such director, officer, employee, agent or controlling person may
become subject, under the 1933 Act or otherwise, insofar as such losses,
claims, damages or liabilities joint or several (including any
investigative, legal and other expenses reasonably incurred in connection
with, and any amounts paid in settlement of, any action, suit or
proceeding or any claim asserted) for which the Indemnified Parties may
become subject, under the 1933 Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) (1) arise
out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in information furnished by Fund or its
investment adviser or sub-adviser for use in the registration statement
or Prospectus or sales literature or advertisements of the Fund or with
respect to the Separate Account or Contracts; (2) arise out of or are
based upon the omission to state in the registration statement or
Prospectus or sales literature or advertisements of the Fund any material
fact required to be stated therein or necessary to make the statements
therein not misleading; (3) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in
the registration statement or Prospectus or sales literature or
advertisements with respect to the Separate Account or the Contracts and
such statements were based on information provided to Insurance Company
by the Fund, or (4) arise out of any breach by the Fund of a material
term of this Agreement or as a result of any failure by the Fund to
provide the services and furnish the materials or to make any payments
provided for in or related to this Agreement; and the Fund will reimburse
any legal or other expenses reasonably incurred by Insurance Company or
any such affiliate, director, officer, employee, agent or controlling
person in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the Fund will
not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
omission or alleged omission made in such Registration Statement,
Prospectus, sales literature or advertisements in conformity with written
information furnished to the Fund by Insurance Company specifically for
use therein; and provided, further, that the
<PAGE>
Fund shall not be liable for special, consequential or incidental
damages. This indemnity agreement will be in addition to any liability
which the Fund may otherwise have.
2.17 The Fund shall indemnify and hold Insurance Company harmless against any
and all liability, loss, damages, costs or expenses which Insurance
Company may incur, suffer or be required to pay due to the Fund's (1)
incorrect calculation of the daily net asset value, dividend rate or
capital gain distribution rate of a Series; (2) incorrect reporting of
the daily net asset value, dividend rate or capital gain distribution
rate; and (3) untimely reporting of the net asset value, dividend rate or
capital gain distribution rate; provided that the Fund shall have no
obligation to indemnify and hold harmless Insurance Company if the
incorrect calculation or incorrect or untimely reporting was the result
of incorrect information furnished by Insurance Company or information
furnished untimely by Insurance Company or otherwise as a result of or
relating to a breach of this Agreement by Insurance Company; and
provided, further, that the Fund shall not be liable for special,
consequential or incidental damages.
2.18 Promptly after receipt by an indemnified party under this Article of
notice of the commencement of any action, such indemnified party will, if
a claim in respect thereof is to be made against the indemnifying party
under this Article, notify the indemnifying party of the commencement
thereof. The omission to so notify the indemnifying party will not
relieve the indemnifying party from any liability under this Article IX,
except to the extent that the omission results in a failure of actual
notice to the indemnifying party and such indemnifying party is damaged
solely as a result of the failure to give such notice. In case any such
action is brought against any indemnified party, and it notified the
indemnifying party of the commencement thereof, the indemnifying party
will be entitled to participate therein and, to the extent that it may
wish, assume the defense thereof, with counsel reasonably satisfactory to
such indemnified party, and to the extent that the indemnifying party has
given notice to such effect to the indemnified party and is performing
its obligations under this Article, the indemnifying party shall not be
liable for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof.
Notwithstanding the foregoing, in any such proceeding, any indemnified
party shall have the right to retain its own counsel, but the fees and
expenses of such counsel shall be at the expense of such indemnified
party unless (i) the indemnifying party and the indemnified party shall
have mutually agreed to the retention of such counsel or (ii) the named
parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation
of both parties by the same counsel would be inappropriate due to actual
or potential differing interests between them. The indemnifying party
shall not be liable for any settlement of any proceeding effected without
its written consent.
A successor by law of the parties to this Agreement shall be
entitled to the benefits of the indemnification contained in this
Article IX.
2.19 Insurance Company shall indemnify and hold the Fund, its investment
adviser and any sub-investment adviser of a Series harmless against any
tax liability incurred by the Fund under Section 851 of the Code arising
from purchases or redemptions by Insurance Company's General Accounts or
the account of its affiliates, except to the extent such liability is
attributable to the negligence or conduct of the Fund, its investment
adviser or any sub-investment adviser.
9.6 The Fund shall indemnify and hold Insurance Company harmless against any
tax liability incurred by the Insurance Company or the Separate Account
under Section 817(h) or Subchapter M of the Code, except to the extent
such liability is attributable to the negligence or conduct of the
Insurance Company or the Separate Account .
ARTICLE X 10.
COMMENCEMENT AND TERMINATION
2.20 This Agreement shall be effective as of the date hereof and shall
continue in force until terminated in accordance with the provisions
herein.
2.21 This Agreement shall terminate without penalty as to one or more Series
at the option of the terminating party:
<PAGE>
a. At the option of Insurance Company or the Fund at any time
from the date hereof upon 180 days' notice, unless a shorter
time is agreed to by the parties;
b. At the option of Insurance Company, if shares of any Series
are not reasonably available to meet the requirements of the
Contracts as determined by Insurance Company. Prompt notice
of election to terminate shall be furnished by Insurance
Company, said termination to be effective ten days after
receipt of notice unless the Fund makes available a sufficient
number of shares to meet the requirements of the Contracts
within said ten-day period;
c. At the option of Insurance Company, upon the institution of
formal proceedings against the Fund by the Commission,
National Association of Securities Dealers or any other
regulatory body, the expected or anticipated ruling, judgment
or outcome of which would, in Insurance Company's reasonable
judgment, materially impair the Fund's ability to meet and
perform the Fund's obligations and duties hereunder. Prompt
notice of election to terminate shall be furnished by
Insurance Company with said termination to be effective upon
receipt of notice;
d. At the option of the Fund, upon the institution of formal
proceedings against Insurance Company by the Commission,
National Association of Securities Dealers or any other
regulatory body, the expected or anticipated ruling, judgment
or outcome of which would, in the Fund's reasonable judgment,
materially impair Insurance Company's ability to meet and
perform Insurance Company's obligations and duties hereunder.
Prompt notice of election to terminate shall be furnished by
the Fund with said termination to be effective upon receipt of
notice;
e. At the option of either party, if such party shall determine,
in its sole judgment reasonably exercised in good faith, that
the Insurance Company, on the one hand, or the Fund, on the
other hand, has suffered a material adverse change in its
business or financial condition or is the subject of material
adverse publicity and such material adverse change or material
adverse publicity is likely to have a material adverse impact
upon the business and operation of the Insurance Company, on
the one hand, or the Fund or its investment adviser, on the
other hand, such party shall notify the other party in writing
of such determination and its intent to terminate this
Agreement, and after considering the actions taken by the
Insurance Company or the Fund, as the case may be, and any
other changes in circumstances since the giving of such
notice, such determination shall continue to apply on the
sixtieth (60th) day following the giving of such notice, which
sixtieth day shall be the effective date of termination;
f. Upon termination of the Investment Advisory Agreement between
the Fund and its investment adviser or its successors unless
Insurance Company specifically approves the selection of a new
Fund investment adviser. The Fund shall immediately furnish
notice of such termination to Insurance Company;
g. In the event the Fund's shares are not registered, issued or
sold in accordance with applicable federal law, or such law
precludes the use of such shares as the underlying investment
medium of Contracts issued or to be issued by Insurance
Company. Termination shall be effective immediately upon such
occurrence, and notice shall be provided immediately to
Company.
h. At the option of the Fund upon a determination by the Board in
good faith that it is no longer advisable and in the best
interests of shareholders for the Fund to continue to operate
pursuant to this Agreement. Termination pursuant to this
Subsection (h) shall be effective upon notice by the Fund to
Insurance Company of such termination;
i. At the option of the Fund if the Contracts cease to qualify as
annuity contracts or life insurance policies, as applicable,
under the Code, or if the Fund reasonably believes in judgment
exercised in good faith that the Contracts may fail to so
qualify;
j. At the option of either party to this Agreement, upon another
party's breach of any material provision of this Agreement;
k. At the option of the Fund, if the Contracts are not
registered, issued or sold in accordance with applicable
federal and/or state law; or
<PAGE>
l. Upon assignment of this Agreement, unless made with the
written consent of the non-assigning party.
Any such termination pursuant to Section 10.2a, 10.2d, 10.2e,
10.2f or 10.2k herein shall not affect the operation of Article V
of this Agreement. Any termination of this Agreement shall not
affect the operation of Article IX of this Agreement.
2.22 Notwithstanding any termination of this Agreement pursuant to
Section 10.2 hereof, the Fund and its investment adviser may, at the
option of the Fund, continue to make available additional Series shares
for so long as the Fund desires pursuant to the terms and conditions of
this Agreement as provided below, for all Contracts in effect on the
effective date of termination of this Agreement (hereinafter referred to
as "Existing Contracts"). Specifically, without limitation, if the Fund
so elects to make additional Series shares available, the owners of the
Existing Contracts or Insurance Company, whichever shall have legal
authority to do so, shall be permitted to reallocate investments in the
Series, redeem investments in the Fund and/or invest in the Fund upon the
making of additional purchase payments under the Existing Contracts. In
the event of a termination of this Agreement pursuant to Section 10.2
hereof, the Fund, as promptly as is practicable under the circumstances,
shall notify Insurance Company whether the Fund will continue to make
Series shares available after such termination. If Series shares
continue to be made available after such termination, the provisions of
this Agreement shall remain in effect and thereafter either the Fund or
Insurance Company may terminate the Agreement, as so continued pursuant
to this Section 10.3, upon prior written notice to the other party, such
notice to be for a period that is reasonable under the circumstances but,
if given by the Fund, need not be for more than six months.
ARTICLE XI 11.
AMENDMENTS
2.23 Any other changes in the terms of this Agreement shall be made by
agreement in writing between Insurance Company and Fund.
ARTICLE XII 12.
NOTICE
2.24 Each notice required by this Agreement shall be given by certified mail,
return receipt requested, to the appropriate parties at the following
addresses:
Insurance Company:
Attn:
Fund:
JPM Series Trust II
c/o Morgan Guaranty Trust Company
522 Fifth Avenue
New York, New York 10036
Attention: Sharon J. Weinberg
Notice shall be deemed to be given on the date of receipt by the
addresses as evidenced by the return receipt.
<PAGE>
ARTICLE XIII 13.
MISCELLANEOUS
2.25 This Agreement has been executed on behalf of the Fund by the undersigned
officer of the Fund in his capacity as an officer of the Fund. The
obligations of this Agreement shall only be binding upon the assets and
property of the Fund and shall not be binding upon any Trustee, officer
or shareholder of the Fund individually.
ARTICLE XIV 14.
LAW
2.26 This Agreement shall be construed in accordance with the internal laws of
the State of New York, without giving effect to principles of conflict of
laws.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be duly
executed and attested as of the date first above written.
[Insurance Company]
By:
-------------------------------
Its:
------------------------------
JPM SERIES TRUST II
By:
-------------------------------
Its:
------------------------------
<PAGE>
SCHEDULE 1
Name of Series
- --------------
JPM Bond Portfolio
JPM International Equity Portfolio
<PAGE>
PARTICIPATION AGREEMENT
AMONG
MORGAN STANLEY UNIVERSAL FUNDS, INC.,
MORGAN STANLEY ASSET MANAGEMENT INC.
MILLER ANDERSON & SHERRERD, LLP
AND
_______________ LIFE INSURANCE COMPANY
DATED AS OF
________________, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I. Purchase of Fund Shares 2
ARTICLE II Representations and Warranties 4
ARTICLE III. Prospectuses, Reports to Shareholders
and Proxy Statements, Voting 6
ARTICLE IV. Sales Material and Information 8
ARTICLE V Fees and Expenses 9
ARTICLE VI. Diversification 10
ARTICLE VII. Potential Conflicts 10
ARTICLE VIII. Indemnification 12
ARTICLE IX. Applicable Law 18
ARTICLE X. Termination 18
ARTICLE XI. Notices 20
ARTICLE XII. Miscellaneous 21
SCHEDULE A Separate Accounts and Contracts A-1
SCHEDULE B Portfolios of Morgan Stanley Universal Funds, Inc. B-1
SCHEDULE C Proxy Voting Procedures C-1
</TABLE>
<PAGE>
THIS AGREEMENT, made and entered into as of the ___ day of _____, 1997
by and among _________ LIFE INSURANCE COMPANY (hereinafter the "Company"),
an ____ corporation, on its own behalf and on behalf of each separate
account of the Company set forth on Schedule A hereto as may be amended
from time to time (each such account hereinafter referred to as the
"Account"), and MORGAN STANLEY UNIVERSAL FUNDS, INC. (hereinafter the
"Fund"), a Maryland corporation, and MORGAN STANLEY ASSET MANAGEMENT INC.
and MILLER ANDERSON & SHERRERD, LLP (hereinafter collectively the
"Advisers" and individually the "Adviser"), a Delaware corporation and a
Pennsylvania limited liability partnership, respectively.
WHEREAS, the Fund engages in business as an open-end management investment
company and is available to act as (i) the investment vehicle for separate
accounts established by insurance companies for individual and group life
insurance policies and annuity contracts with variable accumulation and/or
pay-out provisions (hereinafter referred to individually and/or collectively as
"Variable Insurance Products") and (ii) the investment vehicle for certain
qualified pension and retirement plans (hereinafter "Qualified Plans"); and
WHEREAS, insurance companies desiring to utilize the Fund as an investment
vehicle under their Variable Insurance Contracts enter into participation
agreements with the Fund and the Advisers (the "Participating Insurance
Companies");
WHEREAS, shares of the Fund are divided into several series of shares, each
representing the interest in a particular managed portfolio of securities and
other assets, any one or more of which may be made available under this
Agreement, as may be amended from time to time by mutual agreement of the
parties hereto (each such series hereinafter referred to as a "Portfolio"); and
WHEREAS, the Fund has obtained an order from the Securities and Exchange
Commission, dated September 19, 1996 (File No. 812-10118), granting
Participating Insurance Companies and Variable Insurance Product separate
accounts exemptions from the provisions of Sections 9(a), 13(a), 15(a), and
15(b) of the Investment Company Act of 1940, as amended (hereinafter the "1940
Act"), and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent
necessary to permit shares of the Fund to be sold to and held by Variable
Annuity Product separate accounts of both affiliated and unaffiliated life
insurance companies and Qualified Plans (hereinafter the "Shared Funding
Exemptive Order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
<PAGE>
WHEREAS, each Adviser is duly registered as an investment adviser under the
Investment Advisers Act of 1940, as amended, and any applicable state securities
laws; and
WHEREAS, each Adviser manages certain Portfolios of the Fund; and
WHEREAS, Morgan Stanley & Co. Incorporated (the "Underwriter") is
registered as a broker/dealer under the Securities Exchange Act of 1934, as
amended (hereinafter the "1934 Act"), is a member in good standing of the
National Association of Securities Dealers, Inc. (hereinafter "NASD") and serves
as principal underwriter of the shares of the Fund; and
WHEREAS, the Company has registered or will register certain Variable
Insurance Products under the 1933 Act; and
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution or under authority of the Board of
Directors of the Company, on the date shown for such Account on Schedule A
hereto, to set aside and invest assets attributable to the aforesaid Variable
Insurance Product; and
WHEREAS, the Company has registered or will register each Account as a unit
investment trust under the 1940 Act; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase, on behalf of each Account, shares
in the Portfolios set forth in Schedule B attached to this Agreement, to fund
certain of the aforesaid Variable Insurance Products and the Underwriter is
authorized to sell such shares to each such Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Company, the
Fund and the Underwriter agree as follows:
ARTICLE I. PURCHASE OF FUND SHARES
1.1. The Fund agrees to make available for purchase by the Company shares
of the Fund and shall execute orders placed for each Account on a daily basis at
the net asset value next computed after receipt by the Fund or its designee of
such order. For purposes of this Section 1.1, the Company shall be the designee
of the Fund for receipt of such orders from each Account and receipt by such
designee shall constitute receipt by the Fund; provided that the Fund receives
notice of such order by 10:00 a.m. Eastern time on the next following Business
Day. "Business Day" shall mean any day on which
2
<PAGE>
the New York Stock Exchange is open for trading and on which the Fund calculates
its net asset value pursuant to the rules of the Securities and Exchange
Commission.
1.2. The Fund, so long as this Agreement is in effect, agrees to make its
shares available indefinitely for purchase at the applicable net asset value per
share by the Company and its Accounts on those days on which the Fund calculates
its net asset value pursuant to rules of the Securities and Exchange Commission
and the Fund shall use all reasonable efforts to calculate such net asset value
on each day which the New York Stock Exchange is open for trading.
Notwithstanding the foregoing, the Board of Directors of the Fund (hereinafter
the "Board") may refuse to permit the Fund to sell shares of any Portfolio to
any person, or suspend or terminate the offering of shares of any Portfolio if
such action is required by law or by regulatory authorities having jurisdiction
or is, in the sole discretion of the Board acting in good faith and in light of
their fiduciary duties under federal and any applicable state laws, necessary in
the best interests of the shareholders of such Portfolio.
1.3. The Fund agrees that shares of the Fund will be sold only to
Participating Insurance Companies and their separate accounts and to certain
Qualified Plans. No shares of any Portfolio will be sold to the general public.
1.4. The Fund agrees to redeem for cash, on the Company's request, any
full or fractional shares of the Fund held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt by
the Fund or its designee of the request for redemption. For purposes of this
Section 1.4, the Company shall be the designee of the Fund for receipt of
requests for redemption from each Account and receipt by such designee shall
constitute receipt by the Fund, provided that the Fund receives notice of such
request for redemption on the next following Business Day.
1.5. The Company agrees that purchases and redemptions of Portfolio shares
offered by the then current prospectus of the Fund shall be made in accordance
with the provisions of such prospectus. The Variable Insurance Products issued
by the Company, under which amounts may be invested in the Fund (hereinafter the
"Contracts"), are listed on Schedule A attached hereto and incorporated herein
by reference, as such Schedule A may be amended from time to time by mutual
written agreement of all of the parties hereto.
1.6. The Company shall pay for Fund shares on the next Business Day after
an order to purchase Fund shares is made in accordance with the provisions of
Section 1.1 hereof. Payment shall be in federal funds transmitted by wire no
later than 2:30 p.m. For purposes of Section 2.10 and 2.11, upon receipt by the
Fund of the federal funds so wired, such funds shall cease to be the
responsibility of the Company and shall become the responsibility of the Fund.
3
<PAGE>
1.7. Issuance and transfer of the Fund's shares will be by book entry
only. Stock certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for each
Account or the appropriate subaccount of each Account.
1.8. The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Company of any income, dividends or
capital gain distributions payable on the Fund's shares. The Company hereby
elects to receive all such income dividends and capital gain distributions as
are payable on the Portfolio shares in additional shares of that Portfolio. The
Company reserves the right to revoke this election and to receive all such
income dividends and capital gain distributions in cash. The Fund shall notify
the Company of the number of shares so issued as payment of such dividends and
distributions.
1.9. The Fund shall make the net asset value per share for each Portfolio
available to the Company on a daily basis as soon as reasonably practical after
the net asset value per share is calculated (normally by 6:30 p.m. Eastern time)
and shall use its best efforts to make such net asset value per share available
by 7:00 p.m. Eastern time.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1. The Company represents and warrants that the Contracts are or will be
registered under the 1933 Act; that the Contracts will be issued and sold in
compliance in all material respects with all applicable federal and state laws
and that the sale of the Contracts shall comply in all material respects with
state insurance suitability requirements. The Company further represents and
warrants that it is an insurance company duly organized and in good standing
under applicable law and that it has legally and validly established each
Account prior to any issuance or sale thereof as a segregated asset account
under applicable _____ law and has registered or, prior to any issuance or sale
of the Contracts, will register each Account as a unit investment trust in
accordance with the provisions of the 1940 Act to serve as a segregated
investment account for the Contracts.
2.2. The Fund represents and warrants that Fund shares sold pursuant to
this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the State of Maryland and all
applicable federal and state securities laws and that the Fund is and shall
remain registered under the 1940 Act. The Fund shall amend the registration
statement for its shares under the 1933 Act and the 1940 Act from time to time
as required in order to effect the continuous offering of its shares. The Fund
shall register and qualify the shares for sale in accordance with the laws of
the various states only if and to the extent deemed advisable by the Fund.
4
<PAGE>
2.3. The Fund represents that it is currently qualified as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), and that it will make every effort to maintain such
qualification (under Subchapter M or any successor or similar provision) and
that it will notify the Company immediately upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future.
2.4. The Company represents that the Contracts are currently treated as
life insurance policies or annuity contracts, under applicable provisions of the
Code and that it will make every effort to maintain such treatment and that it
will notify the Fund immediately upon having a reasonable basis for believing
that the Contracts have ceased to be so treated or that they might not be so
treated in the future.
2.5. The Fund represents that to the extent that it decides to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act, the Fund
undertakes to have a board of directors, a majority of whom are not interested
persons of the Fund, formulate and approve any plan under Rule 12b-1 to finance
distribution expenses.
2.6. The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various states
except that the Fund represents that the Fund's investment policies, fees and
expenses are and shall at all times remain in compliance with the laws of the
State of Maryland and the Fund represents that their respective operations are
and shall at all times remain in material compliance with the laws of the State
of Maryland to the extent required to perform this Agreement.
2.7. The Fund represents that it is lawfully organized and validly
existing under the laws of the State of Maryland and that it does and will
comply in all material respects with the 1940 Act.
2.8. Each Adviser represents and warrants that it is and shall remain duly
registered in all material respects under all applicable federal and state
securities laws and that it will perform its obligations for the Fund in
compliance in all material respects with the laws of its state of domicile and
any applicable state and federal securities laws.
2.9. The Fund represents and warrants that its directors, officers,
employees, and other individuals/entities dealing with the money and/or
securities of the Fund are and shall continue to be at all times covered by a
blanket fidelity bond or similar coverage for the benefit of the Fund in an
amount not less than the minimal coverage as required currently by Rule 17g-(1)
of the 1940 Act or related provisions as may be promulgated from time to time.
The aforesaid blanket fidelity bond shall include
5
<PAGE>
coverage for larceny and embezzlement and shall be issued by a reputable bonding
company.
2.10. The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals/entities dealing
with the money and/or securities of the Fund are covered by a blanket fidelity
bond or similar coverage, in an amount not less $5 million. The aforesaid
includes coverage for larceny and embezzlement is issued by a reputable bonding
company. The Company agrees to make all reasonable efforts to see that this
bond or another bond containing these provisions is always in effect, and agrees
to notify the Fund and the Underwriter in the event that such coverage no longer
applies.
ARTICLE III. PROSPECTUSES, REPORTS TO SHAREHOLDERS AND PROXY STATEMENTS; VOTING
3.1. The Fund or its designee shall provide the Company with as many
printed copies of the Fund's current prospectus and statement of additional
information as the Company may reasonably request. If requested by the Company,
in lieu of providing printed copies the Fund shall provide camera-ready film or
computer diskettes containing the Fund's prospectus and statement of additional
information, and such other assistance as is reasonably necessary in order for
the Company once each year (or more frequently if the prospectus and/or
statement of additional information for the Fund is amended during the year) to
have the prospectus for the Contracts and the Fund's prospectus printed together
in one document, and to have the statement of additional information for the
Fund and the statement of additional information for the Contracts printed
together in one document. Alternatively, the Company may print the Fund's
prospectus and/or its statement of additional information in combination with
other fund companies' prospectuses and statements of additional information.
3.2. Except as provided in this Section 3.2., all expenses of printing and
distributing Fund prospectuses and statements of additional information shall be
the expense of the Company. For prospectuses and statements of additional
information provided by the Company to its existing owners of Contracts who
currently own shares of one or more of the Fund's Portfolios, in order to update
disclosure as required by the 1933 Act and/or the 1940 Act, the cost of printing
shall be borne by the Fund. If the Company chooses to receive camera-ready film
or computer diskettes in lieu of receiving printed copies of the Fund's
prospectus, the Fund will reimburse the Company in an amount equal to the
product of x and y where x is the number of such prospectuses distributed to
owners of the Contracts who currently own shares of one or more of the Fund's
Portfolios, and y is the Fund's per unit cost of typesetting and printing the
Fund's prospectus. The same procedures shall be followed with respect to the
Fund's statement of additional information. The Company agrees to provide the
Fund or its designee with such information as may be reasonably requested by the
6
<PAGE>
Fund to assure that the Fund's expenses do not include the cost of printing any
prospectuses or statements of additional information other than those actually
distributed to existing owners of the Contracts.
3.3. The Fund's statement of additional information shall be obtainable
from the Fund, the Company or such other person as the Fund may designate, as
agreed upon by the parties.
3.4. The Fund, at its expense, shall provide the Company with copies of
its proxy statements, reports to shareholders, and other communications (except
for prospectuses and statements of additional information, which are covered in
section 3.1) to shareholders in such quantity as the Company shall reasonably
require for distributing to Contract owners.
3.5. If and to the extent required by law the Company shall:
(i) solicit voting instructions from Contract owners;
(ii) vote the Fund shares in accordance with instructions
received from Contract owners; and
(iii) vote Fund shares for which no instructions have been
received in the same proportion as Fund shares of such
Portfolio for which instructions have been received,
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund
shares held in any segregated asset account in its own right, to the extent
permitted by law. The Fund and the Company shall follow the procedures, and
shall have the corresponding responsibilities, for the handling of proxy and
voting instruction solicitations, as set forth in Schedule C attached hereto and
incorporated herein by reference. Participating Insurance Companies shall be
responsible for ensuring that each of their separate accounts participating in
the Fund calculates voting privileges in a manner consistent with the standards
set forth on Schedule C, which standards will also be provided to the other
Participating Insurance Companies.
3.6. The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, and in particular the Fund will either provide for
annual meetings or comply with Section 16(c) of the 1940 Act (although the Fund
is not one of the trusts described in Section 16(c) of that Act) as well as with
Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will act
in accordance with the Securities and Exchange Commission's interpretation of
the requirements of Section 16(a) with respect
7
<PAGE>
to periodic elections of directors and with whatever rules the Commission may
promulgate with respect thereto.
3.7. The Fund shall use reasonable efforts to provide Fund prospectuses,
reports to shareholders, proxy materials and other Fund communications (or
camera-ready equivalents) to the Company sufficiently in advance of the
Company's mailing dates to enable the Company to complete, at reasonable cost,
the printing, assembling and/or distribution of the communications in accordance
with applicable laws and regulations.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee, each piece of sales literature or other promotional
material in which the Fund or the Adviser(s) is named, at least ten Business
Days prior to its use. No such material shall be used if the Fund or its
designee reasonably objects to such use within ten Business Days after receipt
of such material. The Fund agrees to use its best efforts to provide all
comments on such material within ten Business Days.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or prospectus for the
Fund shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or its
designee, except with the permission of the Fund.
4.3. The Fund or its designee shall furnish, or shall cause to be
furnished, to the Company or its designee, each piece of sales literature or
other promotional material in which the Company and/or its separate account(s)
is named at least ten Business Days prior to its use. No such material shall be
used if the Company or its designee reasonably objects to such use within ten
Business Days after receipt of such material. The Company agrees to use its
best efforts to provide all comments on such material within ten Business Days.
4.4. The Fund and the Advisers shall not give any information or make any
representations on behalf of the Company or concerning the Company, each
Account, or the Contracts, other than the information or representations
contained in a registration statement or prospectus for the Contracts, as such
registration statement and prospectus may be amended or supplemented from time
to time, or in published reports for each Account which are in the public domain
or approved by the Company for distribution to Contract owners, or in sales
literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
8
<PAGE>
4.5. The Fund will provide to the Company at least one complete copy of
all registration statements, prospectuses, statements of additional information,
reports, proxy statements, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Fund or its shares, which are relevant
to the Company or the Contracts.
4.6. The Company will provide to the Fund at least one complete copy of
all registration statements, prospectuses, statements of additional information,
reports, solicitations for voting instructions, sales literature and other
promotional materials, applications for exemptions, requests for no action
letters, and all amendments to any of the above, that relate to the investment
in the Fund under the Contracts.
4.7. For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, any of the
following that refer to the Fund or any affiliate of the Fund: advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media), sales
literature (I.E., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts of
any other advertisement, sales literature, or published article), educational or
training materials or other communications distributed or made generally
available to some or all agents or employees, and registration statements,
prospectuses, statements of additional information, shareholder reports, and
proxy materials.
ARTICLE V. FEES AND EXPENSES
5.1. The Fund shall pay no fee or other compensation to the Company under
this Agreement, except that if the Fund or any Portfolio adopts and implements a
plan pursuant to Rule 12b-1 to finance distribution expenses, then the
Underwriter may make payments to the Company or to the underwriter for the
Contracts if and in amounts agreed to by the Underwriter in writing.
5.2. All expenses incident to performance by the Fund under this Agreement
shall be paid by the Fund. The Fund shall see to it that all its shares are
registered and authorized for issuance in accordance with applicable federal law
and, if and to the extent deemed advisable by the Fund, in accordance with
applicable state laws prior to their sale. The Fund shall bear the expenses for
the cost of registration and qualification of the Fund's shares, preparation and
filing of the Fund's prospectus and registration statement, proxy materials and
reports, setting the prospectus in type, setting in type
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and printing the proxy materials and reports to shareholders (including the
costs of printing a prospectus that constitutes an annual report), the
preparation of all statements and notices required by any federal or state law,
and all taxes on the issuance or transfer of the Fund's shares.
5.3. The Company shall bear the expenses of distributing the Fund's
prospectus, proxy materials and reports to owners of Contracts issued by the
Company.
ARTICLE VI. DIVERSIFICATION
6.1. The Fund represents and warrants that it will at all times invest
money from the Contracts in such a manner as to ensure that the Contracts will
be treated as variable contracts under the Code and the regulations issued
thereunder. Without limiting the scope of the foregoing, the Fund will at all
times comply with Section 817(h) of the Code and Treasury Regulation 1.817-5,
relating to the diversification requirements for variable annuity, endowment, or
life insurance contracts and any amendments or other modifications to such
Section or Regulations. In the event of a breach of this Article VI by the
Fund, it will take all reasonable steps (a) to notify Company of such breach and
(b) to adequately diversify the Fund so as to achieve compliance within the
grace period afforded by Regulation 817-5.
ARTICLE VII. POTENTIAL CONFLICTS
7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict
may arise for a variety of reasons, including: (a) an action by any state
insurance regulatory authority; (b) a change in applicable federal or state
insurance, tax, or securities laws or regulations, or a public ruling, private
letter ruling, no-action or interpretative letter, or any similar action by
insurance, tax, or securities regulatory authorities; (c) an administrative or
judicial decision in any relevant proceeding; (d) the manner in which the
investments of any Portfolio are being managed; (e) a difference in voting
instructions given by Variable Insurance Product owners; or (f) a decision by a
Participating Insurance Company to disregard the voting instructions of contract
owners. The Board shall promptly inform the Company if it determines that an
irreconcilable material conflict exists and the implications thereof.
7.2. The Company will report any potential or existing conflicts of which
it is aware to the Board. The Company will assist the Board in carrying out its
responsibilities under the Shared Funding Exemptive Order, by providing the
Board with all information reasonably necessary for the Board to consider any
issues raised.
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This includes, but is not limited to, an obligation by the Company to inform the
Board whenever contract owner voting instructions are disregarded.
7.3. If it is determined by a majority of the Board, or a majority of its
disinterested members, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense and
to the extent reasonably practicable (as determined by a majority of the
disinterested directors), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1)
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a vote
of all affected Contract owners and, as appropriate, segregating the assets of
any appropriate group (I.E., annuity contract owners, life insurance policy
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
contract owners the option of making such a change; and (2) establishing a new
registered management investment company or managed separate account.
7.4. If a material irreconcilable conflict arises because of a decision by
the Company to disregard contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's
investment in the Fund and terminate this Agreement with respect to such Account
(at the Company's expense); provided, however that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested members
of the Board.
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's investment in the Fund and terminate this Agreement with
respect to such Account within six months after the Board informs the Company in
writing that it has determined that such decision has created an irreconcilable
material conflict; provided, however, that such withdrawal and termination shall
be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested members of the Board.
Until the end of the foregoing six month period, the Underwriter and Fund shall
continue to accept and implement orders by the Company for the purchase (and
redemption) of shares of the Fund.
7.6. For purposes of Sections 7.3 through 7.5 of this Agreement, a
majority of the disinterested members of the Board shall determine whether any
proposed action
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<PAGE>
adequately remedies any irreconcilable material conflict, but in no event will
the Fund be required to establish a new funding medium for the Contracts. The
Company shall not be required by Section 7.3 to establish a new funding medium
for the Contracts if an offer to do so has been declined by vote of a majority
of Contract owners materially adversely affected by the irreconcilable material
conflict.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940
Act or the rules promulgated thereunder with respect to mixed or shared funding
(as defined in the Shared Funding Exemptive Order) on terms and conditions
materially different from those contained in the Shared Funding Exemptive Order,
then (a) the Fund and/or the Participating Insurance Companies, as appropriate,
shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T),
as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable;
and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall
continue in effect only to the extent that terms and conditions substantially
identical to such Sections are contained in such Rule(s) as so amended or
adopted.
ARTICLE VIII. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE COMPANY
8.1(a) The Company agrees to indemnify and hold harmless the Fund and each
member of the Board and officers, and each Adviser and each director, officer
and employee of each Adviser, and each person, if any, who controls the Fund or
the Adviser within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" and individually, "Indemnified Party," for purposes of
this Section 8.1) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the Company)
or litigation (including legal and other expenses), to which the Indemnified
Parties may become subject under any statute, regulation, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) or settlements are related to the sale or
acquisition of the Fund's shares or the Contracts and:
(i) arise out of or are based upon any untrue
statements or alleged untrue statements of any material fact contained
in the registration statement or prospectus for the Contracts or
contained in the Contracts or sales literature for the Contracts (or
any amendment or supplement to any of the foregoing), or arise out of
or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not
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<PAGE>
misleading, provided that this agreement to indemnify shall not apply
as to any Indemnified Party if such statement or omission or such
alleged statement or omission was made in reliance upon and in
conformity with information furnished to the Company by or on behalf
of the Fund for use in the registration statement or prospectus for
the Contracts or in the Contracts or sales literature (or any
amendment or supplement) or otherwise for use in connection with the
sale of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or representations contained in
the registration statement, prospectus or sales literature of the Fund
not supplied by the Company, or persons under its control and other
than statements or representations authorized by the Fund or an
Adviser) or unlawful conduct of the Company or persons under its
control, with respect to the sale or distribution of the Contracts or
Fund shares; or
(iii) arise out of or as a result of any untrue
statement or alleged untrue statement of a material fact contained in
a registration statement, prospectus, or sales literature of the Fund
or any amendment thereof or supplement thereto or the omission or
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading if such a statement or omission was made in reliance upon
and in conformity with information furnished to the Fund by or on
behalf of the Company; or
(iv) arise as a result of any failure by the Company
to provide the services and furnish the materials under the terms of
this Agreement; or
(v) arise out of or result from any material breach of
any representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material breach of
this Agreement by the Company, as limited by and in accordance with
the provisions of Sections 8.1(b) and 8.1(c) hereof.
8.1(b). The Company shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation incurred or assessed against an Indemnified
Party as such may arise from such Indemnified Party's willful
misfeasance, bad faith, or gross negligence in the performance of such
Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations or duties under this Agreement.
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<PAGE>
8.1(c). The Company shall not be liable under this
indemnification provision with respect to any claim made against an
Indemnified Party unless such Indemnified Party shall have notified
the Company in writing within a reasonable time after the summons or
other first legal process giving information of the nature of the
claim shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on
any designated agent), but failure to notify the Company of any such
claim shall not relieve the Company from any liability which it may
have to the Indemnified Party against whom such action is brought
otherwise than on account of this indemnification provision. In case
any such action is brought against the Indemnified Parties, the
Company shall be entitled to participate, at its own expense, in the
defense of such action. The Company also shall be entitled to assume
the defense thereof, with counsel satisfactory to the party named in
the action. After notice from the Company to such party of the
Company's election to assume the defense thereof, the Indemnified
Party shall bear the fees and expenses of any additional counsel
retained by it, and the Company will not be liable to such party under
this Agreement for any legal or other expenses subsequently incurred
by such party independently in connection with the defense thereof
other than reasonable costs of investigation.
8.1(d). The Indemnified Parties will promptly notify the Company
of the commencement of any litigation or proceedings against them in
connection with the issuance or sale of the Fund shares or the
Contracts or the operation of the Fund.
8.2. INDEMNIFICATION BY THE ADVISERS
8.2(a). Each Adviser agrees, with respect to each Portfolio that
it manages, to indemnify and hold harmless the Company and each of its
directors, officers and employees and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" and individually,
"Indemnified Party," for purposes of this Section 8.2) against any and
all losses, claims, damages, liabilities (including amounts paid in
settlement with the written consent of the Adviser) or litigation
(including legal and other expenses) to which the Indemnified Parties
may become subject under any statute, regulation, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) or settlements are related to
the sale or acquisition of shares of the Portfolio that it manages or
the Contracts and:
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<PAGE>
(i) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact
contained in the registration statement or prospectus or
sales literature of the Fund (or any amendment or supplement
to any of the foregoing), or arise out of or are based upon
the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to
make the statements therein not misleading, provided that
this agreement to indemnify shall not apply as to any
Indemnified Party if such statement or omission or such
alleged statement or omission was made in reliance upon and
in conformity with information furnished to the Fund by or
on behalf of the Company for use in the registration
statement or prospectus for the Fund or in sales literature
(or any amendment or supplement) or otherwise for use in
connection with the sale of the Contracts or Portfolio
shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or representations
contained in the registration statement, prospectus or sales
literature for the Contracts not supplied by the Fund or
persons under its control and other than statements or
representations authorized by the Company) or unlawful
conduct of the Fund, Adviser(s) or Underwriter or persons
under their control, with respect to the sale or
distribution of the Contracts or Portfolio shares; or
(iii) arise out of or as a result of any untrue
statement or alleged untrue statement of a material fact
contained in a registration statement, prospectus, or sales
literature covering the Contracts, or any amendment thereof
or supplement thereto, or the omission or alleged omission
to state therein a material fact required to be stated
therein or necessary to make the statement or statements
therein not misleading, if such statement or omission was
made in reliance upon information furnished to the Company
by or on behalf of the Fund; or
(iv) arise as a result of any failure by the Fund to
provide the services and furnish the materials under the
terms of this Agreement; or
15
<PAGE>
(v) arise out of or result from any material breach of
any representation and/or warranty made by the Adviser in
this Agreement or arise out of or result from any other
material breach of this Agreement by the Adviser; as limited
by and in accordance with the provisions of Sections 8.2(b)
and 8.2(c) hereof.
8.2(b). An Adviser shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation incurred or assessed against an Indemnified
Party as such may arise from such Indemnified Party's willful
misfeasance, bad faith, or gross negligence in the performance of such
Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations and duties under this Agreement.
8.2(c). An Adviser shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party
unless such Indemnified Party shall have notified the Adviser in
writing within a reasonable time after the summons or other first
legal process giving information of the nature of the claim shall have
been served upon such Indemnified Party (or after such Indemnified
Party shall have received notice of such service on any designated
agent), but failure to notify the Adviser of any such claim shall not
relieve the Adviser from any liability which it may have to the
Indemnified Party against whom such action is brought otherwise than
on account of this indemnification provision. In case any such action
is brought against the Indemnified Parties, the Adviser will be
entitled to participate, at its own expense, in the defense thereof.
The Adviser also shall be entitled to assume the defense thereof, with
counsel satisfactory to the party named in the action. After notice
from the Adviser to such party of the Adviser's election to assume the
defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the Adviser
will not be liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
8.2(d). The Company agrees promptly to notify the Adviser of the
commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issuance or sale of the
Contracts or the operation of each Account.
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<PAGE>
8.3. INDEMNIFICATION BY THE FUND
8.3(a). The Fund agrees to indemnify and hold harmless the
Company, and each of its directors, officers and employees and each
person, if any, who controls the Company within the meaning of Section
15 of the 1933 Act (hereinafter collectively, the "Indemnified
Parties" and individually, "Indemnified Party," for purposes of this
Section 8.3) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the
Fund) or litigation (including legal and other expenses) to which the
Indemnified Parties may become subject under any statute, regulation,
at common law or otherwise, insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof) or settlements
result from the gross negligence, bad faith or willful misconduct of
the Board or any member thereof or any officer of the Fund, are
related to the operations of the Fund and:
(i) arise as a result of any failure by the Fund
to provide the services and furnish the materials under the terms
of this Agreement; or
(ii) arise out of or result from any material
breach of any representation and/or warranty made by the
Fund in this Agreement or arise out of or result from any
other material breach of this Agreement by the Fund;
8.3(b). The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation incurred or assessed against an Indemnified Party as may
arise from such Indemnified Party's willful misfeasance, bad faith, or
gross negligence in the performance of such Indemnified Party's duties
or by reason of such Indemnified Party's reckless disregard of
obligations and duties under this Agreement.
8.3(c). The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party
unless such Indemnified Party shall have notified the Fund in writing
within a reasonable time after the summons or other first legal
process giving information of the nature of the claim shall have been
served upon such Indemnified Party (or after such Indemnified Party
shall have received notice of such service on any designated agent),
but failure to notify the Fund of any such claim shall not relieve the
Fund from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification
17
<PAGE>
provision. In case any such action is brought against the Indemnified
Parties, the Fund will be entitled to participate, at its own expense,
in the defense thereof. The Fund also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Fund to such party of the Fund's
election to assume the defense thereof, the Indemnified Party shall
bear the fees and expenses of any additional counsel retained by it,
and the Fund will not be liable to such party under this Agreement for
any legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than
reasonable costs of investigation.
8.3(d). The Company agrees promptly to notify the Fund of the
commencement of any litigation or proceedings against it or any of its
respective officers or directors in connection with this Agreement,
the issuance or sale of the Contracts, with respect to the operation
of either Account, or the sale or acquisition of shares of the Fund.
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of New
York.
9.2. This Agreement shall be subject to the provisions of the
1933, 1934 and 1940 Acts, and the rules and regulations and rulings
thereunder, including such exemptions from those statutes, rules and
regulations as the Securities and Exchange Commission may grant
(including, but not limited to, the Shared Funding Exemptive Order)
and the terms hereof shall be interpreted and construed in accordance
therewith.
ARTICLE X. TERMINATION
10.1. This Agreement shall continue in full force and effect
until the first to occur of:
(a) termination by any party for any reason by sixty (60) days
advance written notice delivered to the other parties; or
(b) termination by the Company by written notice to the Fund and
the Adviser with respect to any Portfolio based upon the Company's
determination that shares of such Portfolio is not reasonably
available to meet the requirements of the Contracts; or
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<PAGE>
(c) termination by the Company by written notice to the Fund and
the Adviser with respect to any Portfolio in the event any of the
Portfolio's shares are not registered, issued or sold in accordance
with applicable state and/or federal law or such law precludes the use
of such shares as the underlying investment media of the Contracts
issued or to be issued by the Company; or
(d) termination by the Company by written notice to the Fund and
the Adviser with respect to any Portfolio in the event that such
Portfolio ceases to qualify as a Regulated Investment Company under
Subchapter M of the Code or under any successor or similar provision,
or if the Company reasonably believes that the Fund may fail to so
qualify; or
(e) termination by the Company by written notice to the Fund and
the Adviser with respect to any Portfolio in the event that such
Portfolio falls to meet the diversification requirements specified in
Article VI hereof; or
(f) termination by either the Fund by written notice to the
Company if the Fund shall determine, in its sole judgment exercised in
good faith, that the Company and/or its affiliated companies has
suffered a material adverse change in its business, operations,
financial condition or prospects since the date of this Agreement or
is the subject of material adverse publicity, or
(g) termination by the Company by written notice to the Fund and
the Adviser, if the Company shall determine, in its sole judgment
exercised in good faith, that either the Fund or the Adviser has
suffered a material adverse change in its business, operations,
financial condition or prospects since the date of this Agreement or
is the subject of material adverse publicity; or
10.2. Notwithstanding any termination of this Agreement, the
Fund shall at the option of the Company, continue to make available
additional shares of the Fund pursuant to the terms and conditions of
this Agreement, for all Contracts in effect on the effective date of
termination of this Agreement (hereinafter referred to as "Existing
Contracts"). Specifically, without limitation, the owners of the
Existing Contracts shall be permitted to direct reallocation of
investments in the Fund, redemption of investments in the Fund and/or
investment in the Fund upon the making of additional purchase payments
under the Existing Contracts.
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The parties agree that this Section 10.2 shall not apply to any
terminations under Article VII and the effect of such Article VII
terminations shall be governed by Article VII of this Agreement.
10.3. The Company shall not redeem Fund shares attributable to
the Contracts (as distinct from Fund shares attributable to the
Company's assets held in the Account) except (i) as necessary to
implement Contract Owner initiated or approved transactions, or (ii)
as required by state and/or federal laws or regulations or judicial or
other legal precedent of general application (hereinafter referred to
as a "Legally Required Redemption") or (iii) as permitted by an order
of the Securities and Exchange Commission pursuant to Section 26(b) of
the 1940 Act. Upon request, the Company will promptly furnish to the
Fund the opinion of counsel for the Company (which counsel shall be
reasonably satisfactory to the Fund) to the effect that any redemption
pursuant to clause (ii) above is a Legally Required Redemption.
Furthermore, except in cases where permitted under the terms of the
Contracts, the Company shall not prevent Contract Owners from
allocating payments to a Portfolio that was otherwise available under
the Contracts without first giving the Fund 90 days prior written
notice of its intention to do so.
ARTICLE XI. NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set
forth below or at such other address as such party may from time to
time specify in writing to the other party.
If to the Fund:
Morgan Stanley Universal Funds, Inc.
c/o Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
Attention: Harold J. Schaaff, Jr., Esq.
If to Adviser:
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
Attention: Harold J. Schaaff, Jr., Esq.
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If to Adviser:
Miller Anderson & Sherrerd, LLP
One Tower Bridge
West Conshohocken, Pennsylvania 19428
Attention: Lorraine Truten
If to the Company:
__________ Life Insurance Company
515 West Market Street, 8th Floor
Louisville, Kentucky 40202
Attention: Kevin L. Howard, Esq.
ARTICLE XII. MISCELLANEOUS
12.1. All persons dealing with the Fund must look solely to the
property of the Fund for the enforcement of any claims against the
Fund as neither the Board, officers, agents or shareholders assume any
personal liability for obligations entered into on behalf of the Fund.
12.2. Subject to the requirements of legal process and
regulatory authority, each party hereto shall treat as confidential
the names and addresses of the owners of the Contracts and all
information reasonably identified as confidential in writing by any
other party hereto and, except as permitted by this Agreement, shall
not disclose, disseminate or utilize such names and addresses and
other confidential information until such time as it may come into the
public domain without the express written consent of the affected
party.
12.3. The captions in this Agreement are included for
convenience of reference only and in no way define or delineate any of
the provisions hereof or otherwise affect their construction or
effect.
12.4. This Agreement may be executed simultaneously in two or
more counterparts, each of which taken together shall constitute one
and the same instrument.
12.5. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder
of the Agreement shall not be affected thereby.
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12.6. Each party hereto shall cooperate with each other party
and all appropriate governmental authorities (including without
limitation the Securities and Exchange Commission, the National
Association of Securities Dealers and state insurance regulators) and
shall permit such authorities reasonable access to its books and
records in connection with any investigation or inquiry relating to
this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto
further agrees to furnish the California Insurance Commissioner with
any information or reports in connection with services provided under
this Agreement which such Commissioner may request in order to
ascertain whether the insurance operations of the Company are being
conducted in a manner consistent with the California Insurance
Regulations and any other applicable law or regulations.
12.7. The rights, remedies and obligations contained in this
Agreement are cumulative and are in addition to any and all rights,
remedies and obligations at law or in equity, which the parties hereto
are entitled to under state and federal laws.
12.8. This Agreement or any of the rights and obligations
hereunder may not be assigned by any party without the prior written
consent of all parties hereto; provided, however, that an Adviser may
assign this Agreement or any rights or obligations hereunder to any
affiliate of or company under common control with the Adviser, if such
assignee is duly licensed and registered to perform the obligations of
the Adviser under this Agreement and such assignment would not cause a
termination of this Agreement under the 1940 Act.
12. 9 The Company shall furnish, or shall cause to be furnished,
to the Fund or its designee copies of the following reports:
(a) the Company's annual statement (prepared under
statutory accounting principles) and annual report (prepared
under generally accepted accounting principles ("GAAP"), if any),
as soon as practical and in any event within 90 days after the
end of each fiscal year;
(b) the Company's quarterly statements (statutory) (and
GAAP, if any), as soon as practical and in any event within 45
days after the end of each quarterly period:
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<PAGE>
(c) any financial statement, proxy statement, notice or
report of the Company sent to stockholders and/or policyholders,
as soon as practical after the delivery thereof to stockholders;
(d) any registration statement (without exhibits) and
financial reports of the Company filed with the Securities and
Exchange Commission or any state insurance regulator, as soon as
practical after the filing thereof;
(e) any other publicly available reports submitted to the
Company by independent accountants in connection with any annual,
interim or special audit made by them of the books of the
Company, as soon as practical after the receipt thereof.
12. 10 The Fund shall, upon request of the Company, furnish, or
cause to be furnished, to Company or its designee copies of the
following reports:
(a) any registration statement (without exhibits) and
financial reports of the Fund filed with the Securities and
Exchange Commission or any state securities regulator, as soon as
practical after the filing thereof with the Securities and
Exchange Commission;
(b) any financial statement, proxy statement, notice or
report of the Fund sent to shareholders relating to any of the
Portfolios of the Fund listed on Schedule B, as soon as practical
after filing with the Securities and Exchange Commission; and
(c) any other publicly available reports submitted to the
Fund by independent accountants in connection with any annual,
interim or special audit made by them of the books of the company
as soon as practical after the receipt thereof.
23
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by its duly
authorized representative and its seal to be hereunder affixed hereto
as of the date specified above.
LIFE INSURANCE COMPANY
By:
------------------------------
NAME:
TITLE:
MORGAN STANLEY UNIVERSAL FUNDS, INC.
By:
------------------------------
NAME:
TITLE:
MORGAN STANLEY ASSET MANAGEMENT INC.
By:
------------------------------
NAME:
TITLE:
MILLER ANDERSON & SHERRERD, LLP
By:
------------------------------
NAME:
TITLE:
24
<PAGE>
SCHEDULE A
SEPARATE ACCOUNTS AND CONTRACTS
NAME OF SEPARATE ACCOUNT AND FORM NUMBER AND NAME OF CONTRACT
DATE ESTABLISHED BY BOARD OF DIRECTORS FUNDED BY SEPARATE ACCOUNT
- -------------------------------------- --------------------------
Separate Account II Pinnacle Flexible Premium Variable
established May 21, 1992 Annuity
File No. 811-7134
A-1
<PAGE>
SCHEDULE B
PORTFOLIOS OF MORGAN STANLEY
UNIVERSAL FUNDS, INC.
Emerging Markets Debt Portfolio
High Yield Portfolio
U.S. Real Estate Portfolio
Asian Equity Portfolio
B-1
<PAGE>
SCHEDULE C
PROXY VOTING PROCEDURES
The following is a list of procedures and corresponding responsibilities for the
handling of proxies and voting instructions relating to the Fund. The defined
terms herein shall have the meanings assigned in the Participation Agreement
except that the term "Company" shall also include the department or third party
assigned by the Company to perform the steps delineated below.
- - The proxy proposals are given to the Company by the Fund as early as
possible before the date set by the Fund for the shareholder meeting to
enable the Company to consider and prepare for the solicitation of voting
instructions from owners of the Contracts and to facilitate the
establishment of tabulation procedures. At this time the Fund will inform
the Company of the Record, Mailing and Meeting dates. This will be done
verbally approximately two months before meeting.
- - Promptly after the Record Date, the Company will perform a "tape run", or
other activity, which will generate the names, addresses and number of
units which are attributed to each contract owner/policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.
Note: The number of proxy statements is determined by the activities
described in this Step #2. The Company will use its best efforts to call
in the number of Customers to the Fund , as soon as possible, but no later
than two weeks after the Record Date.
- - The Fund's Annual Report must be sent to each Customer by the Company
either before or together with the Customers' receipt of voting,
instruction solicitation material. The Fund will provide the last Annual
Report to the Company pursuant to the terms of Section 3.3 of the Agreement
to which this Schedule relates.
- - The text and format for the Voting Instruction Cards ("Cards" or "Card") is
provided to the Company by the Fund. The Company, at its expense, shall
produce and personalize the Voting Instruction Cards. The Fund or its
affiliate must approve the Card before it is printed. Allow approximately
2-4 business days for printing information on the Cards. Information
commonly found on the Cards includes:
C-1
<PAGE>
- name (legal name as found on account registration)
- address
- fund or account number
- coding to state number of units
- individual Card number for use in tracking and verification of votes
(already on Cards as printed by the Fund).
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
- - During this time, the Fund will develop, produce and pay for the Notice of
Proxy and the Proxy Statement (one document). Printed and folded notices
and statements will be sent to Company for insertion into envelopes
(envelopes and return envelopes are provided and paid for by the Company).
Contents of envelope sent to Customers by the Company will include:
- Voting Instruction Card(s)
- One proxy notice and statement (one document)
- return envelope (postage pre-paid by Company) addressed to the Company
or its tabulation agent
- "urge buckslip" - optional, but recommended. (This is a small, single
sheet of paper that requests Customers to vote as quickly as possible
and that their vote is important. One copy will be supplied by the
Fund.)
- cover letter - optional, supplied by Company and reviewed and approved
in advance by the Fund.
- - The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews
and approves the contents of the mailing package to ensure correctness and
completeness. Copy of this approval sent to the Fund.
- - Package mailed by the Company.
* The Fund must allow at least a 15-day solicitation time to the Company
as the shareowner. (A 5-week period is recommended.) Solicitation
time is calculated as calendar days from (but NOT including,) the
meeting, counting backwards.
- - Collection and tabulation of Cards begins. Tabulation usually takes place
in another department or another vendor depending on process used. An
often used procedure is to sort Cards on arrival by proposal into vote
categories of all yes, no, or mixed replies, and to begin data entry.
C-2
<PAGE>
Note: Postmarks are not generally needed. A need for postmark information
would be due to an insurance company's internal procedure and has not been
required by the Fund in the past.
- - Signatures on Card checked against legal name on account registration which
was printed on the Card.
Note: For Example, if the account registration is under "John A. Smith,
Trustee," then that is the exact legal name to be printed on the Card and
is the signature needed on the Card.
- - If Cards are mutilated, or for any reason are illegible or are not signed
properly, they are sent back to Customer with an explanatory letter and a
new Card and return envelope. The mutilated or illegible Card is
disregarded and considered to be NOT RECEIVED for purposes of vote
tabulation. Any Cards that have been "kicked out" (e.g. mutilated,
illegible) of the procedure are "hand verified," i.e., examined as to why
they did not complete the system. Any questions on those Cards are usually
remedied individually.
- - There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort the
Cards as they first arrive into categories depending upon their vote; an
estimate of how the vote is progressing may then be calculated. If the
initial estimates and the actual vote do not coincide, then an internal
audit of that vote should occur. This may entail a recount.
- - The actual tabulation of votes is done in units which is then converted to
shares. (It is very important that the Fund receives the tabulations stated
in terms of a percentage and the number of SHARES.) The Fund must review
and approve tabulation format.
- - Final tabulation in shares is verbally given by the Company to the Fund on
the morning of the meeting not later than 10:00 a.m. Eastern time. The
Fund may request an earlier deadline if reasonable and if required to
calculate the vote in time for the meeting.
- - A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
The Fund will provide a standard form for each Certification.
C-3
<PAGE>
- - The Company will be required to box and archive the Cards received from the
Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, the Fund will be
permitted reasonable access to such Cards.
- - All approvals and "signing-off' may be done orally, but must always be
followed up in writing.
C-4
<PAGE>
PARTICIPATION AGREEMENT
among
SELECT TEN PLUS FUND, LLC
ARM SECURITIES CORPORATION
and
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
THIS AGREEMENT, entered into as of the _____ day of ________, 1999 by and
among NATIONAL INTEGRITY LIFE INSURANCE COMPANY (hereinafter the "Company"), a
New York corporation, on its own behalf and on behalf of each separate account
of the Company set forth on Schedule A hereto as may be amended from time to
time (each such account hereinafter referred to as the ''Account"), SELECT TEN
PLUS FUND, LLC (hereinafter the "Fund"), a Delaware corporation, and ARM
SECURITIES CORPORATION (hereinafter the ''Distributor"), a Delaware corporation.
WHEREAS, the Fund is registered under the Investment Company Act of 1940,
as amended (the "1940 Act"), as an open-end management investment company and
its shares are registered under the Securities Act of 1933, as amended
(hereinafter the "1933 Act"); and
WHEREAS, the capital stock of the Fund is divided into several series of
shares, each designated a "Portfolio" and representing the interest in a
particular managed portfolio of securities and other assets; and
WHEREAS, the Fund is available to act as the investment vehicle for
separate accounts established for variable annuity contracts and may in the
future be available as an investment medium for separate accounts established
for variable life insurance policies (collectively, the "Variable Insurance
Products"); and
WHEREAS, the Variable Insurance Products are to be offered by insurance
companies which have entered into participation agreements with the Fund and the
Distributor (hereinafter "Participating Insurance Companies"); and
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution of the Board of Directors of the
Company, on the date shown for such Account on Schedule A hereto, to set aside
and invest assets attributable to one or more Variable Insurance Products; and
<PAGE>
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios on behalf
of each Account to fund certain Variable Insurance Products ("Contracts"), and
the Distributor is authorized to sell such shares to each Account at the net
asset value of the respective Portfolios; and
WHEREAS, the Company has registered or will register each Account as a unit
investment trust under the 1940 Act and has registered or will register the
Contracts under the 1933 Act: and
WHEREAS, ARM Capital Advisors, Inc. ("ARM Capital") is duly registered as
an investment adviser under the Investment Advisers Act of 1940 and any
applicable state securities laws; and
WHEREAS, the Distributor is registered as a broker dealer with the
Securities and Exchange Commission (the "SEC") under the Securities Exchange Act
of 1934, as amended (hereinafter the "1934 Act"), and is a member in good
standing of the National Association of Securities Dealers, Inc. (hereinafter
"NASD");
WHEREAS, the Distributor serves as principal underwriter for Fund shares
pursuant to a Distribution Agreement dated August 30, 1995 between the
Distributor and the Fund.
NOW, THEREFORE, in consideration of their mutual promises, the Company, the
Fund and the Distributor agree as follows:
ARTICLE I. SALE OF FUND SHARES
1.1. The Fund and the Distributor agree to sell to the Company those shares
of the Fund which each Account orders, executing such orders on a daily
basis at the net asset value next computed after receipt by the Fund or
its designee of the order for the shares of the Fund. For purposes of
this Section 1.1, the Company shall be the designee of the Fund for
receipt of such orders from each Account and receipt by such designee
shall constitute receipt by the Fund; provided that the Fund receives
notice of such order by 9:30 a.m. New York time on the next following
Business Day. "Business Day" shall mean any day on which the New York
Stock Exchange is open for trading and on which the Fund calculates its
net asset value pursuant to the rules of the SEC.
1.2. The Fund agrees to make its shares available indefinitely for purchase
at the applicable net asset value per share by the Company and its
Accounts on those days on which the Fund calculates its net asset value
pursuant to rules of the SEC and the Fund shall use reasonable efforts to
calculate such
<PAGE>
net asset value on each day which the New York Stock Exchange is open for
trading. Notwithstanding the foregoing, the Board of Directors of the
Fund (hereinafter the "Board") may refuse to sell shares of any Portfolio
to any person, or suspend or terminate the offering of shares of any
Portfolio if such action is required by law or by regulatory authorities
having jurisdiction or is, in the sole discretion of the Board acting in
good faith and in light of their fiduciary duties under federal and any
applicable state laws, necessary in the best interests of the
shareholders of such Portfolio.
1.3. The Fund and the Distributor agree that shares of the Fund will be
sold only to Participating Insurance Companies and their separate
accounts. No shares of any Portfolio will be sold to the general public.
The Fund and the Distributor agree that each participation agreement with
a Participating Insurance Company will contain substantially identical
terms as this Agreement, including in particular Articles l, lll, V, Vll
and Sections 2.5 and 2.12 of Article ll of this Agreement.
1.4. The Fund and the Distributor agree that they will not sell Fund shares
to any insurance company or its separate accounts other than the Company
and Integrity, or their affiliates unless the Fund has obtained an order
from the SEC granting Participating Insurance Companies exceptions from
the provisions of sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act,
to the extent necessary to permit shares of the Fund to be sold to and
held by separate accounts of both affiliated and unaffiliated life
insurance companies (hereinafter the "Shared Funding Exemptive Order").
1.5. The Fund agrees to redeem for cash, on the Company's request, any full
or fractional shares of the Fund held by the Company and it Accounts,
executing such requests on a daily basis, in a manner consistent with the
provisions of Section 22(e) of the 1940 Act, at the net asset value next
computed after receipt by the Fund or its designee of the request for
redemption, without any redemption charge. For purposes of this Section
1.5, the Company shall be the designee of the Fund for receipt of
requests for redemption from each Account and receipt by such designee
shall constitute receipt by the Fund; provided that the Fund receives
notice of such request for redemption on the next following Business Day.
1.6. The Company agrees to purchase and redeem the shares of each Portfolio
offered by the then current prospectus of the Fund and in accordance with
the provisions of such prospectus. The Company agrees that all net
amounts available under the Separate Accounts listed on Schedule A shall
be invested in the Fund, in such other Funds advised by the Adviser as
may be mutually agreed to in writing by the parties hereto, or in
3
<PAGE>
the Company's general account, provided that such amounts may also be
invested in an investment company other than the Fund if (a) such other
investment company, or the series thereof to be invested in, has
investment objectives or policies that are substantially different from
the investment objectives and policies of all the Portfolios of the Fund
(excluding any Portfolios for which the Company has terminated this
Agreement pursuant to Section 10.1(b)); or (b) such other investment
company was available as a funding vehicle for the Contracts prior to the
date of this Agreement and the Company so informs the Fund and
Distributor prior to their signing this Agreement; or (c) the Fund and
Distributor consent to the use of such other investment company or
portfolio.
1.7. The Company shall pay for Fund shares on the next Business Day after
an order to purchase Fund shares is made in accordance with the
provisions of Section 1.1 hereof. Payment shall be in federal funds
transmitted by wire. For purpose of Section 2.10 and 2.11, upon receipt
by the Fund of the federal funds so wired, such funds shall cease to be
the responsibility of the Company and shall become the responsibility of
the Fund.
1.8. Issuance and transfer of the Fund's shares will be by book entry only.
Stock certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for
each Account or the appropriate subaccount or division of each Account.
1.9. The Fund shall furnish same day notice (by wire or telephone, followed
by written confirmation) to the Company of any income, dividends or
capital gain distributions payable on the Fund's shares. The Company
hereby elects to receive all such income dividends and capital gain
distributions as are payable on the Portfolio shares in additional shares
of that Portfolio. The Company reserves the right with respect to each
Portfolio to revoke this election and to receive all such income
dividends and capital gain distributions in cash. The Fund shall notify
the Company of the number of shares so issued as payment of such
dividends and distributions.
1.10. The Fund shall make the net asset value per share for each Portfolio
available to the Company or its designee on a daily basis as soon as
reasonably practical after the net asset value per share is calculated
and shall use its best efforts to make such net asset value per share
available by 7 p.m. New York time.
ARTICLE ll. REPRESENTATIONS AND WARRANTIES
2.1. The Company represents and warrants that the Contracts are or will
4
<PAGE>
be registered under the 1933 Act; that the Contracts will be issued and
sold in compliance in all material respects with all applicable Federal
and State laws and that the sale of the Contracts shall comply in all
material respects with state insurance suitability requirements. The
Company further represents and warrants that it is an insurance company
duly organized and in good standing under applicable law and that it has
legally and validly established each Account prior to any issuance or
sale thereof as a separate account under Section 4240 of the New York
Insurance Law and has registered or, prior to any issuance or sale of the
Contracts, will register each Account as a unit investment trust in
accordance with the provisions of the 1940 Act to serve as a unit
investment trust for the Contracts.
2.2. The Fund represents and warrants that Fund shares sold pursuant to
this Agreement shall be registered under the 1933 Act, duly authorized
for issuance and sold in compliance with the laws of the State of New
York and all applicable federal and state securities laws and that the
Fund is and shall remain registered under the 1940 Act. The Fund shall
amend the Registration Statement for its shares under the 1933 Act and
the 1940 Act from time to time as required in order to effect the
continuous offering of its shares. The Fund shall register and qualify
the shares for sale in accordance with the laws of the various states
only if and to the extent deemed advisable by the Fund or the
Distributor.
2.3. The Fund represents that it is currently qualified as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), that it will make every effort to maintain
such qualification (under Subchapter M or any successor or similar
provision) and that it will notify the Company immediately upon having a
reasonable basis for believing that it has ceased to so qualify or that
it might not so qualify in the future.
2.4. The Company represents that the Contracts are currently treated as
endowment, annuity or life insurance contracts under applicable
provisions of the Code, that it will make every effort to maintain such
treatment and that it will notify the Fund and the Distributor
immediately upon having a reasonable basis for believing that the
Contracts have ceased to be so treated or that they might not be so
treated in the future.
2.5. The Fund currently does not intend to make any payments to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act or
otherwise, although it may make such payments in the future, subject to
compliance with applicable requirements under federal and state law. The
Fund may in the future adopt a "no fee" or "defensive" Rule 12b-1 Plan
5
<PAGE>
under which it makes no payments for distribution expenses (a "Rule 12b-1
Plan"). To the extent that it decides to finance distribution expenses
pursuant to Rule 12b-1, the Fund will undertake to have the Board, a
majority of whom are not interested persons of the Fund, formulate and
approve any Rule 12b-1 Plan to finance distribution expenses.
2.6. The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and
investment policies) complies with the insurance laws or regulations of
the various states except that the Fund represents that the Fund's
investment policies, fees and expenses are and shall at all times remain
in compliance with the laws of the State of New York and the Fund and the
Distributor represent that their respective operations are and shall at
all times remain in material compliance with the laws of the State of New
York to the extent required to perform this Agreement.
2.7. The Distributor represents and warrants that it is a member in good
standing of the NASD and is registered as a broker-dealer with the SEC.
The Distributor further represents that it will sell and distribute the
Fund shares in accordance with the laws of the State of New York and all
applicable state and federal securities laws, including without
limitation the 1933 Act, the 1934 Act and the 1940 Act.
2.8. The Fund represents that it is lawfully organized and validly existing
under the laws of the State of Maryland and that it does and will comply
in all material respects with the 1940 Act.
2.9. The Fund represents and warrants that the Adviser is and shall remain
duly registered in all material respects under all applicable federal and
state securities laws and that the Adviser shall perform its obligations
for the Fund in compliance in all material respects with the laws of the
State of New York and any applicable state and federal securities laws.
2.10. The Fund and Distributor represent and warrant that all of their
directors, officers, employees, investment advisers, and other
individuals/entities dealing with the money and/or securities of the Fund
are and shall continue to be at all times covered by a blanket fidelity
bond or similar coverage for the benefit of the Fund in an amount not
less than the minimal coverage as required currently by Rule 179-(1) of
the 1940 Act or related provisions as may be promulgated from time to
time. Such bond shall include coverage for larceny and embezzlement and
shall be issued by a reputable bonding company.
6
<PAGE>
2.11. The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals/entities
dealing with the money and/or securities of the Fund are and shall
continue to be at all times covered by a blanket fidelity bond or similar
coverage for the benefit of the Fund, in an amount not less than the
minimal coverage as required currently by entities subject to the
requirements of Rule 17g-1 of the 1940 Act or related provisions as may
be promulgated from time to time. The Bond shall include coverage for
larceny and embezzlement and shall be issued by a reputable bonding
company.
ARTICLE lll. PROSPECTUSES, STATEMENTS OF ADDITIONAL INFORMATION AND PROXY
STATEMENTS; VOTING
3.1. The Fund shall provide to the Company such documentation (including a
camera ready final copy of each prospectus or supplement thereto as set
in type at the Fund's expense) and other assistance as is reasonably
necessary in order for the Company once each year (or more frequently if
the prospectus for the Fund is amended) to have the prospectus for the
Contracts and the Fund's prospectus printed together in one document
(such printing to be at the Company's expense).
3.2. The Fund's prospectus shall state that the current Statement of
Additional Information for the Fund is available from the Distributor (or
in the Fund's discretion, the Prospectus shall state that such Statement
is available from the Fund), and the Distributor (or the Fund), at its
expense, shall print, or otherwise reproduce, and provide such Statement
free of charge to the Company and to each Contract owner who requests
such Statement. At the request of the Company, the Fund shall provide to
the Company a camera ready final copy of such Statement.
3.3. The Fund shall promptly notify the Company of any anticipated
amendments to the Fund's registration statement or supplements to the
prospectus.
3.4. The Fund, at its expense, shall provide the Company with copies of its
proxy material, reports to stockholders and other communications to
stockholders in such quantity as the Company shall reasonably require for
distributing to Contract owners. At the request of the Company, the Fund
shall provide a camera ready copy of such communication to the Company,
which may combine such communication with a communication of the Company
or the Accounts, which communications may be bound together. In such case
the printing expenses of the combined communications shall be
7
<PAGE>
borne by the Company and the Fund in proportion to the number of pages
for which they are respectively responsible.
3.5. If and to the extent required by law the Company shall
(a) solicit voting instructions from Contract owners;
(b) vote the Fund shares in accordance with instructions received
from Contract owners: and
(c) vote Fund shares for which no instructions have been received in
the same proportion as Fund shares of such Portfolio for which
instructions have been received;
so long as and to the extent that the SEC continues to interpret the 1940
Act to require pass-through voting privileges for Variable Insurance
Products owners. The Company reserves the right to vote Fund shares held
in any separate account in its own right to the extent permitted by law.
Participating Insurance Companies shall be responsible for assuring that
each of their separate accounts participating in the Fund calculates
voting privileges in a manner consistent with the standards set forth on
Schedule B attached hereto and incorporated herein by this reference,
which standards will also be provided to the other Participating
Insurance Companies, and with the requirements of the 1940 Act.
3.6. The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, and in particular the Fund will either provide
for annual meetings or comply with Section 16(c) of the 1940 Act
(although the Fund is not one of the trusts described in Section 16(c) of
that Act) as well as with Sections 16(a) and, if and when applicable,
16(b). Further, the Fund will act in accordance with the SEC's
interpretation of the requirements of Section 16(a) with respect to
periodic elections of directors and with whatever rules the Commission
may promulgate with respect thereto.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. The Company shall furnish, or shall cause to be furnished, to the Fund
or its designee the text and, to the extent relevant, the graphic
component of each piece of sales literature or other promotional material
in which the Fund or its investment adviser or the Distributor is named,
at least fifteen Business Days prior to its use. No such material shall
be used if the Fund or its designee object to such use within fifteen
Business Days after receipt of such material.
8
<PAGE>
4.2. The Company shall not give any information or make any representations
or statements on behalf of the Fund or concerning the Fund in connection
with the sale of the Contracts other than the information or
representations contained in the registration statement and prospectus
for the Fund shares, as such registration statement and prospectus may be
amended or supplemented from time to time, or in reports or proxy
statements for the Fund, or in sales literature or other promotional
material approved by the Fund or its designee or by the Distributor,
except with the permission of the Fund or the Distributor or the designee
of either.
4.3. The Fund, Distributor, or its designee shall furnish, or shall cause
to be furnished, to the Company or its designee, each piece of sales
literature or other promotional material in which the Company and/or its
separate account(s), is named at least fifteen Business Days prior to its
use. No such material shall be used if the Company or its designee object
to such use within fifteen Business Days after receipt for such material.
4.4. The Fund and the Distributor shall not give any information or make
any representations on behalf of the Company or concerning the Company,
each Account, or the Contracts other than the information or
representations contained in a registration statement or prospectus for
the Contracts, as such registration statement and prospectus may be
amended or supplemented from time to time, or in published reports for
each Account which are in the public domain or approved by the Company
for distribution to Contact owners, or in sales literature or other
promotional material approved by the Company or its designee, except with
the permission of the Company.
4.5. The Fund will provide to the Company at least one complete copy of all
registration statements, prospectuses, Statements of Additional
Information, reports, proxy statements, sales literature and other
promotional materials, applications for exemptions, requests for
no-action letters, and all amendments to any of the above, that relate to
the Fund or its shares, contemporaneously with the filing of such
document with the SEC or other regulatory authorities.
4.6. The Company will provide to the Fund at least one complete copy of all
registration statements, prospectuses, Statements of Additional
Information, reports, solicitations for voting instructions, sales
literature and other promotional materials, applications for exemptions,
requests for no-action letters, and all amendments to any of the above,
that relate to the Contracts or each Account, contemporaneously with the
filing of such document with the SEC.
9
<PAGE>
4.7. For purposes of this Article IV, the phrase "sales literature or other
promotional material" includes, but is not limited to, advertisements
(such as material published, or designed for use in, a newspaper,
magazine, or other periodical, radio, television, telephone or tape
recording, videotape display, signs or billboards, motion pictures, or
other public media), sales literature (I.E.,, any written communication
distributed or made generally available to customers or the public,
including brochures, circulars, research reports, market letters, form
letters, seminar texts, reprints or excerpts of any other advertisement,
sales literature, or published article), educational or training
materials or other communications distributed or made generally available
to some or all agents or employees, and registration statements
prospectuses, Statements of Additional Information, shareholder reports,
and proxy materials.
ARTICLE V. FEES AND EXPENSES
5.1. The Fund and Distributor shall pay no fee or other compensation to the
Company under this Agreement, except that if the Fund or any Portfolio
adopts and implements a Rule 12b-1 Plan to finance distribution expenses,
then the Distributor may make payments to the Company or to the
underwriter for the Contracts if and in amount agreed to by the
Distributor in writing and such payments will be made out of existing
fees otherwise payable to the Distributor, past profits of the
Distributor or other resources available to the Distributor. No such
payments shall be made directly by the Fund. Currently, no such payments
are contemplated.
5.2. All expenses incident to performance by the Fund under this Agreement
shall be paid by the Fund, except as otherwise provided herein. The Fund
shall see to it that all its shares are registered and authorized for
issuance in accordance with applicable federal law and, if and to the
extent deemed advisable by the Fund, in accordance with applicable state
laws prior to their sale. The Fund shall bear the expenses for the cost
of registration and qualification of the Fund's shares, preparation and
filing of the Fund's prospectus and registration statement, proxy
materials and reports, setting the prospectus in type, setting in type
and printing the proxy materials and reports to shareholders (including
the costs of printing a prospectus that constitutes an annual report),
the setting in type of, and the printing or other reproduction for each
Contract owner of, the statement of additional information, the
preparation of all statements and notices required by any federal or
state law, and all taxes on the issuance or transfer of the Fund's
shares.
10
<PAGE>
5.3. The Company shall bear the expenses of printing and distributing the
Fund's prospectus to owners of Contracts issued by the Company and of
distributing the Fund's proxy materials and reports to such Contract
owners.
11
<PAGE>
ARTICLE Vl. DIVERSIFICATION
6.1. The Fund will at all times invest money from the Contracts in such a
manner as to ensure that the Contracts will be treated as variable
contracts under the Code and the regulations issued thereunder. Without
limiting the scope of the foregoing, the Fund will at all times comply
with Section 817(h) of the Code and Treasury Regulation 1.817-5, relating
to the diversification requirements for variable annuity, endowment, or
life insurance contracts and any amendments or other modifications to
such Section or Regulations. The Fund shall promptly notify the Company
of any breach by any Portfolio of this Article Vl.
ARTICLE Vll. POTENTIAL CONFLICTS
From and after the date the Fund obtains a Shared Funding Exemptive
Order, or begin serving as a funding medium for variable life insurance
policies:
7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of
all separate accounts investing in the Fund. An irreconcilable material
conflict may arise for a variety of reasons, including: (a) an action by
any state insurance regulatory authority; (b) a change in applicable
federal or state insurance, tax, or securities laws or regulations, or a
public ruling, private letter ruling, no-action or interpretative letter,
or any similar action by insurance, tax, or securities regulatory
authorities; (c) an administrative or judicial decision in any relevant
proceeding; (d) the manner in which the investments of any Portfolio are
being managed; (e) a difference in voting instructions given by variable
annuity contract and variable life insurance contract owners; or (f) a
decision by an insurer to disregard the voting instructions of contract
owners. The Board shall promptly inform the Company if it determines that
an irreconcilable material conflict exists and the implications thereof.
7.2. The Company will report any potential or existing conflicts of which
it is aware to the Board. The Company will assist the Board in carrying
out its responsibilities under the Shared Funding Exemptive Order by
providing the Board with all information reasonably necessary for the
Board to consider any issues raised. This includes, but is not limited
to, an obligation by the Company to inform the Board whenever contract
owner voting instructions are disregarded.
7.3. If it is determined by a majority of the Board, or a majority of its
12
<PAGE>
disinterested directors, that a material irreconcilable conflict exists,
the Company and other Participating Insurance Companies shall, at their
expense and to the extent reasonably practicable (as determined by a
majority of the disinterested directors), take whatever steps are
necessary to remedy or eliminate the irreconcilable material conflict, up
to and including: (1) withdrawing the assets allocable to some or all of
the separate accounts from the Fund or any Portfolio and reinvesting such
assets in a different investment medium, including (but not limited to)
another Portfolio of the Fund, or submitting the question whether such
segregation should be implemented to a vote of all affected contract
owners and, as appropriate, segregating the assets of any appropriate
group (I.E,, annuity contract owners, life insurance policy owners, or
variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the
affected contract owners the option of making such a change; and (2)
establishing a new registered management investment company or managed
separate account.
7.4. If a material irreconcilable conflict arises because of a decision by
the Company to disregard contract owner voting instructions and that
decision represents a minority position or would preclude a majority
vote, the Company may be required, at the Fund's election, to withdraw
the affected Account's investment in the Fund and terminate this
Agreement with respect to such Account; provided, however that such
withdrawal and termination shall be limited to the extent required by the
foregoing material irreconcilable conflict as determined by a majority of
the disinterested members of the Board. Any such withdrawal and
termination must take place within six (6) months after the Fund gives
written notice that this provision is being implemented, and until the
end of that six month period the Distributor and Fund shall continue to
accept and implement orders by the Company for the purchase (and
redemption) of shares of the Fund.
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts
with the majority of other state regulators, then the Company will
withdraw the affected Account's investment in the Fund and terminate this
Agreement with respect to such Account within six (6) months after the
Board informs the Company in writing that it has determined that such
decision has created an irreconcilable material conflict; provided,
however, that such withdrawal and termination shall be limited to the
extent required by the foregoing material irreconcilable conflict as
determined by a majority of the disinterested members of the Board. Until
the end of the foregoing six month period, the Distributor and Fund shall
continue to accept and implement orders by the Company for the purchase
(and redemption) of shares of the
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<PAGE>
Fund.
7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a majority
of the disinterested members of the Board shall determine whether any
proposed action adequately remedies any irreconcilable material conflict,
but in no event will the Fund be required to establish a new funding
medium for the Contracts. The Company shall not be required by Section
7.3 to establish a new funding medium for the Contracts if an offer to do
so has been declined by vote of a majority of Contract owners materially
adversely affected by the irreconcilable material conflict. In the event
that the Board determines that any proposed action does not adequately
remedy any irreconcilable material conflict, then the Company will
withdraw the Account's investment in the Fund and terminate this
Agreement within six (6) months after the Board informs the Company in
writing of the foregoing determination, provided, however, that such
withdrawal and termination shall be limited to the extent required by any
such material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
ARTICLE Vlll. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE COMPANY
8.1(a). The Company agrees to indemnify and hold harmless the Fund
and each of the members of the Board and Fund officers and each
person, if any, who controls the Fund within the meaning of
Section 15 of the 1933 Act (collectively, the "Indemnified
Parties" for purposes of this Section 8.1) against any and all
losses, claims, damages, liabilities (including amounts paid in
settlement with the written consent of the Company) or litigation
(including legal and other expenses), to which the Indemnified
Parties may become subject under any statute, regulation, at
common law or otherwise, insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof) or
settlements are related to the sale or acquisition of the Fund's
shares or the Contracts and:
(i) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained
in the registration statement or prospectus for the
Contracts or sales literature for the Contracts (or any
amendment or supplement to any of the foregoing), or arise
out of or are based upon the omission or the alleged
omission to state therein a material fact required to be
14
<PAGE>
stated therein or necessary to make the statements therein
not misleading, provided that this agreement to indemnify
shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or
omission was made in reliance upon and in conformity with
information furnished to the Company by or on behalf of
the Fund for use in the Registration Statement or
prospectus for the Contracts or in the Contracts or sales
literature (or any amendment or supplement) or otherwise
for use in connection with the sale of the Contracts or
Fund shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or representations
contained in the registration statement, prospectus or
sales literature of the Fund not supplied by the Company
or persons under its control) or wrongful conduct of the
Company or persons under its control, with respect to the
sale or distribution of the Contracts or Fund shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a registration
statement, prospectus, or sales literature of the Fund or
any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make
the statements therein not misleading if such a statement
or omission was made in reliance upon information
furnished to the Fund by or on behalf of the Company; or
(iv) arise as a result of any failure by the Company to provide
the services and furnish the materials under the terms of
this Agreement; or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other
material breach of this Agreement by the Company, as
limited by and in accordance with provisions of Sections
8.1 (b) and 8.1 (c) hereof.
8.1(b). The Company shall not be liable under this indemnification
provision with respect to any losses, claims,
15
<PAGE>
damages, liabilities or litigation incurred or assessed against
an Indemnified Party as such may arise from such Indemnified
Party's willful misfeasance, bad faith, or gross negligence in
the performance of such Indemnified Party's duties or by reason
of such Indemnified Party's reckless disregard of obligations or
duties under this Agreement or to the Fund, whichever is
applicable.
8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified
Party unless such Indemnified Party shall have notified the
Company in writing within a reasonable time after the summons or
other first legal process giving information of the nature of the
claim shall have been served upon such Indemnified Party (or
after such Indemnified Party shall have received notice of such
service on any designated agent), but failure to notify the
Company of any such claim shall not relieve the Company from any
liability which it may have to the Indemnified Party against whom
such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought
against the Indemnified Parties, the Company shall be entitled to
participate, at its own expense, in the defense of such action.
The Company also shall be entitled to assume the defense thereof,
with counsel satisfactory to the party named in the action, and
to settle the claim at its own expense, provided however, that no
such settlement shall, without the Indemnified Parties' written
consent, include any factual stipulations referring to the
Indemnified Parties or their conduct. After notice from the
Company to such party of the Company's election to assume the
defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the
Company will not be liable to such party under this Agreement for
any legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than
reasonable costs of investigation.
8.1(d). The Indemnified Parties will promptly notify the Company
of the commencement of any litigation or proceedings against them
in connection with the issuance or sale of the Fund shares or the
Contracts or the operation of the Fund.
8.2 INDEMNIFICATION BY THE DISTRIBUTOR
16
<PAGE>
8.2(a). The Distributor agrees to indemnify and hold harmless the
Company and each of its directors and officers and each person,
if any, who controls the Company within the meaning of Section 15
of the 1933 Act (collectively, the "Indemnified Parties" for
purposes of this Section 8.2) against any and all losses, claims,
damages, liabilities (including amounts paid in settlement with
the written consent of the Distributor) or litigation (including
legal and other expenses) to which the Indemnified Parties may
become subject under any statute, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses
(or actions in respect thereof) or settlements are related to the
sale or acquisition of the Fund's shares or the Contracts and:
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
the Registration Statement or prospectus or sales
literature of the Fund (or any amendment or supplement to
any of the foregoing), or arise out of or are based upon
the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary
to make the statements therein not misleading, provided
that this agreement to indemnify shall not apply as to any
Indemnified Party if such statement or omission or such
alleged statement or omission was made in reliance upon
and in conformity with information furnished to the
Distributor or Fund by or on behalf of the Company for use
in the registration statement or prospectus for the Fund
or in sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the
Contracts or Fund shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or representations
contained in the registration statement, prospectus or
sales literature for the Contracts not supplied by the
Fund, Distributor or persons under their control) or
wrongful conduct of Fund or the Distributor or persons
under their control, with respect to the sale or
distribution of the Contracts or Fund shares; or
(iii) arise out of any untrue statement or alleged untrue
17
<PAGE>
statement of a material fact contained in a registration
statement, prospectus, or sales literature covering the
Contracts, or any amendment thereof or supplement thereto,
or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary
to make the statement or statements therein not
misleading, if such statement or omission was made in
reliance upon information furnished to the Company by or
on behalf of the Fund or the Distributor; or
(iv) arise as a result of any failure by the Distributor to
provide the services and furnish the materials under the
terms of this Agreement; or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Distributor in
this Agreement or arise out of or result from any other
material breach of this Agreement by the Distributor; as
limited by and in accordance with the provisions of
Sections 8.2(b) and 8.2(c) hereof.
8.2(b). The Distributor shall not be liable under this
indemnification provision with respect to any losses, claims,
damages, liabilities or litigation incurred or assessed against
an Indemnified Party as such may arise from such Indemnified
Party's willful misfeasance, bad faith, or gross negligence in
the performance of such Indemnified Party's duties or by reason
of such Indemnified Party's reckless disregard of obligations and
duties under this Agreement or to each Company or the Account,
whichever is applicable.
8.2(c). The Distributor shall not be liable under this
indemnification provision with respect to any claim made against
an Indemnified Party unless such Indemnified Party shall have
notified the Distributor in writing within a reasonable time
after the summons or other first legal process giving information
of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have
received notice of such service on any designated agent), but
failure to notify the Distributor of any such claim shall not
relieve the Distributor from any liability which it may have to
the Indemnified Party against whom such action is brought
otherwise than on account of this indemnification provision. In
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<PAGE>
case any such action is brought against the Indemnified Parties,
the Distributor will be entitled to participate, at its own
expense, in the defense thereof. The Distributor also shall be
entitled to assume the defense thereof, with counsel satisfactory
to the party named in the action, and to settle the claim at its
own expense, provided however, that no such settlement shall,
without the Indemnified Parties' written permission, include any
factual stipulations referring to the Indemnified Parties or
their conduct. After notice from the Distributor to such party of
the Distributor's election to assume the defense thereof, the
Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Distributor will not
be liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party independently
in connection with the defense thereof other than reasonable
costs of investigation.
8.2(d). The Company agrees promptly to notify the Distributor of
the commencement of any litigation or proceedings against it or
any of its officers or directors in connection with the issuance
or sale of the Contracts or the operation of each Account.
8.3. INDEMNIFICATION BY THE FUND
8.3(a). The Fund agrees to indemnify and hold harmless the
Company, and each of its directors and officers and each person,
if any, who controls the Company within the meaning of Section 15
of the 1933 Act, other than Affiliated persons (as defined in
Section 2(a)(3) of the 1940 Act) of the Fund (collectively, the
"Indemnified Parties" for purposes of this Section 8.3) against
any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Fund)
or litigation (including legal and other expenses) to which the
Indemnified Parties may become subject under any statute, at
common law or otherwise, insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof) or
settlements result from the gross negligence, bad faith or
willful misconduct of the Board or any member thereof, are
related to the operations of the Fund and:
(i) arise as a result of any failure by the Fund to provide
the services and furnish the materials under the terms of
this Agreement (including a failure to comply with the
19
<PAGE>
diversification requirements specified in Article Vl of
this Agreement); or
(ii) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this
Agreement or arise out of or result from any other
material breach of this Agreement by the Fund;
as limited by and in accordance with the provisions of Sections 8.3(b)
and 8.3(c) hereof.
8.3(b). The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages,
liabilities or litigation incurred or assessed against an
Indemnified Party as such may arise from such Indemnified Party's
willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of
such Indemnified Party's reckless disregard of obligations and
duties under this Agreement or to the Company, the Fund, the
Distributor or each Account, whichever is applicable.
8.3(c). The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified
Party unless such Indemnified Party shall have notified the Fund
in writing within a reasonable time after the summons or other
first legal process giving information of the nature of the claim
shall have been served upon such Indemnified Party (or after such
Indemnified Party shall have received notice of such service on
any designated agent), but failure to notify the Fund of any such
claim shall not relieve the Fund from any liability which it may
have to the Indemnified Party against whom such action is brought
otherwise than on account of this indemnification provision. In
case any such action is brought against the Indemnified Parties,
the Fund will be entitled to participate, at its own expense, in
the defense thereof. The Fund also shall be entitled to assume
the defense thereof, with counsel satisfactory to the party named
in the action, and to settle the claim at its own expense,
provided however, that no such settlement shall, without the
Indemnified Parties' written permission, include any factual
stipulations referring to the Indemnified Parties or their
conduct. After notice from the Fund to such party of the Fund's
election to assume the defense thereof, the Indemnified Party
shall bear the fees and expenses
20
<PAGE>
of any additional counsel retained by it, and the Fund will not
be liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party independently
in connection with the defense thereof other than reasonable
costs of investigation.
8.3(d). The Company and the Distributor agree promptly to notify
the Fund of the commencement of any litigation or proceedings
against it or any of its respective officers or directors in
connection with this Agreement, the issuance or sale of the
Contracts, with respect to the operation of each Account, or the
sale or acquisition of shares of the Fund.
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of New
York.
9.2. This Agreement shall be subject to the provisions of the 1933, 1934
and 1940 Acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as
the SEC may grant (including, but not limited to, the Shared Funding
Exemptive Order), and the terms hereof shall be interpreted and construed
in accordance therewith.
ARTICLE X. TERMINATION
10.1. This Agreement shall terminate:
(a) at the option of any party upon one year advance written notice
to the other parties; provided, however such notice shall not be
given earlier than one year following the date of this Agreement;
or
(b) at the option of the Company to the extent that shares of
Portfolios are not reasonably available to meet the requirements
of the Contracts as determined by the Company, provided however,
that such termination shall apply only to the Portfolio(s) not
reasonably available. Prompt notice of the election to terminate
for such cause shall be furnished by the Company; or
(c) at the option of the Fund in the event that formal administrative
proceedings are instituted against the Company by the NASD, the
SEC, any state insurance department or any other regulatory body
21
<PAGE>
regarding the Company's duties under this Agreement or related to
the sale of the Contracts, with respect to the operation of any
Account, or the purchase of the Fund shares, provided however,
that the Fund determines in its sole judgment exercised in good
faith, that any such administrative proceedings will have a
material adverse effect upon the ability of the Company to
perform its obligations under this Agreement; or
(d) at the option of the Company in the event that formal
administrative proceedings are instituted against the Fund or
Distributor by the NASD, the SEC, or any state securities or
insurance department or any other regulatory body, provided,
however, that the Company determines in its sole judgment
exercised in good faith, that any such administrative proceedings
will have a material adverse effect upon the ability of the Fund
or Distributor to perform its obligations under this Agreement;
or
(e) with respect to any Account, upon requisite vote of the Contract
owners having an interest in such Account (or any subaccount or
division) to substitute the shares of another investment company
for the corresponding Portfolio shares of the Fund in accordance
with the terms of the Contracts for which those Portfolio shares
had been selected to serve as the underlying investment media.
The Company will give 30 days' prior written notice to the Fund
of the date of any proposed vote to replace the Fund's shares; or
(f) at the option of the Company, in the event any of the Fund's
shares are not registered, issued or sold in accordance with
applicable state and/or federal law or such law precludes the use
of such shares as the underlying investment media of the
Contracts issued or to be issued by the Company; or
(g) at the option of the Company, if the Fund ceases to qualify as a
Regulated Investment Company under Subchapter M of the Code or
under any successor or similar provision, or if the Company
reasonably believes that the Fund may fail to so qualify; or
(h) at the option of the Company, if the Fund fails to meet the
diversification requirements specified in Article Vl hereof; or
(i) at the option of either the Fund or the Distributor, if (1) the
Fund or the Distributor, respectively, shall determine, in its
sole judgment reasonably exercised in good faith, that the
Company has suffered a
22
<PAGE>
material adverse change in its business or financial condition or
is the subject of material adverse publicity and such material
adverse change or material adverse publicity will have a material
adverse impact upon the business and operations of either the
Fund or the Distributor, (2) the Fund or the Distributor shall
notify the Company in writing of such determination and its
intent to terminate this Agreement, and (3) after considering the
actions taken by the Company and any other changes in
circumstances since the giving of such notice, such determination
of the Fund or the Distributor shall continue to apply on the
sixtieth (60th) day following the giving of such notice, which
sixtieth day shall be the effective date of termination; or
(j) at the option of the Company, if (1) the Company shall determine,
in its sole judgment reasonably exercised in good faith, that
either the Fund or the Distributor has suffered a material
adverse change in its business or financial condition or is the
subject of material adverse publicity and such material adverse
change or material adverse publicity will have a material adverse
impact upon the business and operations of the Company, (2) the
Company shall notify the Fund and the Distributor in writing of
such determination and its intent to terminate the Agreement, and
(3) after considering the actions taken by the Fund and/or the
Distributor and any other changes in circumstances since the
giving of such notice, such determination shall continue to apply
on the sixtieth (60th) day following the giving of such notice,
which sixtieth day shall be the effective date of termination; or
(k) at the option of either the Fund or the Distributor, if the
Company gives the Fund and the Distributor the written notice
specified in Section 1.6(b) hereof and at the time such notice
was given there was no notice of termination outstanding under
any other provision of this Agreement; provided, however any
termination under this Section 10.1(k) shall be effective forty
five (45) days after the notice specified in Section 1.6(b) was
given.
10.2. It is understood and agreed that the right of any party hereto to
terminate this Agreement pursuant to Section 10.1 (a) may be exercised
for any reason or for no reason.
10.3. NOTICE REQUIREMENT No termination of this Agreement shall be effective
unless and until the party terminating this Agreement gives prior written
notice to all other parties to this Agreement of its intent to terminate,
which notice shall set forth the basis for such termination. Furthermore,
23
<PAGE>
(a) in the event that any termination is based upon the provisions of
Article Vll, or the provision of Section 10.1(a), 10.1(i), 10.1(j) or
10.1(k) of this Agreement, such prior written notice shall be given in
advance of the effective date of termination as required by such
provisions; and
(b) in the event that any termination is based upon the provisions of
Section 10.1 (c) or 10.1 (d) of this Agreement, such prior written notice
shall be given at least ninety (90) days before the effective date of
termination.
10.4. EFFECT OF TERMINATION Notwithstanding any termination of this
Agreement, the Fund and the Distributor shall, at the option of the
Company, continue to make available additional shares of the Fund
pursuant to the terms and conditions of this Agreement, for all Contracts
in effect on the effective date of termination of this Agreement
(hereinafter referred to as "Existing Contracts"). Specifically, without
limitation, the owners of the Existing Contracts shall be permitted to
reallocate investments in the Fund, redeem investments in the Fund and/or
invest in the Fund upon the making of additional purchase payments under
the Existing Contracts. The parties agree that this Section 10.4 shall
not apply to any terminations under Article Vll and the effect of such
Article Vll terminations shall be governed by Article Vll of this
Agreement.
10.5. The Company shall not redeem Fund shares attributable to the Contracts
(as opposed to Fund shares attributable to the Company's assets held in
each Account) except (a) as necessary to implement Contract Owner
initiated transactions, (b) as required by state and/or federal laws or
regulations or judicial or other legal precedent of general application
(hereinafter a "Legally Required Redemption"), or (c) upon termination of
this Agreement with respect to one or more Portfolios. Upon request, the
Company will promptly furnish to the Fund and the Distributor the opinion
of counsel for the Company (which counsel shall be reasonably
satisfactory to the Fund and the Distributor) to the effect that any
redemption pursuant to clause (b) above is a Legally Required Redemption.
Furthermore, except in cases where permitted under the terms of the
Contracts, the Company shall not prevent Contract owners from allocating
payments to a Portfolio that was otherwise available under the Contracts
without first giving the Fund or the Distributor ninety (90) days notice
of its intention to do so.
10.6. If for any reason the shares of any Portfolio are no longer to be made
available, then, at the request of the Company, the Fund and the
Distributor shall cooperate with the Company so that the provisions of
Section 26(b) of
24
<PAGE>
the 1940 Act will be complied with as soon as reasonably practicable and
substitution of an underlying funding medium accomplished without
disruption of sales of securities to the Account or any subaccount or
division thereof in connection with such Contracts.
10.7. Articles ll and Vlll and Sections 12.1, 12.6, and 12.7 shall survive
termination of this Agreement.
ARTICLE Xl. NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail to, or when received by overnight or other delivery service by, a
party at the address of such party set forth below or at such other address as
such party may from time to time specify in writing to the other parties.
If to the Fund: Select Ten Plus Fund, LLC
515 West Market Street, 8th Floor
Louisville, KY 40202
Attention: Kevin L. Howard
If to the Company: National Integrity Life Insurance Company
515 West Market Street, 8th Floor
Louisville, KY 40202
Attention: General Counsel
If to the Distributor: ARM Securities Corporation
515 West Market Street, 8th Floor
Louisville, KY 40202
Attention: President
ARTICLE Xll. MISCELLANEOUS
12.1. All persons dealing with the Fund must look solely to the property of
the Fund for the enforcement of any claims against the Fund as neither
the Board, officers, agents or shareholders assume any personal liability
for obligations entered into on behalf of the Fund.
12.2. Subject to the requirements of legal process and regulatory authority,
each party hereto shall treat as confidential the names and addresses of
the owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto and, except as
permitted by this Agreement, shall not disclose, disseminate or utilize
such names and addresses and other confidential information until such
time as it may come into the public domain without the express written
consent of the affected
25
<PAGE>
party.
12.3. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions
hereof or otherwise affect their construction or effect.
12.4. This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the
same instrument.
12.5. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the
Agreement shall not be affected thereby.
12.6. Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the
SEC, the NASD and state insurance regulators) and shall permit such
authorities reasonable access to its books and records in connection with
any investigation or inquiry relating to this Agreement or the
transactions contemplated hereby. Notwithstanding the generality of the
foregoing, each party hereto further agrees to furnish the California
Insurance Commissioner with any information or reports in connection with
services provided under this Agreement which such Commissioner may
request in order to ascertain whether the variable life insurance
operations of the Company are being conducted in a manner consistent with
the California Variable Life Insurance Regulations and any other
applicable law or regulations.
12.7. The Fund and Distributor agree that to the extent any advisory or
other fees received by the Fund, the Distributor or the Adviser are
determined to be unlawful in legal or administrative proceedings under
the 1973 NAIC model variable life insurance regulation in the states of
California, Colorado, Maryland or Michigan, the Distributor shall
indemnify and reimburse the Company for any out of pocket expenses and
actual damages the Company has incurred as a result of any such
proceeding; provided however, that the provisions of Section 8.2(b) and
8.2(c) of this Agreement shall apply to such indemnification and
reimbursement obligation. Such indemnification and reimbursement
obligation shall be in addition to any other indemnification and
reimbursement obligations of the Fund and/or the Distributor under this
Agreement.
12.8. The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled
to under state and
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federal laws.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed in its name and on its behalf by its duly authorized
representative as of the date first written above.
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
By:
-------------------------------------
Title:
----------------------------------
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SBM FINANCIAL SERVICES, INC. THE LEGENDS FUND, INC.
By: By:
---------------------------------
Title: Title:
------------------------------
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SCHEDULE A
ACCOUNTS
Date of Resolution of Company's Board
Name of Account Which Established the Account
- --------------- --------------------------------------
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SCHEDULE B
PROXY VOTING PROCEDURES
The following is a list or procedures and corresponding responsibilities for the
handling of proxies relating to the Fund by the Distributor, the Fund and the
Company. The defined terms herein shall have the meanings assigned in the
Participation Agreement except that the term "Company" shall also include the
department or third party assigned by the Insurance Company to perform the steps
delineated below.
1. The number of proxy proposals is given to the Company by the Distributor
as early as possible before the date set by the Fund for the shareholder
meeting to facilitate the establishment of tabulation procedures. At this
time the Distributor will inform the Company of the Record, Mailing and
Meeting dates. This will be done verbally approximately two months before
the meeting.
2. Promptly after the Record Date, the Company will perform a "tape run", or
other activity, which will generate the names, addresses and number of
units which are attributed to each contractowner/policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.
Note: The number of proxy statements is determined by the activities
described in Step #2. The Company will use its best efforts to
call in the number of Customers to the Fund as soon as possible,
but no later than two weeks after the Record Date.
3. The Fund's Annual Report must be sent to each Customer by the Company
either before or together with the Customers' receipt of a proxy
statement. The Distributor will provide at least one copy of the last
Annual Report to the Company.
4. The text and format for the Voting Instruction Cards ("Cards" or "Card")
is provided to the Company by the Fund. The Company, at its expense,
shall produce and personalize the Voting Instruction Cards. The Legal
Department of the Adviser or its affiliate must approve the Card before
it is printed. Allow approximately 24 business days for printing
information on the Cards. Information commonly found on the Cards
includes:
a. name (legal name as found on account registration)
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b. address
c. Fund or account number
d. coding to state number of units
e. individual Card number for use in tracking and verification of votes
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
5. During this time, the Fund or its counsel will develop and produce, and
the Fund will pay for, the Notice of Proxy and the Proxy Statement (one
document). Printed and folded notices and statements will be sent to the
Company for insertion into envelopes (envelopes and return envelopes are
provided and paid for by the Insurance Company). Contents of the envelope
sent to Customers by the Company will include:
a. Voting Instruction Card(s)
b. One proxy notice and statement (one document)
c. return envelope (postage pre-paid by the Company) addressed to the
Company or its tabulation agent
d. "urge buckslip" - optional, but recommended. (This is a small,
single sheet of paper that requests Customers to vote as quickly as
possible and that their vote is important.)
e. cover letter - optional, supplied by the Company
6. The above contents should be received by the Company approximately 3-5
business days before the mail date. The individual in charge at the
Company reviews and approves the contents of the mailing package to
ensure correctness and completeness. A copy of this approval is sent to
the Fund or its counsel.
7. Package mailed by the Company.
* The Fund MUST allow at least a 15-day solicitation time to the
Company as the shareowner. (A 5-week period is recommended.)
Solicitation time is calculated as calendar days from (but NOT
including) the meeting, counting backwards.
8. Collection and tabulation of Cards begins. Cards sorted on arrival by
proposal into vote categories of all yes, no, or mixed replies, and data
entry begun.
Note: Postmarks are not generally needed. A need for postmark
information would be due to a Company's internal procedure.
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9. Signatures on Card checked against legal name on account registration
which was printed or affixed on the Card.
Note: For example, if the account registration is under "Bertram C.
Jones, Trustee," then that is the exact legal name and is the
signature needed on the Card.
10. If Cards are mutilated, or for any reason are illegible or are not signed
properly, they are sent back to the Customer with an explanatory letter a
new Card and a return envelope. The mutilated or illegible Card is
disregarded and considered to be NOT RECEIVED for purposes of vote
tabulation. Any Cards that have "kicked out" (e.g. mutilated, illegible)
of the procedure are "hand verified," i.e., examined as to why they did
not complete the system. Any questions on those Cards are usually
remedied individually.
11. There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort the
Cards as they first arrive into categories depending upon their vote; an
estimate of how the vote is progressing may then be calculated. If the
initial estimates and the actual vote do not coincide, then an internal
audit of that vote should occur. This may entail a recount.
12. The actual tabulation of votes is done in units which is then converted
to shares. (It is very important that the Fund receive the tabulations
stated in terms of a percentage and the number of SHARES.) The Fund or
its counsel must review and approve tabulation format.
13. Final tabulation in shares is verbally given by the Company to the Fund
on the morning of the meeting not later than 10:00 a.m. New York Time.
The Fund or its counsel may request an earlier deadline if required to
calculate the vote in time for the meeting.
14. A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
The Fund will provide a standard form for each Certification.
15. The Company will be required to box and archive the Cards received from
the Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, the Fund will be
permitted reasonable access to such Cards.
16. All approvals and "signing-off" may be done orally, but must always be
followed up in writing.
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Exhibit 10
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Financial Statements"
in Post- Effective Amendment No. 11 to the Registration Statement (Form N-4 No.
33-51126) and Amendment No. 12 to the Registration Statement (Form N-4 No.
811-7132) and related Prospectus of Separate Account II of National Integrity
Life Insurance Company and to the use of our reports (a) dated February 9, 1999,
with respect to the statutory basis financial statements of National Integrity
Life Insurance Company, and (b) dated April 9, 1999, with respect to the
financial statements of Separate Account II of National Integrity Life Insurance
Company, both included in the Registration Statement (Form N-4) for 1998 filed
with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Louisville, Kentucky
April 21, 1999
