<PAGE>
As filed with the Securities and Exchange Commission on April 28, 2000
Registration Nos. 33-51126 and 811-7132
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. 12 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 13 [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, 2000 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 flexible premium variable annuity contracts offered to
individuals and to groups by National Integrity Life Insurance Company, an
indirect wholly owned subsidiary of The Western and Southern Life Insurance
Company (W&S). The contracts (collectively, a CONTRACT) 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 contract.
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: Deutsche Asset Management VIT Funds
(DEUTSCHE VIT FUNDS); 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; Janus Aspen Series;
J.P. Morgan Series Trust II; The Legends Fund, Inc. (THE LEGENDS FUND); MFS
Variable Insurance Trust Funds (MFS FUNDS); The Universal Institutional
Funds, Inc., managed by Morgan Stanley Asset Management (MORGAN STANLEY UIF
PORTFOLIOS); 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 34 Variable Account Options
available under Separate Account II:
<TABLE>
<S> <C>
DEUTSCHE ASSET MANAGEMENT VIT FUNDS THE LEGENDS FUND
Deutsche VIT EAFE-Registered Trademark- Harris Bretall Sullivan & Smith Equity Growth Portfolio
Equity Index Fund Scudder Kemper Value Portfolio
Deutsche VIT Equity 500 Index Fund Zweig Asset Allocation Portfolio
Deutsche VIT Small Cap Index Fund Zweig Equity (Small Cap) Portfolio
FIDELITY'S VIP FUNDS
VIP Equity-Income Portfolio MFS FUNDS
VIP II Contrafund Portfolio MFS Capital Opportunities Portfolio
VIP III Growth & Income Portfolio MFS Emerging Growth Portfolio
VIP III Growth Opportunities Portfolio MFS Growth With Income Portfolio
VIP Growth Portfolio MFS Mid Cap Growth Portfolio
VIP III Mid Cap Portfolio MFS New Discovery Portfolio
JANUS ASPEN SERIES MORGAN STANLEY UNIVERSAL INSTITUTIONAL FUNDS
Janus Aspen Aggressive Growth Portfolio Morgan Stanley UIF Asian Equity Portfolio
Janus Aspen Growth Portfolio Morgan Stanley UIF Emerging Markets Debt Portfolio
Janus Aspen Capital Appreciation Portfolio Morgan Stanley UIF High Yield Portfolio
Janus Aspen Balanced Portfolio Morgan Stanley UIF U.S. Real Estate Portfolio
Janus Aspen Worldwide Growth Portfolio
Janus Aspen Money Market Portfolio SELECT TEN PLUS FUND
Select Ten Plus Division-March
J.P. MORGAN SERIES TRUST II Select Ten Plus Division-June
J.P. Morgan International Opportunities Portfolio Select Ten Plus Division-September
J.P. Morgan Bond Portfolio Select Ten Plus Division-December
</TABLE>
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
<PAGE>
3%. YOU MUST TRANSFER ALL CONTRIBUTIONS YOU MAKE TO THE STO INTO OTHER
INVESTMENT OPTIONS WITHIN ONE YEAR OF CONTRIBUTION ON A MONTHLY OR QUARTERLY
BASIS.
This prospectus contains information about the contract 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 us at 1-800-433-1778.
Registration statements relating to the contract, which include a Statement of
Additional Information (SAI) dated May 1, 2000, 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 CONTRACT IS NOT A DEPOSIT OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY
BANK, NOR IS IT INSURED BY THE FDIC. IT IS SUBJECT TO INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE
CONTRACT 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 CONTRACT 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 CONTRACT ON THE SEC'S INTERNET SITE AT http://www.sec.gov. COPIES OF
THAT INFORMATION ARE ALSO AVAILABLE, AFTER PAYING A DUPLICATING FEE, BY
ELECTRONIC REQUEST TO [email protected], OR BY WRITING THE SEC'S PUBLIC
REFERENCE SECTION, WASHINGTON, D.C. 20459-0102.
The date of this prospectus is May 1, 2000.
<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
Table of Annual Fees and Expenses..............................................4
Examples.......................................................................7
SECTION 2 - NATIONAL INTEGRITY AND SEPARATE ACCOUNT II
National Integrity Life Insurance Company......................................9
Separate Account II and the Variable Account Options...........................9
Assets of Our Separate Account.................................................9
Changes In How We Operate......................................................9
SECTION 3 - YOUR INVESTMENT OPTIONS
Deutsche Asset Management VIT Funds...........................................10
Fidelity's Variable Insurance Products Funds..................................10
Janus Aspen Series............................................................11
J.P. Morgan Series Trust II...................................................12
The Legends Fund..............................................................13
MFS Funds.....................................................................14
Morgan Stanley UIF Portfolios.................................................15
The Select Ten Plus Fund......................................................15
Performance History of the Dogs of the Dow Strategy -
Comparison of Historical Total Return.................................18
Fixed Accounts................................................................19
Guaranteed Rate Options.................................................19
Renewals of GRO Accounts.............................................19
Market Value Adjustments.............................................20
Systematic Transfer Option..............................................20
SECTION 4 - DEDUCTIONS AND CHARGES
Separate Account Charges......................................................21
Annual Administrative Charge..................................................21
Portfolio Charges.............................................................21
Reduction or Elimination of Separate Account or Administrative Charges........21
State Premium Tax Deduction...................................................21
Contingent Withdrawal Charge..................................................22
Reduction or Elimination of the Contingent Withdrawal Charge..................22
Transfer Charge...............................................................22
Hardship Waiver...............................................................23
Tax Reserve...................................................................23
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SECTION 5 - TERMS OF YOUR VARIABLE ANNUITY
Contributions Under Your Contract.............................................23
Your Account Value............................................................23
Units in Separate Account II..................................................24
How We Determine Unit Value...................................................24
Transfers.....................................................................24
Excessive Trading.............................................................25
Withdrawals...................................................................26
Assignments...................................................................26
Death Benefits and Similar Benefit Distributions..............................26
Annuity Benefits..............................................................27
Annuities.....................................................................27
Fixed Annuity Payments........................................................27
Timing of Payment.............................................................28
How You Make Requests and Give Instructions...................................28
SECTION 6 - VOTING RIGHTS
Portfolio Voting Rights.......................................................28
How We Determine Your Voting Shares...........................................28
How Portfolio Shares Are Voted................................................29
Separate Account Voting Rights................................................29
SECTION 7 - TAX ASPECTS OF THE CONTRACT
Introduction..................................................................29
Your Contract is an Annuity...................................................29
Taxation of Annuities Generally...............................................29
Distribution-at-Death Rules...................................................31
Diversification Standards.....................................................31
Tax-Favored Retirement Programs...............................................31
Federal and State Income Tax Withholding......................................31
Impact of Taxes on National Integrity.........................................31
Transfers Among Investment Options............................................31
SECTION 8 - ADDITIONAL INFORMATION
Systematic Withdrawals........................................................32
Income Plus Withdrawal Program................................................32
Dollar Cost Averaging.........................................................33
Systematic Transfer Program...................................................33
Customized Asset Rebalancing..................................................33
Callan Asset Allocation and Rebalancing Program...............................34
Systematic Contributions......................................................34
Performance Information.......................................................34
SECTION 9 - PRIOR CONTRACTS
Death Benefit Information for Contacts Issued Before January 1, 1997..........35
Reduction in Charges..........................................................36
Contingent Withdrawal Charge .................................................36
Retirement Date...............................................................37
Callan Asset Allocation and Rebalancing Program...............................37
Hardship Waivers..............................................................37
Fixed Accounts................................................................37
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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.
<PAGE>
GLOSSARY
ACCOUNT VALUE - the value of your contract, which consists of amounts
attributable to the 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 - the person upon whose life an annuity benefit and death benefit are
based.
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.
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.
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.
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SECTION 1 - SUMMARY
YOUR VARIABLE ANNUITY CONTRACT
When this prospectus uses the terms "we," "our" and "us," it means National
Integrity Life Insurance Company (NATIONAL INTEGRITY). 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 will
determine the timing of distribution.
If you want to invest for retirement by buying a Pinnacle Variable Annuity,
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, additional contributions can be any amount you choose, as
long as they are above the minimum required contribution discussed below.
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
Contract" 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. Additional contributions can be as
little as $100. Some tax-favored retirement plans allow smaller contributions.
For more details on contribution requirements, see "Contributions Under Your
Contract" in Section 5.
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 with the performance of the corresponding Portfolio. For a full
description of each Portfolio, see that Portfolio's prospectus and Statement of
Additional Information.
1
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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 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 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 contract year
with no withdrawal charges. After the first 10% within a contract 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 certain states. If you cancel your contract, we'll return your Account
Value, which may be more or less than your initial contribution. 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
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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, Janus Aspen Aggressive Growth Portfolio and 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 Divisions or Portfolios may experience
greater fluctuations in value than an investment in a diversified Portfolio. In
addition, the non-diversified Divisions or 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.
There are certain risks that are specific to certain industries or market
sectors. Examples of this are industries that are highly regulated and could
experience declines due to burdensome regulations and industries such as the
tobacco industry that are the subject of lawsuits and governmental scrutiny.
Some issuers of stock refine, market and transport oil and related petroleum
products. These companies face the risks of price and availability of oil, the
level of demand for the products, refinery capacity and operating costs, the
cost of financing the exploration for oil and the increasing expenses necessary
to comply with environmental and other energy related regulations. Declining
U.S. crude oil production is likely to lead to increased dependence on foreign
sources of oil and to uncertain supply for refiners and the risk of
unpredictable supply disruptions. In addition, future scientific advances with
new energy sources could have a negative impact on the petroleum and natural gas
industries.
For a complete discussion of the risks associated with an investment in any
particular Portfolio, see the prospectus of that Portfolio.
3
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TABLE OF ANNUAL FEES AND EXPENSES
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 SEPARATE 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>
<CAPTION>
Management Other Total Annual
Portfolio Fees Expenses Expenses
- --------- ---------- -------- ------------
<S> <C> <C> <C>
Deutsche VIT EAFE-Registered Trademark- Equity Index.......... 0.26% (4) 0.39% (4) 0.65% (4)
Deutsche VIT Equity 500 Index................................. 0.14% (4) 0.16% (4) 0.30% (4)
Deutsche VIT Small Cap Index.................................. 0.13% (4) 0.32% (4) 0.45% (4)
VIP Equity-Income: Initial Class.............................. 0.48% 0.08% 0.56% (5)
VIP II Contrafund: Initial Class.............................. 0.58% 0.07% 0.65% (5)
VIP III Growth & Income: Initial Class........................ 0.48% 0.11% 0.59% (5)
VIP III Growth Opportunities: Initial Class................... 0.58% 0.10% 0.68% (5)
VIP Growth: Service Class..................................... 0.58% 0.17% (6) 0.75% (5)
VIP III Mid Cap: Service Class................................ 0.57% 0.50% (6) 1.07% (7)
Harris Bretall Sullivan & Smith Equity Growth................. 0.65% 0.31% 0.96%
Scudder Kemper Value.......................................... 0.65% 0.31% 0.96%
Zweig Asset Allocation........................................ 0.90% 0.33% 1.23%
Zweig Equity (Small Cap)...................................... 1.05% 0.49% 1.54% (8)
Janus Aspen Aggressive Growth: Service Shares................. 0.65% (9) 0.27% (9) 0.92% (9)
Janus Aspen Growth: Service Shares............................ 0.65% (9) 0.27% (9) 0.92% (9)
Janus Aspen Capital Appreciation: Institutional Shares........ 0.65% (10) 0.04% (10) 0.69% (10)
Janus Aspen Balanced: Institutional Shares.................... 0.65% (10) 0.02% (10) 0.67% (10)
Janus Aspen Worldwide Growth: Institutional Shares............ 0.65% (10) 0.05% (10) 0.70% (10)
Janus Aspen Money Market: Institutional Shares................ 0.25% (10) 0.18% (10) 0.43% (10)
J.P. Morgan International Opportunities....................... 0.60% 0.60% (11) 1.20% (11)
J.P. Morgan Bond.............................................. 0.30% 0.45% 0.75%
MFS Capital Opportunities: Service Class...................... 0.75% 0.36% (12) (13) 1.11% (13)
MFS Emerging Growth: Service Class............................ 0.75% 0.29% (12) (13) 1.04% (13)
MFS Growth With Income: Service Class......................... 0.75% 0.33% (12) (13) 1.08% (13)
MFS Mid Cap Growth: Service Class............................. 0.75% 0.35% (12) (13) 1.10% (13)
MFS New Discovery: Service Class.............................. 0.90% 0.37% (12) (13) 1.27% (13)
Morgan Stanley UIF Asian Equity............................... 0.00% (14) 1.27% (14) 1.27% (14)
Morgan Stanley UIF Emerging Markets Debt...................... 0.45% (14) 0.98% (14) 1.43% (14)
Morgan Stanley UIF High Yield................................. 0.19% (14) 0.61% (14) 0.80% (14)
Morgan Stanley UIF U.S. Real Estate........................... 0.00% (14) 1.10% (14) 1.10% (14)
4
<PAGE>
Select Ten Plus Division-March................................ 0.50% (15) 0.35% (16) 0.85% (16)
Select Ten Plus Division-June................................. 0.50% (15) 0.35% (16) 0.85% (16)
Select Ten Plus Division-September............................ 0.50% (15) 0.35% (16) 0.85% (16)
Select Ten Plus Division-December............................. 0.50% (15) 0.35% (16) 0.85% (16)
</TABLE>
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(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 Company for the Deutsche
Asset Management VIT Funds, 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-Registered Trademark- 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. Deutsche Asset Management has
voluntarily undertaken to waive its fees and to reimburse the Portfolios for
certain expenses so that the EAFE-Registered Trademark- Equity Index Fund,
Equity 500 Index Fund and Small Cap Index Fund Total Annual Expenses will not
exceed 0.65%, 0.30% and 0.45%, respectively. Without the waiver and
reimbursement, Total Annual Expenses for the year ended December 31, 1999
would have been as follows: 1.15% for the EAFE-Registered Trademark- Equity
Index Fund, 0.43% for the Equity 500 Index Fund and 1.18% 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 Annual Expenses presented in the table would have been .57% for VIP
Equity-Income Portfolio, .77% for VIP Growth Portfolio, .67% for VIP II
Contrafund Portfolio, .69% for VIP III Growth Opportunities Portfolio, and .60%
for VIP III Growth & Income Portfolio.
(6) The Other Expenses presented in the table 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 Annual Expenses would have been .57%,
2.84% (including the payment of .10% pursuant to the Rule 12b-1 Plan), and 3.41%
respectively for the VIP III Mid Cap Portfolio.
(8) Touchstone Advisors has agreed to reimburse each of The Legends Fund
Portfolios for Other 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, 1999 would have been 1.64% for the Zweig Equity (Small Cap) Portfolio.
Touchstone 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
2000. In The Legends Fund's prospectus, see "Management of the Fund."
(9) Expenses are based on the estimated expenses that the new Service Shares
Class of each Portfolio expects to incur in its initial fiscal year. The Other
Expenses reflect the payment of 0.25% pursuant to a Rule 12b-1 Plan adopted by
the underlying Portfolios. All expenses are shown without the effect of expense
offset arrangements.
(10) Expenses are based on the expenses for the fiscal year ended December 31,
1999, restated to reflect a reduction in the management fee for Aggressive
Growth, Growth, Balanced, Capital Appreciation and Worldwide Growth Portfolios.
All expenses are shown without the effect of expense offset arrangements.
(11) 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
5
<PAGE>
the average daily net assets of J.P. Morgan International Opportunities. Without
this agreement, the Other Expenses and Total Annual Expenses for the fiscal year
ended December 31, 1999 would have been as follows: 1.38% and 1.98% for the
International Opportunities Portfolio.
(12) The Other Expenses reflect the payment of 0.20% pursuant to a Rule 12b-1
Plan adopted by the underlying Portfolios.
(13) MFS has contractually agreed, subject to reimbursement, to bear the
Portfolios' expenses so that the Other Expenses presented in the table do not
exceed 0.15% annually (this reimbursement does not include the 0.20% Rule 12b-1
fee described above or the expense offset arrangement described below). These
contractual fee arrangements will continue until at least May 1, 2001, unless
changed with the consent of the board of trustees that oversees the Portfolios.
In addition, each Portfolio has an expense offset arrangement that reduces its
custodian fee based upon the amount of cash it maintains with its custodian and
dividend disbursing agent. The Portfolios may enter into other similar
arrangements and directed brokerage arrangements, which would also have the
effect of reducing their expenses. The Other Expenses presented in the table do
not take into account these expense offset reductions, and are therefore higher
than the actual expenses of the Portfolios. Without these contractual fee
arrangements and expense offset arrangements, the Total Annual Expenses
presented in the table are estimated to be 1.22% for the Capital Opportunities
Portfolio, 1.41% for the Mid Cap Growth Portfolio, and 2.69% for the New
Discovery Portfolio.
(14) 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, 1999 would have been as follows: .80%, 2.23% and 3.03% for
the Asian Equity Portfolio; .80%, 0.98% and 1.78% for the Emerging Markets Debt
Portfolio; .50%, 0.61% and 1.11% for the High Yield Portfolio; and .80%, 1.10%
and 1.90% 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.
(15) Touchstone 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. Touchstone
Advisors has guaranteed it or an affiliate will pay National Asset an annual
minimum sub-advisory fee of $50,000.
(16) Touchstone 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, Other Expenses and
Total Annual Expenses would have been 10.13% and 10.63%, respectively, for the
June Division, 9.21% and 9.71%, respectively, for the September Division, and
54.0% and 54.5%, respectively, for the December Division. Touchstone Advisors
reserves the right to withdraw or modify its policy of expense reimbursement for
the Divisions, but doesn't intend to do so during 2000.
6
<PAGE>
EXAMPLES
The examples below show the expenses on a $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>
Deutsche VIT EAFE-Registered Trademark- Equity Index.............. $ 90.99 $114.75 $140.98 $238.35
Deutsche VIT Equity 500 Index..................................... $ 87.41 $103.87 $122.66 $200.80
Deutsche VIT Small Cap Index...................................... $ 88.94 $108.54 $130.54 $217.06
VIP Equity-Income: Initial Class.................................. $ 90.07 $111.96 $136.29 $228.82
VIP II Contrafund: Initial Class.................................. $ 90.99 $114.75 $140.98 $238.35
VIP III Growth & Income: Initial Class............................ $ 90.38 $112.89 $137.86 $232.01
VIP III Growth Opportunities: Initial Class....................... $ 91.30 $115.68 $142.54 $241.51
VIP Growth: Service Class......................................... $ 92.02 $117.84 $146.16 $248.84
VIP III Mid Cap: Service Class.................................... $ 95.30 $127.70 $162.61 $281.68
Harris Bretall Sullivan & Smith Equity Growth..................... $ 94.17 $124.32 $156.98 $270.51
Scudder Kemper Value.............................................. $ 94.17 $124.32 $156.98 $270.51
Zweig Asset Allocation............................................ $ 96.94 $132.60 $170.74 $297.71
Zweig Equity (Small Cap).......................................... $ 100.11 $142.05 $186.35 $328.03
Janus Aspen Aggressive Growth: Service Shares..................... $ 93.76 $123.09 $154.93 $266.42
Janus Aspen Growth: Service Shares................................ $ 93.76 $123.09 $154.93 $266.42
Janus Aspen Capital Appreciation: Institutional Shares............ $ 91.40 $115.99 $143.06 $242.56
Janus Aspen Balanced: Institutional Shares........................ $ 91.20 $115.37 $142.02 $240.46
Janus Aspen Worldwide Growth: Institutional Shares................ $ 91.51 $116.30 $143.57 $243.61
Janus Aspen Money Market: Institutional Shares.................... $ 88.74 $107.92 $129.49 $214.90
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
MFS Capital Opportunities: Service Class.......................... $ 95.71 $128.93 $164.65 $285.72
MFS Emerging Growth: Service Class................................ $ 94.99 $126.78 $161.08 $278.65
MFS Growth With Income: Service Class............................. $ 95.40 $128.01 $163.12 $282.69
MFS Mid Cap Growth: Service Class................................. $ 95.61 $128.62 $164.14 $284.71
MFS New Discovery: Service Class.................................. $ 97.35 $133.82 $172.77 $301.68
Morgan Stanley UIF Asian Equity................................... $ 97.35 $133.82 $172.77 $301.68
Morgan Stanley UIF Emerging Markets Debt.......................... $ 98.99 $138.71 $180.84 $317.38
Morgan Stanley UIF High Yield .................................... $ 92.53 $119.39 $148.75 $254.04
Morgan Stanley UIF 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>
7
<PAGE>
CUMULATIVE EXPENSES PER $1,000 INVESTMENT IF YOU ELECT TO ANNUITIZE 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>
Deutsche VIT EAFE-Registered Trademark-Equity Index.......$20.99 $64.75 $110.98 $238.35
Deutsche VIT Equity 500 Index.............................$17.41 $53.87 $ 92.66 $200.80
Deutsche VIT Small Cap Index..............................$18.94 $58.54 $100.54 $217.06
VIP Equity-Income: Initial Class..........................$20.07 $61.96 $106.29 $228.82
VIP II Contrafund: Initial Class..........................$20.99 $64.75 $110.98 $238.35
VIP III Growth & Income: Initial Class....................$20.38 $62.89 $107.86 $232.01
VIP III Growth Opportunities: Initial Class...............$21.30 $65.68 $112.54 $241.51
VIP Growth: Service Class.................................$22.02 $67.84 $116.16 $248.84
VIP III Mid Cap: Service Class............................$25.30 $77.70 $132.61 $281.68
Harris Bretall Sullivan & Smith Equity Growth.............$24.17 $74.32 $126.98 $270.51
Scudder Kemper Value......................................$24.17 $74.32 $126.98 $270.51
Zweig Asset Allocation....................................$26.94 $82.60 $140.74 $297.71
Zweig Equity (Small Cap)..................................$30.11 $92.05 $156.35 $328.03
Janus Aspen Aggressive Growth: Service Shares.............$23.76 $73.09 $124.93 $266.42
Janus Aspen Growth: Service Shares........................$23.76 $73.09 $124.93 $266.42
Janus Aspen Capital Appreciation: Institutional Shares....$21.40 $65.99 $113.06 $242.56
Janus Aspen Balanced: Institutional Shares................$21.20 $65.37 $112.02 $240.46
Janus Aspen Worldwide Growth: Institutional Shares........$21.51 $66.30 $113.57 $243.61
Janus Aspen Money Market: Institutional Shares............$18.74 $57.92 $ 99.49 $214.90
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
MFS Capital Opportunities: Service Class..................$25.71 $78.93 $134.65 $285.72
MFS Emerging Growth: Service Class........................$24.99 $76.78 $131.08 $278.65
MFS Growth With Income: Service Class.....................$25.40 $78.01 $133.12 $282.69
MFS Mid Cap Growth: Service Class.........................$25.61 $78.62 $134.14 $284.71
MFS New Discovery: Service Class..........................$27.35 $83.82 $142.77 $301.68
Morgan Stanley UIF Asian Equity...........................$27.35 $83.82 $142.77 $301.68
Morgan Stanley UIF Emerging Markets Debt..................$28.99 $88.71 $150.84 $317.38
Morgan Stanley UIF High Yield.............................$22.53 $69.39 $118.75 $254.04
Morgan Stanley UIF 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.
8
<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 eight
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. National Integrity is
an indirect wholly owned subsidiary of W&S, a mutual life insurance company
originally organized under the laws of the State of Ohio on February 23, 1888.
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 your contract 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:
X 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;
X register or end the registration of Separate Account II under the 1940 Act;
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);
X restrict or eliminate any voting rights of owners or others who have voting
rights that affect our Separate Account;
X cause one or more Options to invest in a mutual fund other than or in
addition to the Portfolios;
X 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.
9
<PAGE>
SECTION 3 - YOUR INVESTMENT OPTIONS
Management fees and other expenses deducted from each Portfolio are described in
that Portfolio's prospectus. Some of the Portfolios' investment advisers may
compensate us for providing administrative services in connection with the
Portfolios. This compensation is paid from the investment adviser's assets. FOR
A PROSPECTUS CONTAINING MORE COMPLETE INFORMATION ON ANY PORTFOLIO, CALL OUR
ADMINISTRATIVE OFFICE TOLL-FREE AT 1-800-433-1778.
DEUTSCHE ASSET MANAGEMENT VIT FUNDS
The investment adviser for the Deutsche Asset Management VIT Funds is Bankers
Trust Company. Bankers Trust Company is an indirect wholly owned subsidiary of
Deutsche Bank AG. The firm is recognized under the marketing name of Deutsche
Asset Management.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Following is a summary of the
investment objectives of the Deutsche Asset Management VIT Funds. We can't
guarantee that these objectives will be met. YOU SHOULD READ THE DEUTSCHE ASSET
MANAGEMENT VIT FUNDS PROSPECTUSES CAREFULLY BEFORE INVESTING.
DEUTSCHE VIT EAFE-Registered Trademark- EQUITY INDEX FUND
The EAFE-Registered Trademark- Equity Index Fund Seeks to replicate, as
closely as possible (before expenses are deducted), the total return of the
Morgan Stanley Capital International (MSCI) Europe, Australasia, and Far East
(EAFE-Registered Trademark-) Index, a capitalization-weighted index of common
stock of approximately 1,100 companies located outside of the U.S. The
Portfolio invests primarily in a statistically selected sample of the common
stocks of companies that comprise the EAFE-Registered Trademark-Index that
are determined to represent the industry diversification of the entire
EAFE-Registered Trademark- Index.
DEUTSCHE VIT EQUITY 500 INDEX FUND
The Equity 500 Index Fund seeks to replicate, as closely as possible (before
expenses are deducted), the total return of the Standard & Poor's 500
Composite Stock Price Index (the S&P 500-Registered Trademark-), an index
used to portray the performance of common stock of 500 large U.S. companies.
The Portfolio invests primarily in a statistically selected sample of the
common stocks of companies that comprise the S&P 500-Registered Trademark-
Index that are determined to represent the industry diversification of the
entire S&P 500-Registered Trademark- Index.
DEUTSCHE VIT SMALL CAP INDEX FUND
The Small Cap Index Fund seeks to replicate, as closely as possible (before
expenses are deducted), the total return of the Russell 2000 Small Stock
Index (the RUSSELL 2000-Registered Trademark-), an index used to portray the
performance of common stock of 2,000 small U.S. companies. The Portfolio
invests primarily in a statistically selected sample of the common stocks of
companies that comprise the Russell 2000-Registered Trademark- Index that are
determined to represent the industry diversification of the entire Russell
2000-Registered Trademark- Index.
FIDELITY'S VARIABLE INSURANCE PRODUCTS FUNDS
Each of Fidelity's VIP Funds is a diversified mutual fund registered with the
SEC. Fidelity Management & Research Company (FMR) serves as 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.
10
<PAGE>
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 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 AGGRESSIVE GROWTH PORTFOLIO
Janus Aspen Aggressive Growth Portfolio seeks long-term growth of capital. It is
a non-diversified portfolio that pursues its objective by normally investing at
least 50% of its equity assets in securities issued by medium-sized
11
<PAGE>
companies. Medium-sized companies are those whose market capitalizations fall
within the range of companies in the S&P MidCap 400 Index. Market capitalization
is a commonly used measure of the size and value of a company. The market
capitalizations within the Index will vary, but as of December 31, 1999, they
ranged from approximately $170 million to $37 billion.
JANUS ASPEN GROWTH PORTFOLIO
Janus Aspen 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 selected for their
growth potential. Although the Portfolio can invest in companies of any size, it
generally invests in larger, more established companies.
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.
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. 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.
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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. 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 primarily through stock valuation and selection.
THE LEGENDS FUND
The Legends Fund is an open-end management investment company registered with
the SEC. Touchstone Advisors, Inc. is the investment adviser to The Legends
Fund. Touchstone 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 PORTFOLIO
Harris Bretall Sullivan & Smith Equity Growth Portfolio seeks long-term capital
appreciation. It invests primarily in stocks of established companies with
proven records of superior and consistent earnings growth. In selecting equity
securities for the Portfolio, the sub-adviser looks for successful companies
that have exhibited superior growth in revenues and earnings, strong product
lines and proven management ability over a variety of business cycles. The
Portfolio may invest all or a portion of its assets in cash and cash equivalents
if the sub-adviser considers the equities markets to be overvalued. Harris
Bretall Sullivan & Smith, LLC is the sub-adviser to the Portfolio.
SCUDDER KEMPER VALUE PORTFOLIO
Scudder Kemper Value Portfolio seeks long-term capital appreciation, with
current income as its secondary objective. It invests primarily in a diversified
portfolio of the stocks of large U.S. companies with a history of delivering
rising earnings and growing dividends that the sub-adviser believes to be
undervalued, or that have a low price to earnings ratio. These companies usually
have a minimum market capitalization of $1 billion. Scudder Kemper Investors,
Inc. is the sub-adviser to the Portfolio.
ZWEIG ASSET ALLOCATION PORTFOLIO
Zweig Asset Allocation Portfolio seeks long-term capital appreciation and, to a
lesser extent, dividend income, while reducing portfolio exposure to market
risk. The sub-adviser uses a computer-driven stock selection model that ranks
approximately 600 of the most liquid stocks as determined by the sub-adviser
using various measures, including earnings, relative valuation, and changes in
analysts' earnings estimates, and based on those rankings within each industry
group, chooses up to 150 stocks for the Portfolio. Zweig/Glaser Advisers is the
sub-adviser to the Portfolio.
ZWEIG EQUITY (SMALL CAP) PORTFOLIO
Zweig Equity (Small Cap) Portfolio seeks long-term capital appreciation while
striving to limit exposure to market risk. Under normal circumstances, the
Portfolio will invest primarily in small company stocks with market
capitalizations between $250 million and $1.5 billion, but may have some of its
assets invested in larger company stocks. Zweig/Glaser Advisers is the
sub-adviser to the Portfolio.
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MFS FUNDS
Each portfolio of the MFS Variable Insurance Trust is a diversified mutual fund
registered with the SEC. Massachusetts Financial Services Company is the
investment adviser to the MFS Funds.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Below is a summary of the investment
objectives of the Portfolios of the MFS Funds. There is no guarantee that these
objectives will be met. YOU SHOULD READ THE PROSPECTUS FOR MFS VARIABLE
INSURANCE TRUST CAREFULLY BEFORE INVESTING.
MFS CAPITAL OPPORTUNITIES PORTFOLIO
MFS Capital Opportunities Portfolio seeks capital appreciation by normally
investing at least 65% of its total assets in common stocks and related
securities. The Portfolio focuses on companies that MFS believes have favorable
growth prospects and attractive valuations based on current and expected
earnings or cash flow.
MFS EMERGING GROWTH PORTFOLIO
MFS Emerging Growth Portfolio seeks long term growth of capital by normally
investing at least 65% of its total assets in common stocks and related
securities of emerging growth companies. Emerging growth companies are companies
that MFS believes are either (1) early in their life cycle but which have the
potential to become major enterprises, or (2) major enterprises whose rates of
earnings growth are expected to accelerate because of special factors, such as
rejuvenated management, new products, changes in consumer demand, or basic
changes in the economic environment. Emerging growth companies may be of any
size, and MFS would expect these companies to have products, technologies,
management, markets and opportunities that will facilitate earnings growth over
time that is well above the growth rate of the overall economy and the rate of
inflation.
MFS GROWTH WITH INCOME PORTFOLIO
MFS Growth With Income Portfolio seeks to provide reasonable current income and
long-term growth of capital and income by normally investing at least 65% of its
total assets in common stocks and related securities. While the Portfolio may
invest in companies of any size, it generally focuses on companies with larger
market capitalizations that MFS believes have sustainable growth prospects and
attractive valuations based on current and expected earnings or cash flow. The
Portfolio will also seek to generate gross income equal to approximately 90% of
the dividend yield on the Standard & Poor's 500 Composite Index.
MFS MID CAP GROWTH PORTFOLIO
MFS Mid Cap Growth Portfolio seeks long term growth of capital by normally
investing at least 65% of its total assets in common stocks and related
securities of companies with medium market capitalization that MFS believes have
above-average growth potential. Medium market capitalization companies are
defined by the Portfolio as companies with market capitalizations equaling or
exceeding $250 million but not exceeding the top of the Russell Midcap Growth
Index range at the time of the Portfolio's investment. Companies whose market
capitalizations fall below $250 million or exceed the top of the Russell Midcap
Growth Index range after purchase continue to be considered
medium-capitalization companies for purposes of the Portfolio's 65% investment
policy. As of February 29, 2000, the top of the Russell Midcap Growth Index
range was $59.6 billion.
MFS NEW DISCOVERY PORTFOLIO
MFS New Discovery Portfolio seeks capital appreciation by normally investing at
least 65% of its total assets in common stocks and related securities of
emerging growth companies. Emerging growth companies are companies that MFS
believes offer superior prospects for growth and are either (1) early in their
life cycle but which have the potential to become major enterprises, or (2)
major enterprises whose rates of earnings growth are expected to accelerate
because of special factors, such as rejuvenated management, new products,
changes in consumer demand, or basic changes in the economic environment. While
emerging growth companies may be of any size, the Portfolio will generally focus
on smaller cap emerging growth companies that are early in their life cycle. MFS
would expect these companies to have products, technologies, management, markets
and opportunities that will
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facilitate earnings growth over time that is well above the growth rate of the
overall economy and the rate of inflation.
MORGAN STANLEY UIF PORTFOLIOS
Each of the Morgan Stanley UIF Portfolios 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 Markets
Debt, U.S. Real Estate, and Asian Equity Portfolios. MSDW Investment Management
changed its name from Morgan Stanley Asset Management (MSAM) on December 1,
1998, but continues to do business in certain instances using the name Morgan
Stanley Asset Management. Miller Anderson & Sherrerd, LLP (MAS) is the
investment adviser for the High Yield Portfolio. MSAM 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 Morgan Stanley UIF Portfolios. There is no guarantee that
these objectives will be met. YOU SHOULD READ THE MORGAN STANLEY UIF PROSPECTUS
CAREFULLY BEFORE INVESTING.
MORGAN STANLEY UIF ASIAN EQUITY PORTFOLIO
Morgan Stanley UIF 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.
MORGAN STANLEY UIF EMERGING MARKETS DEBT PORTFOLIO
Morgan Stanley UIF 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. The adviser seeks high total return by investing in a
portfolio of emerging market debt that offers low correlation to many other
asset classes. Using macroeconomic and fundamental analysis, the adviser seeks
to identify developing countries that are undervalued and have attractive or
improving fundamentals. After the country allocation is determined, the sector
and security selection is made within each country.
MORGAN STANLEY UIF HIGH YIELD PORTFOLIO
Morgan Stanley UIF High Yield Portfolio seeks above-average total return over a
market cycle of three to five years by investing primarily in high yield
securities (commonly referred to as "junk bonds"). The Portfolio may also invest
in investment grade fixed income securities, including U.S. government
securities, corporate bonds, and mortgage securities. The Portfolio may invest
to a limited extent in foreign fixed income securities, including emerging
market securities.
MORGAN STANLEY UIF U.S. REAL ESTATE PORTFOLIO
Morgan Stanley UIF U.S. Real Estate Portfolio seeks to achieve 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. Touchstone Advisors serves as investment adviser of the
Divisions and National Asset Management serves as the sub-adviser of the
Divisions.
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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 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
DJIAin 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
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are the ten highest yielding stocks in the DJIA as of the market close on March
31, 2000. The ten highest yielding stocks in the DJIA are commonly known as the
"Dogs of the Dow":
AT&T Honeywell
Aluminum Co. of America IBM
American Express Intel
Boeing International Paper*
Caterpillar* Johnson & Johnson
Citigroup J.P. Morgan*
Coca-Cola McDonald's
Disney Merck
DuPont* Microsoft
Eastman Kodak* Minnesota Mining & Manufacturing*
Exxon Mobil* Philip Morris*
General Electric Proctor & Gamble
General Motors* SBC Communications*
Hewlett-Packard United Technologies
Home Depot Wal-Mart
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. 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%
1999 4.0% 27.2%
Cumulative 7,566% 3,092%
</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 course of the years listed above, the ten highest
dividend yielding stocks in the DJIA achieved an average annual total
return of 17.4%. Over this period, the strategy achieved a greater average
annual total return than that of the DJIA, which was 13.6%. 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 and
1999: www.dogsofthedow.com.
(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 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.
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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 your 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% is used to reimburse us for administrative expenses not covered by
the annual administrative charge described below. We deduct the remaining 1.20%
for 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 contract 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 charge 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 we credit 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.
STATE PREMIUM TAX DEDUCTION
We won't deduct state premium taxes from your contributions before investing
them in the Investment Options, unless required 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%.
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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.
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.
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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 performance 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 a 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. 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."
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.
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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 the Unit Value 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.
- - 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 we assumed
under the contract.
Generally, this means that we adjust Unit Values to reflect what happens to the
Portfolios and 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,
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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.
EXCESSIVE TRADING
We reserve the right to limit the number of transfers in any contract year or to
refuse any transfer request for an owner or certain owners if: (a) we believe in
our sole discretion that excessive trading by the owner or owners or a specific
transfer request or group of transfer requests may have a detrimental effect on
Unit Values or the share prices of the underlying mutual funds; or (b) we are
informed by one or more of the underlying mutual funds that the purchase or
redemption of shares is to be restricted because of excessive trading, or that a
specific transfer or group of transfers is expected to have a detrimental effect
on share prices of affected underlying mutual funds. We also have the right,
which may be exercised in our sole discretion, to prohibit transfers occurring
on consecutive Business Days.
We will notify you or your designated representative if your requested transfer
is not made. Current SEC rules preclude us from processing your request at a
later date if it is not made when initially requested. ACCORDINGLY, YOU WILL
NEED TO SUBMIT A NEW TRANSFER REQUEST IN ORDER TO MAKE A TRANSFER THAT WAS NOT
MADE BECAUSE OF THESE LIMITATIONS.
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WITHDRAWALS
You may make 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 Contract" 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 Contract." 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 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 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 there is a contingent Annuitant. In that
case, the contingent Annuitant becomes the new Annuitant under the contract.
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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 98th 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.
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.
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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 cover 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 rights are calculated in a similar manner based on the actuarially
determined value of your interest in each Variable Account Option.
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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 CONTRACT
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 cannot
guarantee that the IRS or the courts 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 CONTRACT.
YOUR CONTRACT IS AN ANNUITY
Under federal tax law, anyone can purchase an annuity with after-tax dollars.
Earnings under the contract won't generally be taxed until you make a
withdrawal. 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, an 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.
TAXATION OF ANNUITIES GENERALLY
Section 72 of the Internal Revenue Code of 1986, as amended (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 generally 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,
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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 states 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 determined using a ratio of the owner's investment to
his or her expected return under the contract (exclusion ratio). The rest of
each payment will be ordinary income. When all of these tax-free portions add up
to your investment in the annuity, future payments are entirely ordinary 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.
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.
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<PAGE>
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 beneficiary may be annuitized over the life of that
beneficiary, as long as distributions begin within one year after the owner
dies. If the 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 tax 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 SAI 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 contract allows 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 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 WITHDRAWAL AND TO INCOME TAXATION. See Section 7,
"Tax Aspects of the Contract."
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:
X the date you reach age 59 1/2; or
X 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 Withdrawal 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 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 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 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 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.
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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 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.
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<PAGE>
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 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
34
<PAGE>
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 over the course of several 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
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.
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.
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<PAGE>
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 contract. We don't expect revenues from contingent withdrawal
charges to cover all of those costs. Any shortfall will be made up from our
General Account assets, which may include profits from other charges under the
contract.
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<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 February 15, 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 before
July 7, 1998.
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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
1999 1998 1997 1996 1995 1994 1993 INCEPTION*
---- ---- ---- ---- ---- ---- ---- ----------
SCUDDER KEMPER VALUE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Unit value at beginning of period............. $27.64 $23.67 $18.39 $14.98 $10.43 $10.65 $10.00
Unit value at end of period................... $23.95 $27.64 $23.67 $18.39 $14.98 $10.43 $10.65
Number of units outstanding at end of period.. 261,851 356,913 288,596 297,625 244,538 156,325 80,112
HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH
Unit value at beginning of period............. $26.16 $19.55 $14.71 $13.08 $10.07 $9.81 $10.00
Unit value at end of period................... $34.97 $26.16 $19.55 $14.71 $13.08 $10.07 $9.81
Number of units outstanding at end of period.. 322,755 382,400 404,243 438,465 374,724 280,091 83,619
ZWEIG ASSET ALLOCATION
Unit value at beginning of period............. $16.80 $17.38 $14.45 $12.75 $10.65 $10.75 $10.00
Unit value at end of period................... $17.51 $16.80 $17.38 $14.45 $12.75 $10.65 $10.75
Number of units outstanding at end of period.. 201,623 376,348 356,623 389,517 421,439 535,776 205,268
ZWEIG EQUITY (SMALL CAP)
Unit value at beginning of period............. $17.78 $18.14 $14.69 $12.57 $10.52 $10.73 - $10.00
Unit value at end of period................... $17.09 $17.78 $18.14 $14.69 $12.57 $10.52 $10.73
Number of units outstanding at end of period.. 101,894 172,489 164,970 138,864 234,629 180,961 68,249
BT EAFE-Registered Trademark- EQUITY INDEX
Unit value at beginning of period............. $11.86 $9.88 - - - - -
Unit value at end of period................... $14.93 $11.86 $9.88
Number of units outstanding at end of period.. 81,473 75,887 5,623
BT EQUITY 500 INDEX
Unit value at beginning of period............. $13.11 $10.32 - - - - $10.00
Unit value at end of period................... $15.57 $13.11 $10.32
Number of units outstanding at end of period.. 1,199,263 631,049 76,431
BT SMALL CAP INDEX
Unit value at beginning of period............. $9.50 $9.85 - - - - $10.00
Unit value at end of period................... $11.27 $9.50 $9.85
Number of units outstanding at end of period.. 459,505 373,914 42,210
VIP EQUITY-INCOME
Unit value at beginning of period............. $11.48 $10.42 - - - - $10.00
Unit value at end of period................... $12.04 $11.48 $10.42
Number of units outstanding at end of period.. 859,369 619,502 63,398
VIP II CONTRAFUND
Unit value at beginning of period............. $12.70 $9.91 - - - - $10.00
Unit value at end of period................... $15.57 $12.70 $9.91
Number of units outstanding at end of period.. 1,083,512 636,505 65,551
VIP III GROWTH & INCOME
Unit value at beginning of period............. $13.18 $10.31 - - - - $10.00
Unit value at end of period................... $14.19 $13.18 $10.31
Number of units outstanding at end of period.. 671,165 413,064 19,862
VIP III GROWTH OPPORTUNITIES
Unit value at beginning of period............. $13.09 $10.65 - - - - $10.00
Unit value at end of period................... $13.47 $13.09 $10.65
Number of units outstanding at end of period.. 483,369 354,838 73,667
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
INCEPTION*
1999 1998 1997 1996 1995 1994 1993 ----------
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
VIP GROWTH
Unit value at beginning of period............. - - - - - - -
Unit value at end of period................... $12.22
Number of units outstanding at end of period 84,815
VIP III MID CAP
Unit value at beginning of period.............. - - - - - - -
Unit value at end of period................... $13.28
Number of units outstanding at end of period 66,543
JANUS ASPEN CAPITAL APPRECIATION
Unit value at beginning of period............. $15.64 $10.03 - - - - -
Unit value at end of period................... $25.77 $15.64 $10.03
Number of units outstanding at end of period.. 1,314,416 583,994 59,108
JANUS ASPEN BALANCED
Unit value at beginning of period............. $13.26 $10.01 - - - - $10.00
Unit value at end of period................... $16.58 $13.26 $10.01
Number of units outstanding at end of period.. 1,764,662 1,741,026 1,827,787
JANUS ASPEN WORLDWIDE GROWTH
Unit value at beginning of period............. $12.63 $9.93 - - - - $10.00
Unit value at end of period................... $20.49 $12.63 $9.93
Number of units outstanding at end of period.. 646,308 331,956 20,675
JANUS ASPEN MONEY MARKET
Unit value at beginning of period............. $10.45 $10.06 - - - - $10.00
Unit value at end of period................... $10.82 $10.45 $10.06
Number of units outstanding at end of period.. 1,194,584 420,446 159,980
J.P. MORGAN INTERNATIONAL OPPORTUNITIES
Unit value at beginning of period............. $10.53 $10.19 - - - - $10.00
Unit value at end of period................... $14.20 $10.53 $10.19
Number of units outstanding at end of period.. 59,953 21,124 5,359
J.P. MORGAN BOND
Unit value at beginning of period............. $10.82 $10.16 - - - - $10.00
Unit value at end of period................... $10.57 $10.82 $10.16
Number of units outstanding at end of period.. 527,600 309,949 158,477
MORGAN STANLEY UIF ASIAN EQUITY
Unit value at beginning of period............. $8.51 $9.23 - - - - $10.00
Unit value at end of period................... $15.09 $8.51 $9.23
Number of units outstanding at end of period.. 152,481 162,463 151,273
MORGAN STANLEY UIF EMERGING MARKETS DEBT
Unit value at beginning of period............. $7.69 $10.88 - - - - $10.00
Unit value at end of period................... $9.82 $7.69 $10.88
Number of units outstanding at end of period.. 43,093 55,295 92,322
MORGAN STANLEY UIF HIGH YIELD
Unit value at beginning of period............. $10.54 $10.19 - - - - $10.00
Unit value at end of period................... $11.13 $10.54 $10.19
Number of units outstanding at end of period.. 464,512 290,668 33,125
MORGAN STANLEY UIF U.S. REAL ESTATE
Unit value at beginning of period............. $9.13 $10.38 - - - - $10.00
Unit value at end of period................... $8.87 $9.13 $10.38
Number of units outstanding at end of period.. 88,783 89,471 8,831
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
SELECT TEN PLUS DIVISION-JUNE
Investment income............................ $0.16
Expenses..................................... $0.05 - - - - -
Net investment income........................ $0.11
Net realized and unrealized gains (losses)
on securities................................ $(1.01)
Net increase (decrease) in unit value........ $(0.90)
Unit value at beginning of period............ $10.00
Unit value at end of period.................. $9.10
Expenses to average net assets............... 0.85%
Portfolio turnover rate...................... 49%
Number of units outstanding at end of period. 33,627
SELECT TEN PLUS DIVISION-SEPTEMBER
Investment income............................ $0.07
Expenses..................................... $0.02 - - - - -
Net investment income........................ $0.05
Net realized and unrealized gains (losses)
on securities................................ $(0.61)
Net increase (decrease) in unit value........ $(0.56)
Unit value at beginning of period............ $10.00
Unit value at end of period.................. $9.44
Expenses to average net assets............... 0.85%
Portfolio turnover rate...................... 0%
Number of units outstanding at end of period. 44,323
SELECT TEN PLUS DIVISION-DECEMBER
Investment income............................
Expenses..................................... - - - - -
Net investment loss..........................
Net realized and unrealized gains (losses)
on securities................................ $0.03
Net increase (decrease) in unit value........ $0.03
Unit value at beginning of period............ $10.00
Unit value at end of period.................. $10.03
Expenses to average net assets............... 0.50%
Portfolio turnover rate...................... 0%
Number of units outstanding at end of period. 6,208
* Less than $0.01.
</TABLE>
---------------------------------------------------------------------------
*The unit value for each Variable Account Option at inception is $10.00. The
inception date for the Harris Bretall Sullivan & Smith Equity Growth Option
is December 8, 1992. The inception date for the Zweig Asset Allocation,
Scudder Kemper Value and Zweig Equity Options is December 14, 1992. The
inception date for the EAFE-Registered Trademark- Equity Index, Equity 500
Index, Small Cap Index, VIP Equity-Income, VIP II Contrafund, VIP III Growth
& Income, VIP III Growth Opportunities, Janus Aspen Capital Appreciation,
Janus Aspen Balanced, Janus Aspen Worldwide Growth, Janus Aspen Money Market,
J.P.Morgan International Opportunities, J.P. Morgan Bond, Morgan Stanley UIF
Asian Equity, Morgan Stanley UIF Emerging Markets Debt, Morgan Stanley UIF
High Yield, and Morgan Stanley UIF U.S. Real Estate Options is October 1,
1997. The inception date for the VIP Growth Portfolio and VIP III Mid Cap
Portfolio is May 1, 1999. The inception date for the Select Ten Plus
Division-June is June 30, 1999. The inception date for the Select Ten Plus
Division-September is September 30, 1999. The inception date for the Select
Ten Plus Division-December is December 31, 1999. The inception date for the
Select Ten Plus Division-March is March 31, 2000. The inception date for the
Janus Aspen Aggressive Growth, Janus Aspen Growth, MFS Capital Opportunities,
MFS Emerging Growth, MFS Growth With Income, MFS Mid Cap Growth, and MFS New
Discovery Portfolios is May 1, 2000. Because the Select Ten Plus Division-March,
Janus Aspen Aggressive Growth, Janus Aspen Growth, MFS Capital Opportunities,
MFS Emerging Growth, MFS Growth With Income, MFS Mid Cap Growth, and MFS New
Discovery Portfolios had not yet begun operations as of the end of 1999, 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:
- -0.0551589 = [(1 + .05)TO THE POWER OF 48/12 / (1 + .0625 +
.0025)TO THE POWER OF 48/12] - 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
If instead of a full withdrawal, $20,000 was requested, we would first determine
the free withdrawal amount:
41
<PAGE>
$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:
.0290890 = [(1 + .05)TO THE POWER OF 48/12 / (1 + .04 +
.0025)TO THE POWER OF 48/12] - 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 Contract
Part 3 - Performance Information
Part 4 - Determination of Accumulation Unit Values
Part 5 - Tax Favored Retirement Programs
Part 6 - 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, 2000
FOR
PINNACLE
FLEXIBLE PREMIUM VARIABLE ANNUITY
ISSUED BY
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
AND
FUNDED THROUGH ITS SEPARATE ACCOUNT II
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..............................................2
Part 4 - Determination of Accumulation Unit Values...........................10
Part 5 - Tax-Favored Retirement Programs.....................................10
Part 6 - Financial Statements................................................12
</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, 2000.
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 515 West Market Street, Louisville, Kentucky,
40202, and its principal administrative 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 The Western and Southern Life Insurance Company (W&S), a
mutual life insurance company originally organized under the laws of the State
of Ohio on February 23, 1888. Until March 3, 2000, National Integrity was an
indirect wholly owned subsidiary of ARM Financial Group, Inc. (ARM).
ARM provided substantially all of the services required to be performed on
behalf of Separate Account II since 1994. Total fees paid to ARM by Integrity
for management services, including services applicable to Separate Account II,
in 1997 were $5,855,216, in 1998 were $8,766,003, and in 1999 were $7,558,793.
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. Integrity is currently rated
"A" (Excellent) by A.M. Best Company, and has received claims paying ability
ratings of "AAA" (Extremely Strong) from Standard & Poor's Corporation, "Aa2"
(Excellent) from Moody's Investors Service, Inc., and "AAA" (Highest) 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
Touchstone Securities, Inc., a wholly owned subsidiary of W&S, is the principal
underwriter of the contracts. Touchstone 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. Touchstone Securities' address is 311 Pike Street,
Cincinnati, Ohio 45202. The contracts are offered through Touchstone 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 $5,150,752 for the year ended December 31, 1999, $2,290,049
for the year ended December 31, 1998, and $223,270 for the year ended December
31, 1997. Distribution allowances weren't retained by ARM Securities
Corporation, the principal underwriter for the contracts prior to March 3, 2000,
during these years. National Integrity may from time to time pay or allow
additional promotional incentives, in the form of cash or other compensation, to
broker-dealers that sell contracts. In some instances, 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
2
<PAGE>
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)to the power of n = ERV, where P is a hypothetical initial payment of
$1,000, T is the average annual total return, n is the number of years, and
ERV is the withdrawal value at the end of the period.
CUMULATIVE TOTAL RETURNS are UNAVERAGED and reflect the simple percentage change
in the value of a hypothetical investment in the Option over a stated period of
time. In addition to the period since inception, cumulative total returns may be
calculated on a year-to-date basis at the end of each calendar month in the
current calendar year. The last day of the period for year-to-date returns is
the last day of the most recent calendar month at the time of publication.
YIELDS
Some Options may advertise yields. Yields quoted in advertising reflect the
change in value of a hypothetical investment in the Option over a stated period
of time, not taking into account capital gains or losses or the imposition of
any contingent withdrawal charge. Yields are annualized and stated as a
percentage.
CURRENT YIELD and EFFECTIVE YIELD are calculated for the Janus Money Market
Option. Current Yield is based on the change in the value of a hypothetical
investment (exclusive of capital changes) over a particular 7-day period, less a
hypothetical charge reflecting deductions from contract values during the period
(the BASE PERIOD), and stated as a percentage of the investment at the start of
the base period (the BASE PERIOD RETURN). The base period return is then
annualized by multiplying by 365/7, with the resulting yield figure carried to
at least the nearest hundredth of one percent. Effective yield assumes that all
dividends received during an annual period have been reinvested. This
compounding effect causes effective yield to be higher than current yield.
Calculation of effective yield begins with the same base period return used in
the calculation of current yield, which is then annualized to reflect weekly
compounding pursuant to the following formula:
Effective Yield = {(Base Period Return) + 1)to the power of 365/7} - 1
3
<PAGE>
<TABLE>
<CAPTION>
SEC STANDARDIZED All figures are unaudited.
AVERAGE ANNUAL RETURN (1)
FOR THE PERIOD ENDING: 12/31/99 ACCOUNT ---------------------------------------------------------------------------
VARIABLE OPTIONS INCEPTION LIFE OF
DATE (2) 1 YEAR 5 YEAR 10 YEAR ACCOUNT
<S> <C> <C> <C> <C> <C>
Deutsche VIT Funds - EAFE Equity Index 11/6/97 19.88% n/a n/a 18.59%
Deutsche VIT Funds- Equity 500 Index 11/6/97 12.76% n/a n/a 21.02%
Deutsche VIT Funds - Small Cap Index 11/6/97 12.54% n/a n/a 3.49%
Fidelity's VIP Equity-Income 11/7/97 -1.10% n/a n/a 6.90%
Fidelity's VIP II Contrafund 11/6/97 16.58% n/a n/a 21.02%
Fidelity's VIP III Growth & Income 11/6/97 1.70% n/a n/a 15.74%
Fidelity's VIP III Growth Opportunities 11/12/97 -3.13% n/a n/a 12.96%
Fidelity's VIP Growth 6/1/99 n/a n/a n/a 48.26%
Fidelity's VIP III Mid Cap 6/1/99 n/a n/a n/a 27.54%
Harris Bretall Sullivan & Smith Equity 1/12/93 27.70% 28.12% n/a 19.64%
Growth
Janus Aspen Series Balanced 11/5/97 19.05% n/a n/a 24.70%
Janus Aspen Series Capital Appreciation 11/7/97 58.75% n/a n/a 54.01%
Janus Aspen Series Worldwide Growth 11/6/97 56.24% n/a n/a 38.02%
JP Morgan Bond 11/12/97 -8.37 n/a n/a .31%
JP Morgan International Opportunities 11/18/97 28.82% n/a n/a 16.03%
Morgan Stanley UIF Asian Equity 11/11/97 71.20% n/a n/a 19.34%
Morgan Stanley UIF Emerging Markets 11/14/97 21.63% n/a n/a -3.27%
Debt
Morgan Stanley UIF High Yield 11/11/97 -.34% n/a n/a 2.91%
Morgan Stanley UIF U.S. Real Estate 11/17/97 -8.80% n/a n/a -8.05%
Scudder Kemper Value 1/12/93 -19.35% 17.89% n/a 13.29%
Zweig Asset Allocation 3/26/93 -1.76% 10.17% n/a 8.54%
Zweig Equity (Small Cap) 1/14/93 -9.91% 9.92% n/a 7.91%
Select Ten Plus Investment - June 6/30/99 n/a n/a n/a -30.24%
Select Ten Plus Investment - September 9/30/99 n/a n/a n/a -42.35%
</TABLE>
(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.
4
<PAGE>
<TABLE>
<CAPTION>
FOR THE PERIOD ENDING: 12/31/99 NON-STANDARD RETURNS All figures are unaudited.
RETURNS WITHOUT SURRENDER CHARGES (1)
CUMULATIVE TOTAL RETURN AVERAGE ANNUAL RETURN
----------------------- ---------------------
FUND
INCEPTION LIFE OF LIFE OF
VARIABLE OPTIONS DATE (3) 3 YEAR 5 YEAR 10 YEAR FUND 1 YEAR 3 YEAR 5 YEAR 10 YEAR FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Deutsche VIT Funds- EAFE Equity Index 6/21/96 51.62 n/a n/a 53.05 25.88 14.88 n/a n/a 12.83
Deutsche VIT Funds- Equity 500 Index 12/31/92 91.15 204.01 n/a 208.09 18.76 24.11 24.90 n/a 17.44
Deutsche VIT Funds - Small Cap Index 8/13/96 41.82 n/a n/a 57.09 18.54 12.35 n/a n/a 14.29
Fidelity's VIP Equity-Income 10/9/86 45.99 120.61 237.77 361.17 4.90 13.44 17.15 12.94 12.25
Fidelity's VIP II Contrafund 1/3/95 92.49 n/a n/a 217.32 22.58 24.40 n/a N/a 26.03
Fidelity's VIP III Growth & Income 12/31/96 76.70 n/a n/a 76.70 7.70 20.90 n/a n/a 20.91
Fidelity's VIP III Growth Opportunities 1/3/95 62.12 n/a n/a 147.31 2.87 17.47 n/a n/a 19.89
Fidelity's VIP III Mid Cap 12/28/98 n/a n/a n/a 51.48 46.94 n/a n/a n/a 51.01
Fidelity's VIP Growth 10/9/86 n/a n/a n/a 711.61 35.44 n/a n/a n/a 17.15
Harris Bretall Sullivan & Smith Equity Growth 1/12/93 137.84 247.15 n/a 249.74 33.70 33.48 28.26 n/a 19.69
Janus Aspen Series Balanced 9/13/93 99.54 181.53 n/a 199.05 25.05 25.90 23.00 n/a 19.00
Janus Aspen Series Capital Appreciation 5/1/97 n/a n/a n/a 222.40 64.75 n/a n/a n/a 55.11
Janus Aspen Series Worldwide Growth 9/13/93 148.66 297.71 n/a 372.55 62.24 35.48 31.80 n/a 27.97
JP Morgan Bond 1/3/95 11.79 n/a n/a 27.41 -2.37 3.79 n/a n/a 4.97
JP Morgan International Opportunities 1/3/95 44.88 n/a n/a 73.28 34.82 13.15 n/a n/a 11.64
Morgan Stanley UIF Asian Equity 12/31/91 -7.40 -0.74 n/a 107.35 77.20 -2.53 -0.15 n/a 9.54
Morgan Stanley UIF Emerging Markets Debt 2/1/94 4.41 95.14 n/a 48.56 27.63 1.45 14.31 n/a 6.93
Morgan Stanley UIF High Yield 8/31/92 21.49 66.67 n/a 86.66 5.66 6.71 10.76 n/a 8.88
Morgan Stanley UIF U.S. Real Estate 2/24/95 5.03 n/a n/a 72.72 -2.80 1.65 n/a n/a 11.93
Scudder Kemper Value 1/12/93 30.25 129.71 n/a 139.52 -13.35 9.21 18.10 n/a 13.36
Zweig Asset Allocation 3/26/93 21.14 64.30 n/a 75.07 4.24 6.60 10.44 n/a 8.63
Zweig Equity (Small Cap) 1/14/93 16.30 62.48 n/a 70.89 -3.91 n/a 10.20 n/a 8.00
<CAPTION>
NON-STANDARD RETURNS All figures are unaudited.
CALENDAR YEAR RETURN(2)
-----------------------
FUND
INCEPTION
VARIABLE OPTIONS DATE (3) 1993 1994 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Deutsche VIT Funds- EAFE Equity Index 6/21/96 n/a n/a n/a 0.94 0.40 19.97 25.88
Deutsche VIT Funds- Equity 500 Index 12/31/92 -3.0 -3.08 32.15 20.35 26.77 26.98 18.76
Deutsche VIT Funds - Small Cap Index 8/13/96 n/a n/a n/a 10.76 23.98 -3.50 18.54
Fidelity's VIP Equity-Income 10/9/86 16.70 5.01 34.05 12.73 26.38 10.12 4.90
Fidelity's VIP II Contrafund 1/3/95 n/a n/a 37.86 19.57 22.47 28.23 22.58
Fidelity's VIP III Growth & Income 12/31/96 n/a n/a n/a n/a 28.34 27.84 7.70
Fidelity's VIP III Growth Opportunities 1/3/95 n/a n/a 30.76 16.67 28.20 22.93 2.87
Fidelity's VIP III Mid Cap 12/28/98 n/a n/a n/a n/a n/a 46.94
Fidelity's VIP Growth 10/9/86 -1.16 33.54 13.14 21.82 37.61 35.44
Harris Bretall Sullivan & Smith Equity Growth 1/12/93 -1.91 2.64 29.93 12.42 32.92 33.83 33.70
Janus Aspen Series Balanced 9/13/93 6.77 -.51 23.11 14.60 20.45 32.48 25.05
Janus Aspen Series Capital Appreciation 5/1/97 n/a n/a n/a n/a 25.46 55.98 64.75
Janus Aspen Series Worldwide Growth 9/13/93 18.62 .17 25.66 27.28 20.51 27.18 62.24
JP Morgan Bond 1/3/95 n/a n/a 13.36 .54 7.47 6.55 -2.37
JP Morgan International Opportunities 1/3/95 n/a n/a 7.16 11.62 4.01 3.32 34.82
Morgan Stanley UIF Asian Equity 12/31/91 102.53 -17.14 5.21 1.88 -43.38 -7.71 77.20
Morgan Stanley UIF Emerging Markets Debt 2/1/94 n/a -23.87 25.75 48.64 15.75 -29.33 27.63
Morgan Stanley UIF High Yield 8/31/92 18.31 -5.76 21.29 13.10 11.22 3.39 5.66
Morgan Stanley UIF U.S. Real Estate 2/24/95 n/a n/a 19.58 37.53 22.88 -12.06 -2.80
Scudder Kemper Value 1/12/93 6.47 -2.07 43.65 22.78 28.71 16.79 -13.35
Zweig Asset Allocation 3/26/93 7.49 -.92 19.75 13.32 20.30 -3.39 4.24
Zweig Equity (Small Cap) 1/14/93 7.29 -1.97 19.54 16.87 23.42 -1.94 -3.91
</TABLE>
5
<PAGE>
(1) Non-standard returns reflect all historical investment results, less
mortality and expense and administrative charges totaling .35%. The
calculation assumes the policy is still in force and therefore doesn't take
withdrawal charges into consideration. Non-standard performance is since
the portfolio inception date, which may predate the separate account.
(2) Italicized returns are calculated from the inception date through year-end.
(3) Presents 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>
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.
7
<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.
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
8
<PAGE>
dollars, Canadian dollars, European Currency Units, French francs, Japanese yen,
Netherlands guilder, Swiss francs, UK pounds sterling, U.S. dollars, and German
deutsche marks.
The J.P. Morgan Global Government Bond Index is a total return, market
capitalization weighted index, rebalanced monthly consisting of the following
countries: Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan,
Netherlands, Spain, Sweden, United Kingdom and United States.
The 50/50 Index assumes a static mix of 50% of the S&P 500 Index and 50% of the
Lehman Government Corporate Index.
Other Composite Indices: 70% S&P 500 Index and 30% NASDAQ Industrial Index; 35%
S&P 500 Index and 65% Salomon Brothers High Grade Bond Index; and 65% S&P Index
and 35% Salomon Brothers High Grade Bond Index.
The SEI Median Balanced Fund Universe measures a group of funds with an average
annual equity commitment and an average annual bond - plus - private - placement
commitment greater than 5% each year. SEI must have at least two years of data
for a fund to be considered for the population.
The Russell 2000/Small Stock Index comprises the smallest 2000 stocks in the
Russell 3000 Index, and represents approximately 11% of the total U.S. equity
market capitalization. The Russell 3000 Index comprises the 3,000 largest U.S.
companies by market capitalization. The smallest company has a market value of
roughly $20 million.
The Russell 2500 Index is comprised of the bottom 500 stocks in the Russell 1000
Index, which represents the universe of stocks from which most active money
managers typically select; and all the stocks in the Russell 2000 Index. The
largest security in the index has a market capitalization of approximately 1.3
billion.
The Consumer Price Index (or Cost of Living Index), published by the United
States Bureau of Labor Statistics is a statistical measure of change, over time,
in the price of goods and services in major expenditure groups.
STOCKS, BONDS, BILLS AND INFLATION, published by Hobson Associates, presents an
historical measure of yield, price and total return for common and small company
stocks, long-term government bonds, Treasury bills and inflation.
Savings and Loan Historical Interest Rates as published in the United States
Savings & Loan League Fact Book.
Historical data supplied by the research departments of First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch, Pierce,
Fenner & Smith, Shearson Lehman Hutton and Bloomberg L.P.
The MSCI Combined Far East Free ex Japan Index is a market-capitalization
weighted index comprising stocks in Hong Kong, Indonesia, Korea, Malaysia,
Philippines, Singapore and Thailand. Korea is included in the MSCI Combined Far
East Free ex Japan Index at 20% of its market capitalization.
The First Boston High Yield Index generally includes over 180 issues with an
average maturity range of seven to ten years with a minimum capitalization of
$100 million. All issues are individually trader-priced monthly.
In reports or other communications to shareholders, the Funds may also describe
general economic and market conditions affecting the Portfolios and may compare
the performance of the Portfolios with (1) that of mutual funds included in the
rankings prepared by Lipper or similar investment services that monitor the
performance of insurance company separate accounts or mutual funds, (2)
IBC/Donoghue's Money Fund Report, (3) other appropriate indices of investment
securities and averages for peer universe of funds which are described in this
SAI, or (4) data developed by National Integrity or any of the sub-advisers
derived from such indices or averages.
For those Variable Account Options which 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 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.
9
<PAGE>
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.
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
10
<PAGE>
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. 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 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. National Integrity doesn't
administer such plans.
11
<PAGE>
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 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, 1999, 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, 1999 and 1998 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.
12
<PAGE>
Financial Statements
(Statutory Basis)
National Integrity Life
Insurance Company
YEARS ENDED DECEMBER 31, 1999 AND 1998
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
National Integrity Life Insurance Company
Financial Statements
(Statutory Basis)
Years Ended December 31, 1999 and 1998
CONTENTS
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
<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, 1999 and 1998, 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 auditing standards generally accepted
in the United States. 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
accounting principles generally accepted in the United States. The variances
between such practices and accounting principles generally accepted in the
United States 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 accounting principles generally accepted in the United States,
the financial position of National Integrity Life Insurance Company at December
31, 1999 and 1998, 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, 1999 and 1998, 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
March 31, 2000
1
<PAGE>
National Integrity Life Insurance Company
Balance sheets (Statutory Basis)
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
-------------------------------
(IN THOUSANDS)
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Bonds $ 345,374 $ 360,012
Preferred stocks 9,740 9,740
Mortgage loans 2,350 2,835
Policy loans 29,246 26,695
Cash and short-term investments 110,583 78,883
Receivable for securities 1,826 -
Federal income tax recoverable 2,769 -
Other invested assets 3,776 3,786
-------------------------------
Total cash and invested assets 505,664 481,951
Separate account assets 841,835 771,953
Accrued investment income 9,618 5,062
Other admitted assets 71 718
-------------------------------
Total admitted assets $ 1,357,188 $ 1,259,684
===============================
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
-----------------------------------
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Policy and contract liabilities:
Life and annuity reserves $ 460,159 $ 437,286
Unpaid claims 50 50
Deposits on policies to be issued 1,067 1,243
-----------------------------------
Total policy and contract liabilities 461,276 438,579
Separate account liabilities 841,835 771,953
Accounts payable and accrued expenses 339 13
Transfers to separate accounts due or (accrued), net (14,732) (27,297)
Reinsurance balances payable 334 207
Federal income taxes - 1,005
Asset valuation reserve 3,526 3,204
Interest maintenance reserve 7,884 8,443
Other liabilities 1,547 4,074
-----------------------------------
Total liabilities 1,302,009 1,200,181
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
Unassigned surplus (deficit) (6,065) (2,491)
-----------------------------------
Total capital and surplus 55,179 59,503
-----------------------------------
Total liabilities and capital and surplus $ 1,357,188 $ 1,259,684
===================================
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
National Integrity Life Insurance Company
Statements of Income (Statutory Basis)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
(IN THOUSANDS)
-----------------------------------
<S> <C> <C>
Premiums and other revenues:
Premiums and annuity considerations $ 13,615 $ 13,496
Deposit-type funds 137,690 196,927
Net investment income 39,019 36,077
Amortization of the interest maintenance reserve 1,127 1,478
Income from Separate Account Seed Money Investment 14,800 -
Reserve adjustments on reinsurance ceded 78,722 -
Other revenues 16,400 8,331
-----------------------------------
Total premiums and other revenues 301,373 256,309
Benefits paid or provided:
Death benefits 961 4,098
Annuity benefits 20,560 16,475
Surrender benefits 221,211 142,420
Payments on supplementary contracts 1,812 1,637
Increase (decrease) in insurance and annuity reserves 22,961 (9,247)
Other benefits 93 101
-----------------------------------
Total benefits paid or provided 267,598 155,484
Insurance and other expenses:
Commissions 17,791 8,904
General expenses 7,393 14,876
Taxes, licenses and fees 795 228
Net transfers to separate accounts 213 63,171
Other expenses 643 3,871
-----------------------------------
Total insurance and other expenses 26,835 91,050
-----------------------------------
Gain from operations before federal income taxes
and net realized capital gains (losses) 6,940 9,775
Federal income tax expense (benefit) (5,113) 31
Gain from operations before net realized -----------------------------------
capital gains (losses) 12,053 9,744
Net realized capital gains (losses), excluding realized
capital gains (losses) net of tax transferred to the
interest maintenance reserve (1999-$567; 1998-$2,681) (1,255) 147
-----------------------------------
Net income $ 10,798 $ 9,891
===================================
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
National Integrity Life Insurance Company
Statements of Changes in Capital and Surplus (Statutory Basis)
Years Ended December 31, 1999 and 1998
<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, 1998 $ 2,000 $ 59,244 $ 750 $ (7,977) $ 54,017
Net income 9,891 9,891
Increase in asse
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
Net income 10,798 10,798
Increase in asset
valuation reserve (322) (322)
Release of Special Surplus Funds (750) 750
Change in surplus in
separate accounts (14,800) (14,800)
-------------------------------------------------------------------------
Balance, December 31, 1999 $ 2,000 $ 59,244 $ - $ (6,065) $ 55,179
==========================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
National Integrity Life Insurance Company
Statements of Cash Flows (Statutory Basis)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
-------------------------------------
(IN THOUSANDS)
<S> <C> <C>
OPERATIONS:
Premiums, policy proceeds, and other
considerations received $ 151,305 $ 210,424
Net investment income received 33,836 36,344
Commission and expense allowances received on
reinsurance ceded 83,164 8
Benefits paid (244,637) (164,730)
Insurance expenses paid (25,653) (24,148)
Other income received net of other expenses paid 11,458 4,368
Net transfers from (to) separate accounts 12,352 (66,100)
Federal income taxes recovered (paid) 2,441 (4,670)
-------------------------------------
Net cash used in operations 24,266 (8,504)
INVESTMENT ACTIVITIES:
Proceeds from sales, maturities, or repayments
of investments:
Bonds 95,849 291,759
Preferred stocks - 38,672
Mortgage loans 485 407
Other invested assets - 8
Net gains on cash and short-term investments 8 64
Total investment proceeds 96,342 330,910
Taxes paid on capital gains (1,407) (1,407)
-------------------------------------
Net proceeds from sales, maturities, or repayments
of investments 94,935 329,503
Cost of investments acquired:
Bonds 80,974 232,584
Preferred stocks - 26,322
-------------------------------------
Total cost of investments acquired 80,974 258,906
Net increase in policy loans and premium notes 2,551 299
-------------------------------------
Net cash provided by investment activities 11,410 70,298
</TABLE>
6
<PAGE>
National Integrity Life Insurance Company
Statements of Cash Flows (Statutory Basis) (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
----------------------------------
(IN THOUSANDS)
<S> <C> <C>
FINANCING AND MISCELLANEOUS ACTIVITIES:
Other cash provided:
Other sources 2,311 8,644
------------------------------
Total other cash provided 2,311 8,644
------------------------------
Other cash applied:
Dividends to shareholder - 2,771
Other applications, net 6,286 862
------------------------------
Total other cash applied 6,286 3,633
------------------------------
Net cash provided by (used in) financing and
miscellaneous activities (3,975) 5,011
------------------------------
Net increase in cash and short-term investments 31,701 66,805
Cash and short-term investments at beginning of year 78,883 12,078
------------------------------
Cash and short-term investments at end of year $ 110,584 $ 78,883
==============================
</TABLE>
SEE ACCOMPANYING NOTES.
7
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)
December 31, 1999
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"). 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 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 accounting principles generally
accepted in the United States ("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 prescribed
8
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
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 (Statuatory 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,
1999 1998
------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Net income as reported in the accompanying statutory
basis financial statements $ 10,798 $ 9,891
Deferred policy acquisition costs, net of amortization 4,073 9,940
Adjustments to customer deposits (2,613) (4,560)
Adjustments to invested asset carrying values at
acquisition date 19 (32)
Amortization of value of insurance in force (831) (539)
Amortization of interest maintenance reserve (1,127) (1,478)
Adjustments for realized investment gains (losses) (1,106) 3,646
Adjustments for federal income tax expense (8,084) (5,200)
Other (2,629) (107)
------------------------------------
Net income (loss), GAAP basis $ (1,500) $ 11,561
====================================
</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,
1999 1998
------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Capital and surplus as reported in the accompanying statutory basis
financial statements $ 55,179 $ 59,503
Adjustments to customer deposits (28,245) (37,356)
Adjustments to invested asset carrying values at
acquisition date (1,231) 77
Asset valuation reserve and interest maintenance reserve 11,410 11,646
Value of insurance in force 3,702 4,159
Deferred policy acquisition costs 48,063 43,497
Net unrealized gains (losses) on available-for-sale securities
(48,105) (7,076)
Other (5,378) 3,474
------------------------------------
Shareholder's equity, GAAP basis $ 35,395 $ 77,924
====================================
</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.
Preferred stocks are reported at cost.
Short-term investments include investments with maturities of less than one
year at the date of acquisition.
11
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
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.
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
12
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
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 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.
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 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
13
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
2. PERMITTED STATUTORY ACCOUNTING PRACTICES (CONTINUED)
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, 1999:
Mortgage-backed securities $ 120,317 $ 8 $ 4 $ 120,321
Corporate securities 182,138 15 11,959 170,194
Asset-backed securities 22,877 - - 22,877
U.S. Treasury securities and
obligations of U.S. government
agencies 3,229 1 199 3,031
Foreign governments 16,813 94 1,886 15,021
-----------------------------------------------------------------------
Total bonds $ 345,374 118 14,048 331,444
=======================================================================
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
=======================================================================
</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, 1999 and 1998, the fair
value of investments in bonds includes $242.4 million and $256.2 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, 1999, by contractual maturity, is as
follows:
<TABLE>
COST OR
AMORTIZED COST FAIR VALUE
------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Years to maturity:
One or less $ 1,068 $ 1,062
After one through five 37,355 37,161
After five through ten 24,019 22,460
After ten 139,738 127,563
Asset-backed securities 22,877 22,877
Mortgage-backed securities 120,317 120,321
------------------------------------
Total $ 345,374 $ 331,444
====================================
</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 1999 and 1998 were $40.7
million and $262.0 million; gross gains of $1.4 million and $5.6 million, and
gross losses of $2.8 million and $1.4 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, 1999 and 1998, bonds with an admitted asset value of $1,220,000
and $1,218,000, 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, 1999,
the Company held no mortgages with interest more than one year past due. During
1999, 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,
1999 1998
------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Income:
Bonds $ 29,956 $ 31,054
Preferred stocks 796 1,328
Mortgage loans 219 245
Policy loans 2,238 2,014
Cash and short-term investments 6,218 2,147
Other 320 279
------------------------------------
Total investment income 39,747 37,067
Investment expenses (725) (656)
Interest expense on repurchase agreements (3) (334)
------------------------------------
Net investment income $ 39,019 $ 36,077
====================================
</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.
The effect of reinsurance on premiums, annuity considerations and deposit-type
funds is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
-------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Direct premiums and amounts assessed against
policyholders $229,228 $ 199,389
Reinsurance assumed 10,640 11,757
Reinsurance ceded (88,563) (723)
-------------------------------------
Net premiums, annuity considerations and deposit-
type funds $151,305 $ 210,423
=====================================
</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, 1999 and 1998, the adjusted capital
and surplus of the Company is 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, 1999 and 1998, 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, 1999:
Subject of discretionary withdrawal (with adjustment):
With market value adjustment $ 209,485 17.3%
At book value less surrender charge of 5% or more 156,431 12.9%
----------------
At market value 617,377 50.9%
-----------------
Total with adjustment or at market value 983,293 81.1%
Subject to discretionary withdrawal (without adjustment)
at book value less surrender charge of 5% or more 166,356 13.7%
Not subject to discretionary withdrawal 62,646 5.2%
---------------------------------
Total annuity reserves and deposit fund liabilities
(before reinsurance) 1,212,295
Less reinsurance ceded 3,772
-----------------
Net annuity reserves and deposit fund liabilities $ 1,208,523 100.0%
=================================
At December 31, 1998:
Subject of 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 less surrender charge of 5% or more 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
=================
</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, 1999 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 $ 10,627 $ 60,894 $ 71,521
========================================================
Reserves for separate accounts with assets at
fair value $ 209,485 $ 617,562 $ 827,047
========================================================
Reserves for separate accounts by withdrawal characteristics:
Subject to discretionary withdrawal (with adjustment):
With market value adjustment $ 209,485 $ - $ 209,485
At book value without market value
adjustment and with current surrender
charge of 5% or more - - -
At market value - 617,562 617,562
--------------------------------------------------------
Total with adjustment or at market value 209,485 617,562 827,047
Not subject to discretionary withdrawal - - -
--------------------------------------------------------
Total separate accounts reserves $ 209,485 $ 617,562 $ 827,047
========================================================
</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, 1999 and 1998 is presented below:
<TABLE>
<CAPTION>
1999 1998
------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Transfers as reported in the Summary of Operations of the Separate Accounts
Statement:
Transfers to separate accounts $ 71,521 $ 119,350
Transfers from separate accounts (71,472) (56,316)
------------------------------------
Net transfers to separate accounts 49 63,034
Reconciling adjustments:
Other revenues 164 137
------------------------------------
Transfers as reported in the Summary of Operations of the Life,
Accident and Health Annual Statement $ 213 $ 63,171
====================================
</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, 1999 DECEMBER 31, 1998
----------------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------------------------------- --------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Bonds $345,374 $290,545 $360,012 $348,766
Preferred stocks 9,740 7,680 9,740 7,981
Mortgage loans 2,350 2,350 2,835 2,835
Cash and short-term investments 110,583 110,583 78,883 78,883
Liabilities:
Life and annuity reserves for
investment-type contracts $382,394 $378,233 $360,606 $359,972
Separate accounts annuity
reserves 826,862 826,164 744,349 733,365
</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 AND CASH AND SHORT-TERM INVESTMENTS
The carrying amount of mortgage loans and cash and short-term investments
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
1999 and 1998, the Company was charged $7.6 million and $8.6 million,
respectively, for these services in accordance with the requirements of
applicable insurance law and regulations.
11. OTHER ITEMS
On July 29, 1999, ARM announced that it was restructuring its institutional
business and positioning its retail business and technology operations for the
sale of ARM or its businesses or its assets. Following the July 29, 1999
announcement, the ratings of ARM and its insurance subsidiaries were
significantly lowered several times by four major rating agencies, materially
and adversely affecting the Company's ability to market retail products and
adversely affecting the persistency of its existing business.
In order to preserve and maximize value for policyholders as well as for ARM's
creditors and/or stockholders, ARM requested supervision with respect to it's
insurance subsidiary Integrity from the Ohio Department of Insurance, its
domiciliary regulator. On August 20, 1999, the Ohio Department of Insurance
issued a Supervision Order. Under the terms of the Supervision Order, Integrity
continued payments of death benefits, previously scheduled systematic
withdrawals, previously scheduled immediate annuity payments, and agent
commissions, but could not make other payments without approval from the Ohio
Department of Insurance. The Supervision Order also suspended the processing of
surrenders of policies except in cases of approved hardship. On August 31, 1999,
the Supervision Order was amended to allow Integrity Life Insurance Company to
resume processing surrender requests from its variable life and annuity
policyholders.
On December 17, 1999, ARM entered into a Purchase Agreement (the "Purchase
Agreement") with The Western and Southern Life Insurance Company ("W&S") whereby
W&S agreed to acquire ARM's insurance subsidiaries, Integrity and National
Integrity Insurance Company, the ("Insurance Subsidiaries").
23
<PAGE>
National Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
11. OTHER ITEMS (CONTINUED)
On March 3, 2000, ARM closed the transaction contemplated by the Purchase
Agreement (the "Closing"). Under the terms of the Purchase Agreement, the
purchase price of $119.3 million is subject to a number of downward price
adjustments (see below) and was placed in an escrow account. The Company does
not expect any remaining proceeds in the escrow (after any such downward
adjustments) to be distributed from the escrow prior to the 12 month anniversary
of the Closing.
The $119.3 million purchase price may be decreased to the extent that the sum of
the Insurance Subsidiaries' statutory surplus and asset valuation reserves set
forth on the Insurance Subsidiaries' final February 29, 2000 balance sheet (less
certain enumerated items) is more than $1 million less than the sum of the
Insurance Subsidiaries' statutory surplus and asset valuation reserves set forth
in the Insurance Subsidiaries September 30, 1999 statutory financial statements
plus $2.2 million. The purchase price may be increased to the extent that the
sum of the Insurance Subsidiaries' statutory surplus and asset valuation
reserves set forth on the Insurance Subsidiaries' final February 29, 2000
balance sheet (less certain enumerated items) is more than $1 million greater
than the sum of the Insurance Subsidiaries' statutory surplus and asset
valuation reserves set forth on the Insurance Subsidiaries' September 30, 1999
statutory financial statements plus $2.2 million.
Subject to certain specified limitations, the purchase price may also be
decreased to the extent of any losses by W&S arising out of any inaccuracy in or
breach of any of ARM's representations, warranties or covenants.
The purchase price may be further decreased to the extent of any "losses" from
the sales or deemed sales of certain securities owned by the Insurance
Subsidiaries (the "Securities"). The Securities, which the parties have agreed
are to be sold, are set forth on a confidential list. "Losses" are calculated as
the aggregate amount by which the "carrying value" of the Securities exceeds the
aggregate net sale proceeds from the sales or deemed sales of the Securities.
The aggregate "carrying value" of the Securities as of February 29, 2000 was
$453.5 million. Losses of $4.7 million have been recognized on securities sold
subsequent to entering into the sale transaction.
24
<PAGE>
Financial Statements
Separate Account II
of
National Integrity Life Insurance Company
DECEMBER 31, 1999
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
Separate Account II
of
National Integrity Life Insurance Company
Financial Statements
December 31, 1999
CONTENTS
Report of Independent Auditors.................................................1
Audited Financial Statements
Statement of Assets and Liabilities............................................2
Statement of Operations........................................................4
Statements of Changes in Net Assets............................................6
Notes to Financial Statements.................................................10
<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, Morgan
Stanley Asian Equity Divisions, VIP Growth Service Class and VIP III Mid Cap
Service Class) as of December 31, 1999 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 auditing standards generally accepted
in the United States. 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., Deutsche Asset Management VIT Fund, 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, 1999, 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, 1999, the results of their operations and changes in
their net assets for each of the periods indicated therein, in conformity with
accounting principles generally accepted in the United States.
Louisville, Kentucky /s/ Ernst & Young LLP
April 12, 2000
1
<PAGE>
Separate Account II of National Integrity Life Insurance Company
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<CAPTION>
HARRIS BRETALL
ZWEIG ASSET SULLIVAN & SMITH SCUDDER ZWEIG EQUITY
ALLOCATION EQUITY GROWTH KEMPER VALUE (SMALL CAP)
DIVISION DIVISION DIVISION DIVISION
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments at value
(aggregate cost of $171,157,413) $ 3,529,881 $ 11,288,187 $ 6,271,786 $ 1,741,285
Receivable from (payable to)
the general account of
National Integrity 538 (1,445) (455) 83
---------------------------------------------------------------------------------------
NET ASSETS $ 3,530,419 $ 11,286,742 $ 6,271,331 $ 1,741,368
=======================================================================================
Unit value $ 17.51 $ 34.97 $ 23.95 $ 17.09
=======================================================================================
Units outstanding 201,623 322,755 261,851 101,894
=======================================================================================
<CAPTION>
EAFE EQUITY SMALL CAP VIP EQUITY-
EQUITY INDEX 500 INDEX INDEX INCOME
DIVISION DIVISION DIVISION DIVISION
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments at value
(aggregate cost of $171,157,413) $ 1,216,125 $ 18,671,332 $ 5,176,770 $ 10,345,820
Receivable from (payable to)
the general account of
National Integrity 267 1,193 1,851 983
--------------------------------------------------------------------------------------
NET ASSETS $ 1,216,392 $ 18,672,525 $ 5,178,621 $ 10,346,803
======================================================================================
Unit value $ 14.93 $ 15.57 $ 11.27 $ 12.04
======================================================================================
Units outstanding 81,473 1,199,263 459,505 859,369
======================================================================================
<CAPTION>
VIP III VIP III JANUS ASPEN
VIP II GROWTH & GROWTH CAPITAL
CONTRAFUND INCOME OPPORTUNITIES APPRECIATION
DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments at value
(aggregate cost of $171,157,413) $ 16,868,833 $ 9,524,335 $ 6,510,235 $ 33,870,974
Receivable from (payable to)
the general account of
National Integrity 1,449 (504) 745 1,526
----------------------------------------------------------------------------------
NET ASSETS $ 16,870,282 $ 9,523,831 $ 6,510,980 $ 33,872,500
==================================================================================
Unit value $ 15.57 $ 14.19 $ 13.47 $ 25.77
==================================================================================
Units outstanding 1,083,512 671,165 483,369 1,314,416
==================================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
Separate Account II of National Integrity Life Insurance Company
Statement of Assets and Liabilities (continued)
December 31, 1999
<TABLE>
<CAPTION>
JANUS ASPEN JPM MORGAN STANLEY
JANUS ASPEN WORLDWIDE JANUS ASPEN INTERNATIONAL EMERGING
BALANCED GROWTH MONEY MARKET OPPORTUNITIES JPM BOND MARKETS DEBT
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments at value
(aggregate cost of $171,157,413) $ 29,257,231 $ 13,240,878 $ 12,926,091 $ 851,242 $ 5,574,177 $ 423,032
Receivable from (payable to)
the general account of
National Integrity 865 1,973 (692) 91 2,555 141
---------------------------------------------------------------------------------------------
NET ASSETS $ 29,258,096 $ 13,242,851 $ 12,925,399 $ 851,333 $ 5,576,732 $ 423,173
=============================================================================================
Unit value $ 16.58 $ 20.49 $ 10.82 $ 14.20 $ 10.57 $ 9.82
=============================================================================================
Units outstanding 1,764,662 646,308 1,194,584 59,953 527,600 43,093
=============================================================================================
<CAPTION>
VIP III
MORGAN STANLEY MORGAN STANLEY MORGAN STANLEY VIP GROWTH MID CAP
HIGH YIELD U.S. REAL ESTATE ASIAN EQUITY SERVICE CLASS SERVICE CLASS
DIVISION DIVISION DIVISION DIVISION DIVISION TOTAL
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments at value
(aggregate cost of $171,157,413) $ 5,170,834 $ 787,546 $ 2,300,684 $ 1,036,800 $ 883,779 $ 197,467,857
Receivable from (payable to)
the general account of
National Integrity (815) (41) 254 (361) (88) 10,113
---------------------------------------------------------------------------------------------
NET ASSETS $ 5,170,019 $ 787,505 $ 2,300,938 $ 1,036,439 $ 883,691 $ 197,477,970
=============================================================================================
Unit value $ 11.13 $ 8.87 $ 15.09 $ 12.22 $ 13.28
=============================================================================================
Units outstanding 464,512 88,783 152,481 84,815 66,543
=============================================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
Separate Account II of National Integrity Life Insurance Company
Statement of Operations
Year Ended December 31, 1999
<TABLE>
<CAPTION>
HARRIS BRETALL
ZWEIG ASSET SULLIVAN & SMITH SCUDDER ZWEIG EQUITY EAFE
ALLOCATION EQUITY GROWTH KEMPER VALUE (SMALL CAP) EQUITY INDEX
DIVISION DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends $ 1,216,249 $ 211,182 $ 1,624,619 $ 23,044 $ 55,545
EXPENSES
Mortality and expense risk and
administrative charges 72,858 138,164 128,437 35,677 15,571
----------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 1,143,391 73,018 1,496,182 (12,633) 39,974
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments (359,056) 1,389,404 (619,685) (556,615) 286,549
Net unrealized appreciation
(depreciation) of investments:
Beginning of period (184,827) 1,155,242 82,487 (622,309) 49,321
End of period (818,213) 2,575,958 (2,081,588) (201,315) 39,403
----------------------------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period (633,386) 1,420,716 (2,164,075) 420,994 (9,918)
----------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (992,442) 2,810,120 (2,783,760) (135,621) 276,631
----------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 150,949 $ 2,883,138 $ (1,287,578) $ (148,254) $ 316,605
==================================================================================
<CAPTION>
VIP III
EQUITY SMALL CAP VIP EQUITY- VIP II GROWTH &
500 INDEX INDEX INCOME CONTRAFUND INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends $ 167,387 $ 175,034 $ 355,003 $ 340,460 $ 112,867
EXPENSES
Mortality and expense risk and
administrative charges 176,681 52,820 131,091 161,751 119,488
-------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) (9,294) 122,214 223,912 178,709 (6,621)
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments 1,767,392 (26,568) 102,754 286,044 434,565
Net unrealized appreciation
(depreciation) of investments:
Beginning of period 870,028 (93,093) 320,870 1,154,016 601,773
End of period 1,501,422 556,222 242,326 3,354,973 774,899
-------------------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period 631,394 649,315 (78,544) 2,200,957 173,126
-------------------------------------------------------------------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 2,398,786 622,747 24,210 2,487,001 607,691
-------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 2,389,492 $ 744,961 $ 248,122 $ 2,665,710 $ 601,070
=========================================================================
<CAPTION>
VIP III JANUS ASPEN
GROWTH CAPITAL
OPPORTUNITIES APPRECIATION
DIVISION DIVISION
----------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Reinvested dividends $ 142,187 $ 99,897
EXPENSES
Mortality and expense risk and
administrative charges 89,145 250,871
----------------------------------------
NET INVESTMENT INCOME (LOSS) 53,042 (150,974)
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments 350,091 782,110
Net unrealized appreciation
(depreciation) of investments:
Beginning of period 542,089 2,172,022
End of period 297,052 12,080,163
----------------------------------------
Change in net unrealized appreciation/
depreciation during the period (245,037) 9,908,141
----------------------------------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 105,054 10,690,251
----------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 158,096 $ 10,539,277
========================================
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
Separate Account II of National Integrity Life Insurance Company
Statement of Operations (continued)
Year Ended December 31, 1999
<TABLE>
<CAPTION>
JANUS ASPEN JPM
JANUS ASPEN WORLDWIDE JANUS ASPEN INTERNATIONAL
BALANCED GROWTH MONEY MARKET OPPORTUNITIES JPM BOND
DIVISION DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends $ 591,984 $ 13,851 $ 349,155 $ 29,499 $ 149,799
EXPENSES
Mortality and expense risk and
administrative charges 346,018 102,021 93,300 6,619 69,297
----------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 245,966 (88,170) 255,855 22,880 80,502
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments 3,251,237 3,975,158 - 172,305 (120,982)
Net unrealized appreciation
(depreciation) of investments:
Beginning of period 4,583,497 267,596 - (4,759) (317)
End of period 6,570,561 1,310,150 25 35,154 (64,425)
----------------------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period 1,987,064 1,042,554 25 39,913 (64,108)
----------------------------------------------------------------------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 5,238,301 5,017,712 25 212,218 (185,090)
----------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 5,484,267 $ 4,929,542 $ 255,880 $ 235,098 $ (104,588)
============================================================================
<CAPTION>
MORGAN STANLEY
EMERGING MORGAN STANLEY MORGAN STANLEY MORGAN STANLEY
MARKETS DEBT HIGH YIELD U.S. REAL ESTATE ASIAN EQUITY
DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends $ 51,331 $ 409,682 $ 49,790 $ 10,836
EXPENSES
Mortality and expense risk and
administrative charges 5,697 60,880 11,540 25,324
-------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 45,634 348,802 38,250 (14,488)
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments (112,097) (47,222) (92,041) 1,055,255
Net unrealized appreciation
(depreciation) of investments:
Beginning of period (171,500) (125,881) (55,828) (105,679)
End of period (5,671) (178,850) (41,715) 95,726
-------------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period 165,829 (52,969) 14,113 201,405
-------------------------------------------------------------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 53,732 (100,191) (77,928) 1,256,660
-------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 99,366 $ 248,611 $ (39,678) $ 1,242,172
===================================================================
<CAPTION>
VIP III
VIP GROWTH MID CAP
SERVICE CLASS SERVICE CLASS
DIVISION (1) DIVISION (1) TOTAL
-----------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends $ - $ 4,836 $ 6,184,237
EXPENSES
Mortality and expense risk and
administrative charges 4,032 1,421 2,098,703
-----------------------------------------------------
NET INVESTMENT INCOME (LOSS) (4,032) 3,415 4,085,534
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments 11,401 240 11,930,239
Net unrealized appreciation
(depreciation) of investments:
Beginning of period - - 10,434,748
End of period 149,237 118,950 26,310,444
-----------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period 149,237 118,950 15,875,696
-----------------------------------------------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 160,638 119,190 27,805,935
-----------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 156,606 $ 122,605 $ 31,891,469
=====================================================
</TABLE>
(1) For the period June 1, 1999 (commencement of operations) to December 31,
1999
SEE ACCOMPANYING NOTES.
5
<PAGE>
Separate Account II of National Integrity Life Insurance Company
Statement of Changes in Net Assets
Year Ended December 31, 1999
<TABLE>
<CAPTION>
HARRIS BRETALL
ZWEIG ASSET SULLIVAN & SMITH SCUDDER ZWEIG EQUITY
ALLOCATION EQUITY GROWTH KEMPER VALUE (SMALL CAP)
DIVISION DIVISION DIVISION DIVISION
------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ 1,143,391 $ 73,018 $ 1,496,182 $ (12,633)
Net realized gain (loss) on sales of investments (359,056) 1,389,404 (619,685) (556,615)
Change in net unrealized appreciation/
depreciation during the period (633,386) 1,420,716 (2,164,075) 420,994
------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 150,949 2,883,138 (1,287,578) (148,254)
INCREASE (DECREASE) IN NET ASSETS FROM
CONTRACT RELATED TRANSACTIONS
Contributions from contract holders 144,548 2,674,539 1,041,462 240,577
Contract terminations and benefits (2,508,262) (4,624,353) (2,132,276) (667,636)
Net transfers among investment options (579,462) 349,834 (1,215,352) (750,173)
------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions (2,943,176) (1,599,980) (2,306,166) (1,177,232)
------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS (2,792,227) 1,283,158 (3,593,744) (1,325,486)
Net assets, beginning of year 6,322,646 10,003,584 9,865,075 3,066,854
------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 3,530,419 $ 11,286,742 $ 6,271,331 $ 1,741,368
==================================================================
UNIT TRANSACTIONS
Contributions 8,292 92,444 36,773 14,206
Terminations and benefits (148,525) (158,215) (79,485) (39,445)
Net transfers (34,492) 6,126 (52,350) (45,356)
------------------------------------------------------------------
Net increase (decrease) in units (174,725) (59,645) (95,062) (70,595)
==================================================================
<CAPTION>
EAFE EQUITY SMALL CAP VIP EQUITY- VIP II
EQUITY INDEX 500 INDEX INDEX INCOME CONTRAFUND
DIVISION DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ 39,974 $ (9,294) $ 122,214 $ 223,912 $ 178,709
Net realized gain (loss) on sales of investments 286,549 1,767,392 (26,568) 102,754 286,044
Change in net unrealized appreciation/
depreciation during the period (9,918) 631,394 649,315 (78,544) 2,200,957
----------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 316,605 2,389,492 744,961 248,122 2,665,710
INCREASE (DECREASE) IN NET ASSETS FROM
CONTRACT RELATED TRANSACTIONS
Contributions from contract holders 128,042 4,131,362 314,315 2,831,340 3,759,678
Contract terminations and benefits (130,191) (774,572) (232,149) (386,910) (564,358)
Net transfers among investment options 1,916 4,653,191 799,311 542,368 2,925,638
----------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions (233) 8,009,981 881,477 2,986,798 6,120,958
----------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 316,372 10,399,473 1,626,438 3,234,920 8,786,668
Net assets, beginning of year 900,020 8,273,052 3,552,183 7,111,883 8,083,614
----------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 1,216,392 $ 18,672,525 $ 5,178,621 $ 10,346,803 $ 16,870,282
============================================================================
UNIT TRANSACTIONS
Contributions 10,701 298,245 35,128 236,911 279,982
Terminations and benefits (9,807) (60,981) (26,655) (37,015) (44,094)
Net transfers 4,692 330,950 77,118 39,971 211,119
----------------------------------------------------------------------------
Net increase (decrease) in units 5,586 568,214 85,591 239,867 447,007
============================================================================
<CAPTION>
VIP III VIP III JANUS ASPEN
GROWTH & GROWTH CAPITAL
INCOME OPPORTUNITIES APPRECIATION
DIVISION DIVISION DIVISION
--------------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ (6,621) $ 53,042 $ (150,974)
Net realized gain (loss) on sales of investments 434,565 350,091 782,110
Change in net unrealized appreciation/
depreciation during the period 173,126 (245,037) 9,908,141
--------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 601,070 158,096 10,539,277
INCREASE (DECREASE) IN NET ASSETS FROM
CONTRACT RELATED TRANSACTIONS
Contributions from contract holders 3,179,018 2,445,290 6,992,175
Contract terminations and benefits (727,720) (224,208) (1,095,712)
Net transfers among investment options 1,027,279 (513,027) 8,303,094
--------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 3,478,577 1,708,055 14,199,557
--------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 4,079,647 1,866,151 24,738,834
Net assets, beginning of year 5,444,184 4,644,829 9,133,666
--------------------------------------------------
NET ASSETS, END OF YEAR $ 9,523,831 $ 6,510,980 $ 33,872,500
==================================================
UNIT TRANSACTIONS
Contributions 237,119 188,415 365,873
Terminations and benefits (57,436) (21,093) (54,616)
Net transfers 78,418 (38,791) 419,165
--------------------------------------------------
Net increase (decrease) in units 258,101 128,531 730,422
==================================================
</TABLE>
SEE ACCOMPANYING NOTES.
6
<PAGE>
Separate Account II of National Integrity Life Insurance Company
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1999
<TABLE>
<CAPTION>
JANUS ASPEN JPM
JANUS ASPEN WORLDWIDE JANUS ASPEN INTERNATIONAL
BALANCED GROWTH MONEY MARKET OPPORTUNITIES JPM BOND
DIVISION DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ 245,966 $ (88,170) $ 255,855 $ 22,880 $ 80,502
Net realized gain (loss) on sales of investments 3,251,237 3,975,158 - 172,305 (120,982)
Change in net unrealized appreciation/
depreciation during the period 1,987,064 1,042,554 25 39,913 (64,108)
----------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 5,484,267 4,929,542 255,880 235,098 (104,588)
INCREASE (DECREASE) IN NET ASSETS FROM
CONTRACT RELATED TRANSACTIONS
Contributions from contract holders 4,836,174 3,174,318 6,663,298 284,653 704,085
Contract terminations and benefits (10,567,950) (953,278) (6,736,667) (52,991) (547,187)
Net transfers among investment options 6,419,600 1,899,665 8,349,227 162,137 2,170,774
----------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 687,824 4,120,705 8,275,858 393,799 2,327,672
----------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 6,172,091 9,050,247 8,531,738 628,897 2,223,084
Net assets, beginning of year 23,086,005 4,192,604 4,393,661 222,436 3,353,648
----------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 29,258,096 $ 13,242,851 $ 12,925,399 $ 851,333 $ 5,576,732
============================================================================
UNIT TRANSACTIONS
Contributions 333,116 223,793 620,336 25,393 65,839
Terminations and benefits (724,925) (61,391) (640,433) (4,409) (53,254)
Net transfers 415,445 151,950 794,235 17,845 205,066
----------------------------------------------------------------------------
Net increase (decrease) in units 23,636 314,352 774,138 38,829 217,651
============================================================================
<CAPTION>
MORGAN STANLEY
EMERGING MORGAN STANLEY MORGAN STANLEY MORGAN STANLEY
MARKETS DEBT HIGH YIELD U.S. REAL ESTATE ASIAN EQUITY
DIVISION DIVISION DIVISION DIVISION
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ 45,634 $ 348,802 $ 38,250 $ (14,488)
Net realized gain (loss) on sales of investments (112,097) (47,222) (92,041) 1,055,255
Change in net unrealized appreciation/
depreciation during the period 165,829 (52,969) 14,113 201,405
---------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 99,366 248,611 (39,678) 1,242,172
INCREASE (DECREASE) IN NET ASSETS FROM
CONTRACT RELATED TRANSACTIONS
Contributions from contract holders 70,253 643,244 99,405 405,251
Contract terminations and benefits (162,215) (309,323) (15,836) (545,293)
Net transfers among investment options (9,450) 1,523,846 (73,256) (183,752)
---------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions (101,412) 1,857,767 10,313 (323,794)
---------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS (2,046) 2,106,378 (29,365) 918,378
Net assets, beginning of year 425,219 3,063,641 816,870 1,382,560
---------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 423,173 $ 5,170,019 $ 787,505 $ 2,300,938
=====================================================================
UNIT TRANSACTIONS
Contributions 8,632 59,747 10,587 38,683
Terminations and benefits (18,735) (28,680) (1,740) (44,669)
Net transfers (2,099) 142,777 (9,535) (3,996)
---------------------------------------------------------------------
Net increase (decrease) in units (12,202) 173,844 (688) (9,982)
=====================================================================
<CAPTION>
VIP III
VIP GROWTH MID CAP
SERVICE CLASS SERVICE CLASS
DIVISION (1) DIVISION (1) TOTAL
--------------------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ (4,032) $ 3,415 $ 4,085,534
Net realized gain (loss) on sales of investments 11,401 240 11,930,239
Change in net unrealized appreciation/
depreciation during the period 149,237 118,950 15,875,696
--------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 156,606 122,605 31,891,469
INCREASE (DECREASE) IN NET ASSETS FROM
CONTRACT RELATED TRANSACTIONS
Contributions from contract holders 756,589 94,794 45,614,410
Contract terminations and benefits (10,708) (3,428) (33,973,223)
Net transfers among investment options 133,952 669,720 36,607,080
--------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 879,833 761,086 48,248,267
--------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 1,036,439 883,691 80,139,736
Net assets, beginning of year - - 117,338,234
--------------------------------------------------------
$ 1,036,439 $ 883,691 $ 197,477,970
NET ASSETS, END OF YEAR ========================================================
UNIT TRANSACTIONS
Contributions 72,656 9,156
Terminations and benefits (921) (289)
Net transfers 13,080 57,676
-----------------------------------
Net increase (decrease) in units 84,815 66,543
===================================
</TABLE>
(1) For the period June 1, 1999 (commencement of operations) to December 31,1999
SEE ACCOMPANYING NOTES.
7
<PAGE>
Separate Account II of National Integrity Life Insurance Company
Statement of Changes in Net Assets
Year Ended December 31, 1998
<TABLE>
<CAPTION>
HARRIS BRETALL
ZWEIG ASSET SULLIVAN & SMITH SCUDDER ZWEIG EQUITY EAFE EQUITY
ALLOCATION EQUITY GROWTH KEMPER VALUE (SMALL CAP) INDEX
DIVISION DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ 995,849 $ 801,093 $ 971,686 $ 663,769 $ 7,309
Net realized gain (loss) on sales of investments 263,521 1,528,277 388,258 113,592 5,402
Change in net unrealized appreciation/
depreciation during the period (1,531,140) (100,798) (110,220) (895,616) 48,673
----------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations (271,770) 2,228,572 1,249,724 (118,255) 61,384
INCREASE (DECREASE) IN NET ASSETS FROM
CONTRACT RELATED TRANSACTIONS
Contributions from contract holders 1,201,224 1,630,035 3,227,445 942,501 517,701
Contract terminations and benefits (553,907) (2,432,491) (652,942) (283,356) (3,970)
Net transfers among investment options (251,009) 674,517 (790,219) (466,592) 269,350
----------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 396,308 (127,939) 1,784,284 192,553 783,081
----------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 124,538 2,100,633 3,034,008 74,298 844,465
Net assets, beginning of year 6,198,108 7,902,951 6,831,067 2,992,556 55,555
----------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 6,322,646 $ 10,003,584 $ 9,865,075 $ 3,066,854 $ 900,020
============================================================================
UNIT TRANSACTIONS
Contributions 67,324 75,515 126,973 51,718 46,614
Terminations and benefits (31,336) (106,362) (25,289) (16,013) (366)
Net transfers (16,263) 9,004 (33,367) (28,186) 24,016
----------------------------------------------------------------------------
Net increase (decrease) in units 19,725 (21,843) 68,317 7,519 70,264
============================================================================
<CAPTION>
VIP III
EQUITY SMALL CAP VIP EQUITY VIP II GROWTH &
500 INDEX INDEX INCOME CONTRAFUND INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ 163,743 $ 43,982 $ 22,543 $ 12,714 $ (29,524)
Net realized gain (loss) on sales of investments 44,151 (14,811) (1,469) 7,917 42,233
Change in net unrealized appreciation/
depreciation during the period 852,963 (100,239) 306,875 1,141,126 601,438
---------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 1,060,857 (71,068) 327,949 1,161,757 614,147
INCREASE (DECREASE) IN NET ASSETS FROM
CONTRACT RELATED TRANSACTIONS
Contributions from contract holders 5,163,765 2,911,637 5,503,354 5,756,048 3,582,183
Contract terminations and benefits (92,937) (40,253) (82,196) (73,373) (32,315)
Net transfers among investment options 1,352,599 336,098 702,169 589,572 1,075,392
---------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 6,423,427 3,207,482 6,123,327 6,272,247 4,625,260
---------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 7,484,284 3,136,414 6,451,276 7,434,004 5,239,407
Net assets, beginning of year 788,768 415,769 660,607 649,610 204,777
---------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 8,273,052 $ 3,552,183 $ 7,111,883 $ 8,083,614 $ 5,444,184
===========================================================================
UNIT TRANSACTIONS
Contributions 448,400 301,131 500,983 524,542 307,158
Terminations and benefits (7,873) (4,491) (7,570) (6,607) (2,733)
Net transfers 114,091 35,064 62,691 53,019 88,777
---------------------------------------------------------------------------
Net increase (decrease) in units 554,618 331,704 556,104 570,954 393,202
===========================================================================
<CAPTION>
VIP III
GROWTH
OPPORTUNITIES
DIVISION
------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ 8,135
Net realized gain (loss) on sales of investments 14,854
Change in net unrealized appreciation/
depreciation during the period 535,085
------------------
Net increase (decrease) in net assets resulting
from operations 558,074
INCREASE (DECREASE) IN NET ASSETS FROM
CONTRACT RELATED TRANSACTIONS
Contributions from contract holders 2,830,017
Contract terminations and benefits (47,678)
Net transfers among investment options 519,862
------------------
Net increase (decrease) in net assets
from contract related transactions 3,302,201
------------------
INCREASE (DECREASE) IN NET ASSETS 3,860,275
Net assets, beginning of year 784,554
------------------
NET ASSETS, END OF YEAR $ 4,644,829
==================
UNIT TRANSACTIONS
Contributions 244,320
Terminations and benefits (4,125)
Net transfers 40,976
------------------
Net increase (decrease) in units 281,171
==================
</TABLE>
SEE ACCOMPANYING NOTES.
8
<PAGE>
Separate Account II of National Integrity Life Insurance Company
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1998
<TABLE>
<CAPTION>
JANUS ASPEN JANUS ASPEN JPM
CAPITAL JANUS ASPEN WORLDWIDE JANUS ASPEN INTERNATIONAL
APPRECIATION BALANCED GROWTH MONEY MARKET OPPORTUNITIES
DIVISION DIVISION DIVISION DIVISION DIVISION
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ (50,261) $ 595,489 $ 25,693 $ 202,359 $ 5,397
Net realized gain (loss) on sales of investments 43,225 419,795 15,865 - (4,885)
Change in net unrealized appreciation/
depreciation during the period 2,157,727 4,343,725 261,974 (49) 1,193
---------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 2,150,691 5,359,009 303,532 202,310 1,705
INCREASE (DECREASE) IN NET ASSETS FROM
CONTRACT RELATED TRANSACTIONS
Contributions from contract holders 5,034,893 2,415,242 2,522,632 8,074,765 151,790
Contract terminations and benefits (67,402) (2,407,347) (10,433) (1,369,000) (3,297)
Net transfers among investment options 1,422,631 (577,047) 1,171,570 (4,123,813) 17,630
---------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 6,390,122 (569,152) 3,683,769 2,581,952 166,123
---------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 8,540,813 4,789,857 3,987,301 2,784,262 167,828
Net assets, beginning of year 592,853 18,296,148 205,303 1,609,399 54,608
---------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 9,133,666 $ 23,086,005 $ 4,192,604 $ 4,393,661 $ 222,436
===========================================================================
UNIT TRANSACTIONS
Contributions 417,038 215,510 216,161 787,669 14,083
Terminations and benefits (5,349) (203,941) (887) (133,290) (322)
Net transfers 113,197 (98,330) 96,007 (393,913) 2,004
---------------------------------------------------------------------------
Net increase (decrease) in units 524,886 (86,761) 311,281 260,466 15,765
===========================================================================
<CAPTION>
MORGAN STANLEY
EMERGING MORGAN STANLEY MORGAN STANLEY MORGAN STANLEY
JPM BOND MARKETS DEBT HIGH YIELD U.S. REAL ESTATE ASIAN EQUITY
DIVISION DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ 103,655 $ 41,318 $ 166,796 $ 14,842 $ (6,667)
Net realized gain (loss) on sales of investments 27,608 (98,098) (9,713) (16,566) (98,762)
Change in net unrealized appreciation/
depreciation during the period 19,824 (217,258) (109,901) (56,559) (30,415)
----------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 151,087 (274,038) 47,182 (58,283) (135,844)
INCREASE (DECREASE) IN NET ASSETS FROM
CONTRACT RELATED TRANSACTIONS
Contributions from contract holders 1,155,669 93,456 2,411,521 627,027 139,325
Contract terminations and benefits (374,645) (114,191) (253,268) (5,801) (128,176)
Net transfers among investment options 811,411 (284,471) 520,662 162,261 111,005
----------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 1,592,435 (305,206) 2,678,915 783,487 122,154
----------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 1,743,522 (579,244) 2,726,097 725,204 (13,690)
Net assets, beginning of year 1,610,126 1,004,463 337,544 91,666 1,396,250
----------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 3,353,648 $ 425,219 $ 3,063,641 $ 816,870 $ 1,382,560
============================================================================
UNIT TRANSACTIONS
Contributions 110,037 10,030 231,191 65,075 17,376
Terminations and benefits (35,040) (10,287) (23,988) (628) (15,666)
Net transfers 76,475 (36,770) 50,340 16,193 9,480
----------------------------------------------------------------------------
Net increase (decrease) in units 151,472 (37,027) 257,543 80,640 11,190
============================================================================
<CAPTION>
TOTAL
------------------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ 4,759,920
Net realized gain (loss) on sales of investments 2,670,394
Change in net unrealized appreciation/
depreciation during the period 7,118,407
-------------------------
Net increase (decrease) in net assets resulting
from operations 14,548,721
INCREASE (DECREASE) IN NET ASSETS FROM
CONTRACT RELATED TRANSACTIONS
Contributions from contract holders 55,892,230
Contract terminations and benefits (9,028,978)
Net transfers among investment options 3,243,578
-------------------------
Net increase (decrease) in net assets
from contract related transactions 50,106,830
-------------------------
INCREASE (DECREASE) IN NET ASSETS 64,655,551
Net assets, beginning of year 52,682,682
-------------------------
NET ASSETS, END OF YEAR $ 117,338,234
=========================
UNIT TRANSACTIONS
Contributions
Terminations and benefits
Net transfers
Net increase (decrease) in units
</TABLE>
SEE ACCOMPANYING NOTES.
9
<PAGE>
Separate Account II
of
National Integrity Life Insurance Company
Notes to Financial Statements
December 31, 1999
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") which, prior to March 3, 2000, was an indirect wholly
owned subsidiary of ARM Financial Group, Inc. ("ARM"). Effective March 3, 2000,
Integrity and National Integrity were acquired by the Western and Southern Life
Insurance Company ("W&S"). (See Note 4 of Notes to Financial Statements.)
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"): Deutsche Asset
Managed VIT Funds ("Deutsche Funds"); 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 Deutsche Funds. Fidelity Management and Research
Company serves as investment adviser to Fidelity's VIP Funds. Integrity Capital
Advisors, Inc., a wholly owned subsidiary of ARM, was the investment adviser of
the Legends Fund until March 3, 2000, when it was changed to Touchstone
Advisors, Inc. 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.
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-three 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 and,
to a lesser extent, dividend income, while reducing portfolio exposure to
market risk. The sub-adviser uses a computer-driven stock selection model
that ranks approximately 600 of the most liquid stocks as determined by the
sub-adviser using various measures, including earnings, relative valuation,
and changes in analysts' earnings estimates, and based on those rankings
within each industry group, chooses up to 150 stocks for the Portfolio.
Zweig/Glaser Advisers is the sub-adviser to the Portfolio.
HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH PORTFOLIO seeks long-term
capital appreciation. It invests primarily in stocks of established
companies with proven records of superior and consistent earnings growth.
In selecting equity securities for the Portfolio, the sub-adviser looks for
successful companies that have exhibited superior growth in revenues and
earnings, strong product lines and proven management ability over a variety
of business cycles. The Portfolio may invest all or a portion of its assets
in cash and cash equivalents if the sub-adviser considers the equities
markets to be overvalued. Harris Bretall Sullivan & Smith, LLC is the
sub-adviser to the Portfolio.
SCUDDER KEMPER VALUE PORTFOLIO seeks long-term capital appreciation, with
current income as its secondary objective of current income. It invests
primarily in a diversified portfolio of the stocks of large U.S. companies
with a history of delivering rising earnings and growth dividends that are
believed to be undervalued, or that have a low price to earnings ratio.
These companies usually have a minimum market capitalization of $1 billion.
Scudder Kemper Investors, Inc. is sub-adviser to the Portfolio.
11
<PAGE>
Separate Account II
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ZWEIG EQUITY (SMALL CAP) PORTFOLIO seeks long-term capital appreciation
while striving to limit exposure to market risk. Under normal
circumstances, the Portfolio will invest primarily in small company stocks
with market capitalizations between $250 million and $1.5 billion, but may
have some of its assets invested in larger company stock. Zweig/Glaser
Advisers is the sub-adviser to the Portfolio.
EAFE EQUITY INDEX PORTFOLIO seeks 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 of common stock of approximately 1,100
companies located outside the United States. The Portfolio invests
primarily in a statically selected sample of the common stocks that
comprise the EAFE Index that are determined to represent the industry
diversification of the entire EAFE Index. 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 expenses are deducted) the total return of the S&P 500, an index
used to portray the performance of common stock of 500 large U.S.
companies. The Portfolio invests primarily in a statistically selected
sample of the common stocks of companies that comprise the S&P 500 Index
that are determined to represent the industry diversification of the entire
S&P 500 Index. Bankers Trust Global Asset Management Services is the
investment adviser to the Portfolio.
SMALL CAP INDEX PORTFOLIO seeks to replicate, as closely as possible
(before expenses are deducted), the total return of the Russell 2000 Small
Stock Index (the "Russell 2000"), an index used to portray the performance
of common stock of 2000 small U.S. companies. The Portfolio invests
primarily in a statistically selected sample of the common stocks of
companies that comprise the Russell 2000 Index that are determined to
represent the industry diversification of the entire Russell 2000 Index.
Bankers Trust Global Asset Management Services is the investment adviser to
the Portfolio.
12
<PAGE>
Separate Account II
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
VIP EQUITY-INCOME PORTFOLIO seeks reasonable income by investing primarily
in income producing equity securities, with the potential for capital
appreciation as a consideration. The Portfolio seeks a yield which exceeds
the composite yield on the securities comprising the S&P 500. 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 common stocks with a focus on those that pay current dividends and show
potential for capital appreciation. 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.
VIP III GROWTH OPPORTUNITIES PORTFOLIO seeks to provide capital growth by
investing primarily in common stocks. The Portfolio may also invest in
other types of securities, including bonds which may be lower-quality debt
securities. Fidelity Management and Research Company serves as 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)
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 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 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 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 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 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 Corporation, the Portfolio's investment
adviser. 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.
14
<PAGE>
Separate Account II
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
JPM INTERNATIONAL OPPORTUNITIES PORTFOLIO seeks to provide a high total
return from a portfolio of equity securities of foreign corporations. 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 primarily through 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. 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 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 serves as the investment adviser to the
Portfolio.
MORGAN STANLEY HIGH YIELD PORTFOLIO seeks above-average total return over a
market cycle of three to five years by investing primarily in a diversified
portfolio of high yield securities of both U.S. and non-U.S. issuers. The
advisor 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. 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 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. MSDW serves as the investment adviser to the Portfolio.
15
<PAGE>
Separate Account II
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MORGAN STANLEY ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation
by investing primarily in a diversified portfolio of equity securities of
Asian issuers (excluding Japan). The advisor employs a disciplined,
value-oriented approach to security selection, focusing on larger companies
with strong management teams. The advisor evaluates top-down country risk
factors and opportunities when determining position sizes and overall
exposure to individual markets. MSDW serves as the investment adviser to
the Portfolio.
VIP GROWTH SERVICE CLASS PORTFOLIO seeks capital appreciation through
investing in companies believed to have above-average growth potential.
Growth may be measured by factors such as earnings of 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. Fidelity Management and
Research Company serves as the investment adviser to the Portfolio.
VIP III MID-CAP SERVICE CLASS PORTFOLIO invests primarily in common stocks.
The Portfolio normally invests at least 65% 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. Fidelity Management and Research Company serves
as the investment advisor 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.
16
<PAGE>
Separate Account II
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States 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.
UNIT VALUE
Unit values for the Separate Account divisions are computed at the end of each
business day. The unit value is equal to the unit value for the preceding
business day multiplied by a net investment factor. This net investment factor
is determined based on the value of the underlying mutual fund portfolios of the
Separate Account, reinvested dividends and capital gains, new premium deposits
or withdrawals, and the daily asset charge for the mortality and expense risk
and administrative charges. Unit values are adjusted daily for all activity in
the Separate Account.
17
<PAGE>
Separate Account II
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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 1999 and the cost of shares held at December 31, 1999 for
each division were as follows:
<TABLE>
<CAPTION>
DIVISION PURCHASES SALES COST
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Zweig Asset Allocation $ 1,623,716 $ 3,422,197 $ 4,348,094
Harris Bretall Sullivan & Smith Equity Growth 4,552,551 6,077,783 8,712,229
Scudder Kemper Value 3,704,226 4,518,312 8,353,374
Zweig Equity (Small Cap) 483,355 1,673,953 1,942,600
EAFE Equity Index 8,066,236 8,026,562 1,176,722
Equity 500 Index 20,191,131 12,190,625 17,169,910
Small Cap Index 1,903,518 902,525 4,620,548
VIP Equity-Income 5,382,104 2,165,637 10,103,494
VIP II Contrafund 7,518,820 1,215,634 13,513,860
VIP III Growth & Income 6,111,206 2,631,946 8,749,436
VIP III Growth Opportunities 4,640,890 2,881,720 6,213,183
Janus Aspen Capital Appreciation 15,514,753 1,468,132 21,790,811
Janus Aspen Balanced 11,810,223 10,875,149 22,686,670
Janus Aspen Worldwide Growth 34,324,741 30,293,467 11,930,728
Janus Aspen Money Market 59,995,796 51,464,364 12,926,066
JPM International Opportunities 10,926,388 10,509,556 816,088
JPM Bond 8,222,462 5,817,525 5,638,602
Morgan Stanley Emerging Markets Debt 211,194 268,780 428,703
Morgan Stanley High Yield 4,492,661 2,283,361 5,349,684
Morgan Stanley Asian Equity 16,361,943 16,699,859 2,204,958
Morgan Stanley U.S. Real Estate 663,083 613,654 829,261
VIP Growth Service Class 1,004,972 128,810 887,563
VIP III Mid Cap Service Class 774,280 9,691 764,829
==================
$ 171,157,413
==================
</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,
19
<PAGE>
Separate Account II
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
3. EXPENSES (CONTINUED)
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).
4. EVENTS RELATING TO NATIONAL INTEGRITY, INTEGRITY AND ARM
On July 29, 1999, ARM announced that it was restructuring its institutional
business and positioning its retail business and technology operations for the
sale of ARM or its businesses or its assets. Following the July 29, 1999
announcement, the ratings of ARM and its insurance subsidiaries, including
National Integrity, were significantly lowered several times by four major
rating agencies, materially and adversely affecting National Integrity's
ability to market retail products and adversely affecting the persistency of
its existing business during the remainder of 1999.
On December 17, 1999 ARM entered into a Purchase Agreement (the "Purchase
Agreement") with W&S whereby W&S agreed to acquire Integrity and National
Integrity. On March 3, 2000, W&S and ARM closed the transaction contemplated by
the Purchase Agreement. The Company has been assigned a AAA (Extremely Strong)
rating for financial strength by Standard & Poor's, AAA (Highest) for claims
paying ability from Duff & Phelps' and A (Excellent) for financial strength from
A.M. Best. It is expected that Moody's will assign similar ratings to National
Integrity.
W&S is part of the Western-Southern Enterprise, a financial services group which
also includes Western-Southern Life Assurance Company, Columbus Life Insurance
Company, Touchstone Advisors, Inc., Fort Washington Investment Advisors, Inc.,
Todd Investment Advisors, Inc., Countrywide Financial Services, Capital Analysts
Incorporated and Eagle Realty Group, Inc. Assets owned or under management by
the group exceed $20 billion. Western and Southern is rated A++ (Superior) by
A.M. Best, AAA (Highest) by Duff & Phelps, AAA (Extremely Strong) by Standard &
Poor's, and Aa2 (Excellent) by Moody's.
20
<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, 1999
Statement of Operations for the Year Ended December 31, 1999
Statements of Changes in Net Assets for the Years Ended
December 31, 1999 and 1998
Notes to Financial Statements
NATIONAL INTEGRITY LIFE INSURANCE COMPANY:
Report of Independent Auditors
Balance Sheets (Statutory Basis) as of December 31, 1999 and 1998
Statements of Income (Statutory Basis) for the Years Ended
December 31, 1999 and 1998
Statements of Changes in Capital and Surplus (Statutory Basis) for
the Years Ended December 31, 1999 and 1998
Statements of Cash Flows (Statutory Basis) for the Years Ended
December 31, 1999 and 1998
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
Touchstone 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 (File No. 33-56658)
filed on August 20, 1992.
4.(b) Form of group variable annuity contract. Incorporated by
reference from Registrant's registration statement (File
No. 33-56658) filed on August 20, 1992.
1
<PAGE>
4.(c) Form of variable annuity certificate. Incorporated by
reference from Registrant's registration statement (File
No. 33-56658) filed on August 20, 1992.
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.
Incorporated by reference to Registrant's Form N-4
registration statement (File No. 33-51126), filed on
April 26, 1999.
8.(g) Form of Participation Agreement Among Insurance Series,
Federated Securities Corp. and National Integrity.
Incorporated by reference to Registrant's Form N-4
registration statement (File No. 33-51126), filed on
April 26, 1999.
8.(h) Form of Participation Agreement Between Janus Aspen Series and
National Integrity. Incorporated by reference to Registrant's
Form N-4 registration statement (File No. 33-51126), filed on
April 26, 1999.
2
<PAGE>
8.(i) Form of Participation Agreement Between JPM Series Trust II
and National Integrity. Incorporated by reference to
Registrant's Form N-4 registration statement (File No.
33-51126), filed on April 26, 1999.
8.(j) Form of Participation Agreement Between Morgan Stanley
Universal Funds, Inc., Morgan Stanley Asset Management Inc.,
Miller Anderson & Sherrerd, LLP and Integrity. Incorporated by
reference to Registrant's Form N-4 registration statement
(File No. 33-51126), filed on April 26, 1999.
8.(k) Form of Participation Agreement Between Select Ten Plus, LLC,
National Integrity and Touchstone Securities Corporation.
Incorporated by reference to Registrant's Form N-4
registration statement (File No. 33-51126), filed on
April 26, 1999.
8.(l) Form of Participation Agreement (Service Shares) between
Janus Aspen Series and National Integrity.
8.(m) Form of Distribution and Shareholder Services Agreement
(Service Shares) between Janus Distributors, Inc. and National
Integrity.
8.(n) Form of Participation Agreement between MFS Variable Insurance
Trust, Massachusetts Financial Services Company and National
Integrity.
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. Consent 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.
<TABLE>
<CAPTION>
DIRECTORS:
NAME AND PRINCIPAL BUSINESS ADDRESS POSITION AND OFFICES WITH DEPOSITOR
<S> <C>
John F. Barrett Director
400 Broadway, Cincinnati, Ohio 45202
Dennis L. Carr Director, Executive Vice President and Chief Actuary
515 W. Market, Louisville, Kentucky 40202
Daniel J. Downing Director
15 Matthews Street, Goshen, New York 10924
Eric C. Fast Director
100 First Stamford Place, Stamford, CT 06092
3
<PAGE>
John R. Lindholm Director and President
515 W. Market, Louisville, Kentucky 40202
Cameron F. MacRae Director
125 W. 55th Street, New York, NY 10019
Robert L. Walker Director
400 Broadway, Cincinnati, Ohio 45202
William J. Williams Director
400 Broadway, Cincinnati, Ohio 45202
Donald J. Wuebbling Director
400 Broadway, Cincinnati, Ohio 45202
OFFICERS:
John R. Lindholm* Director and President
Dennis L. Carr* Director, Executive Vice President & Chief Actuary
James G. Kaiser Executive Vice President
333 Ludlow Street
Stamford, CT 06902
Don W. Cummings* Senior Vice President & Chief Financial Officer
William F. Ledwin Senior Vice President & Chief Investment Officer
400 Broadway, Cincinnati, Ohio 45202
William H. Guth* Senior Vice President
Edward J. Haines* Senior Vice President
Kevin L. Howard* Senior Vice President
William J. Hrabik* Senior Vice President
Jill R. Keinsley* Senior Vice President
Scott Vincini Senior Vice President, National Sales Manager
333 Ludlow Street
Stamford, CT 06902
James J. Vance Vice President & Treasurer
400 Broadway, Cincinnati, Ohio 45202
Joseph F. Vap* Director, Financial Operations
Edward J. Babbitt Secretary
400 Broadway, Cincinnati, Ohio 45202
</TABLE>
* Principal Business Address: 515 West Market Street, Louisville, KY 40202
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH NATIONAL INTEGRITY
OR REGISTRANT
4
<PAGE>
The Western and Southern Life Insurance Company ("WSLIC"); Ohio corporation
Western-Southern Life Assurance Company ("WSLAC"); Ohio corporation; 100%
owned by WSLIC
Courtyard Nursing Care, Inc.; Ohio corporation; 100% owned by WSLAC;
ownership and operation of real estate.
IFS Financial Services, Inc. ("IFS"); Ohio corporation; 100% owned by\
WSLAC; development and marketing of financial products for
distribution through financial institutions.
IFS Systems, Inc.; Delaware corporation; 100% owned by IFS;
development, marketing and support of software systems.
IFS Insurance Agency, Inc.; Ohio corporation; 99% owned by IFS, 1%
owned by William F. Ledwin; general insurance agency.
Touchstone Securities, Inc.; Nebraska corporation; 100% owned by
IFS; securities broker-dealer.
Touchstone Advisors, Inc.; Ohio corporation; 100% owned by IFS;
registered investment adviser.
IFS Agency Services, Inc.; Pennsylvania corporation; 100% owned by
IFS; general insurance agency.
IFS Agency, Inc.; Texas corporation; 100% owned by an individual;
general insurance agency.
IFS General Agency, Inc.; Pennsylvania corporation; 100% owned by
William F. Ledwin; general insurance agency.
Integrity Life Insurance Company; Ohio corporation; 100% owned by WSLIC.
National Integrity Life Insurance Company; New York corporation;
100% owned by Integrity Life Insurance Company.
Seasons Congregate Living, Inc.; Ohio corporation; 100% owned by WSLIC;
ownership and operation of real estate.
Latitudes at the Moors, Inc.; Florida corporation; 100% owned by WSLIC;
ownership and operation of real estate.
WestAd Inc.; Ohio corporation; 100% owned by WSLIC, general advertising,
book-selling and publishing.
Fort Washington Investment Advisors, Inc.; Ohio corporation; 100% owned by
WSLIC; registered investment adviser.
Todd Investment Advisors, Inc.; Kentucky corporation; 100% owned by
Fort Washington Investment Advisors, Inc.; registered investment
adviser.
Countrywide Financial Services, Inc.; Ohio corporation; 100% owned by
Fort Washington Investment Advisors, Inc.
Countrywide Investments, Inc.; Ohio corporation; 100% owned by
Countrywide Financial Services, Inc.; registered investment
advisor and broker dealer.
6
<PAGE>
CW Fund Distributors, Inc.; Ohio corporation; 100% owned by
Countrywide Financial Services, Inc.; registered broker dealer
Countrywide Fund Services, Inc.; Ohio corporation; 100% owned by
Countrywide Financial Services, Inc.
Columbus Life Insurance Company; Ohio corporation; 100% owned by WSLIC;
insurance.
Colmain Properties, Inc.; Ohio corporation; 100% owned by Columbus Life
Insurance Company; acquiring, owning, managing, leasing, selling real
estate.
Colpick, Inc.; Ohio corporation; 100% owned by Colmain Properties,
Inc.; acquiring, owning, managing, leasing and selling real
estate.
CAI Holding Company, Inc.; Ohio corporation; 100% owned by Columbus Life
Insurance Company; holding company.
Capital Analysts Incorporated; Delaware corporation; 100% owned by
CAI Holding Company; securities broker-dealer and registered
investment advisor.
Capital Analysts Agency, Inc.; Ohio corporation; 99% owned by Capital
Analysts Incorporated, 1% owned by William F. Ledwin; general
insurance agency.
Capital Analysts Agency, Inc.; Texas corporation; 100% owned by an
individual who is a resident of Texas, but under contractual
association with Capital Analysts Incorporated; general
insurance agency.
Capital Analysts Insurance Agency, Inc.; Massachusetts corporation;
100% owned by Capital Analysts Incorporated; general insurance
agency.
CLIC Company I; Delaware corporation; 100% owned by Columbus Life Insurance
Company; holding company.
CLIC Company II; Delaware corporation; 100% owned by Columbus Life
Insurance Company; holding company.
Eagle Properties, Inc.; Ohio corporation; 100% owned by WSLIC; ownership,
development and management of real estate.
Seasons Management Company; Ohio corporation; 100 % owned by Eagle
Properties, Inc.; management of real estate.
Waslic Company II; Delaware corporation; 100% owned by WSLIC; holding company.
WestTax, Inc.; Ohio corporation, 100% owned by WSLIC; preparation and electronic
filing of tax returns.
Florida Outlet Marts, Inc.; Florida corporation; 100% owned by WSLIC; ownership
and operation of real estate.
AM Concepts Inc.; Delaware corporation, 100% owned by WSLIC; venture capital
investment in companies engaged in alternative marketing of financial
products.
Western-Southern Agency, Inc.; Ohio corporation; 99% owned by WSLIC; 1% owned by
William F. Ledwin; general insurance agency.
Western-Southern Agency Services, Inc.; Pennsylvania corporation; 100% owned by
WSLIC; general
6
<PAGE>
insurance agency.
W-S Agency of Texas, Inc.; Texas corporation; 100% owned by an individual;
general insurance agency.
ITEM 27. NUMBER OF CONTRACT OWNERS
As of January 31, 2000 there were 02,548 contract owners of Separate
Account II of National Integrity.
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.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Touchstone Securities is the principal underwriter for Separate
Account II. Touchstone Securities also serves as an underwriter for Separate
Account I and VUL of National Integrity, Separate Accounts I, II and VUL of
Integrity, contracts issued under Western-Southern Life Assurance Company's
Separate Accounts 1 and 2; The Legends Fund, Inc.; and for the shares of several
series (Funds) of Touchstone Series Trust (formerly Select Advisors Trust A),
Touchstone Strategic Trust, Touchstone Investment Trust and Touchstone Tax-Free
Trust; each of which is affiliated with the Depositor. 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, Touchstone Securities, are as follows:
<TABLE>
<CAPTION>
NAME AND PRINCIPAL BUSINESS ADDRESS POSITION AND OFFICES WITH TOUCHSTONE SECURITIES
<S> <C>
James N. Clark* Director
Jill T. McGruder Director, Chief Executive Officer and President
311 Pike Street
Cincinnati, Ohio 45202
Edward S. Heenan* Director and Controller
William F. Ledwin* Director
Donald J. Wuebbling* Director
Richard K. Taulbee* Vice President
Robert F. Morand* Secretary
Patricia Wilson Chief Compliance Officer
7
<PAGE>
311 Pike Street
Cincinnati, Ohio 45202
</TABLE>
*Principal Business Address: 400 Broadway, Cincinnati, Ohio 45202
(c) Not applicable.
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
There are currently no management-related services provided to the Registrant.
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 certify that they meet the
requirements of Securities Act Rule 485 for effectiveness of this Registration
Statement and 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 24th day of April, 2000.
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
8
<PAGE>
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
(Depositor)
By: /s/ John R. Lindholm
---------------------
John R. Lindholm
President
<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 24th day of April, 2000.
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: 04/24/00
PRINCIPAL FINANCIAL OFFICER: /s/ Don W. Cummings
--------------------------------------
Don W. Cummings, Chief Financial Officer
Date: 04/24/00
PRINCIPAL ACCOUNTING OFFICER: /s/ Joseph F. Vap
--------------------------------------
Joseph F. Vap, Director, Financial Operations
Date: 04/24/00
DIRECTORS:
/s/ John R. Lindholm /s/ John F. Barrett
- ------------------------ ---------------------------
John R. Lindholm John F. Barrett
Date: 04/24/00 Date: 04/24/00
/s/ Donald J. Wuebbling
- ------------------------ ---------------------------
Eric C. Fast Donald J. Wuebbling
Date: 04/24/00 Date: 04/24/00
/s/ Robert L. Walker
- ------------------------ ---------------------------
Cameron F. MacRae Robert L. Walker
Date: 04/24/00 Date: 04/24/00
/s/ Dennis L. Carr /s/ Daniel J. Downing
- ------------------------ ---------------------------
Dennis L. Carr Daniel J. Downing
Date: 04/24/00 Date: 04/24/00
/s/ William J. Williams
- ------------------------
William J. Williams
Date: 04/24/00
10
<PAGE>
EXHIBIT INDEX
8.(l) Form of Participation Agreement (Service Shares) between Janus
Aspen Series and National Integrity.
8.(m) Form of Distribution and Shareholder Services Agreement (Service
Shares) between Janus Distributors, Inc. and National Integrity.
8.(n) Form of Participation Agreement between MFS Variable Insurance
Trust, Massachusetts Financial Services Company and National
Integrity.
10. Consent of Ernst & Young LLP.
<PAGE>
JANUS ASPEN SERIES
FUND PARTICIPATION AGREEMENT
(SERVICE SHARES)
THIS AGREEMENT is made this ____ day of ______________________, between
JANUS ASPEN SERIES, an open-end management investment company organized as a
Delaware business trust (the "Trust"), and___________________________________, 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 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 registered the offer and sale of a class of shares
designated the Service Shares ("Shares") of each of its Portfolios 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 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 each Account as a unit
investment trust under the 1940 Act; and
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<PAGE>
WHEREAS, the Company desires to utilize the Shares of one or more
Portfolios as an investment vehicle of the Accounts;
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 10:00 a.m. New
York time on the next following Business Day. "Business Day" shall mean any day
on which the New York Stock Exchange is open for trading and on which the Trust
calculates its net asset value pursuant to the rules of the Securities and
Exchange Commission.
1.4 Purchase orders that are transmitted to the Trust in accordance with
Section 1.3 shall be paid for no later than 12:00 noon New York time on the same
Business Day that the Trust receives notice of the order. Payments shall be made
in federal funds transmitted by wire.
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<PAGE>
1.5 Issuance and transfer of the Trust's Shares will be by book entry only.
Stock certificates will not be issued to the Company or the Account. Shares
ordered from the Trust will be recorded in the appropriate title for each
Account or the appropriate subaccount of each Account.
1.6 The Trust shall furnish prompt notice to the Company of any income
dividends or capital gain distributions payable on the Trust's Shares. The
Company hereby elects to receive all such income dividends and capital gain
distributions as are payable on a Portfolio's Shares in additional Shares of
that Portfolio. The Trust shall notify the Company of the number of Shares so
issued as payment of such dividends and distributions.
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 Shares'
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;
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<PAGE>
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 the
Shares' statement of additional information in a form suitable for duplication
by the Company. The Trust (at its expense) shall provide the Company with copies
of any Trust-sponsored proxy materials in such quantity as the Company shall
reasonably require for distribution to Contract owners.
2.3 (a) The Company shall bear the costs of printing and distributing the
Trust's Shares' prospectus, statement of additional information, shareholder
reports and other shareholder communications to owners of and applicants for
policies for which Shares of the Trust are serving or are to serve as an
investment vehicle. The Company shall bear the costs of distributing proxy
materials (or similar materials such as voting solicitation instructions) to
Contract owners. The Company assumes sole responsibility for ensuring that such
materials are delivered to Contract owners in accordance with applicable federal
and state securities laws.
(b) If the Company elects to include any materials provided by the
Trust, specifically prospectuses, SAIs, shareholder reports and proxy materials,
on its web site or in any other computer or electronic format, the Company
assumes sole responsibility for maintaining such materials in the form provided
by the Trust and for promptly replacing such materials with all updates provided
by the Trust.
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
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<PAGE>
such registration statement and prospectus may be amended or supplemented from
time to time), reports of the Trust, Trust-sponsored proxy statements, or in
sales literature or other promotional material approved by the Trust or its
designee, except as required by legal process or regulatory authorities or with
the written permission of the Trust or its designee.
2.7 The Trust shall not give any information or make any representations or
statements on behalf of the Company or concerning the Company, the Accounts or
the Contracts other than information or representations contained in and
accurately derived from the registration statement or prospectus for the
Contracts (as such registration statement and prospectus may be amended or
supplemented from time to time), or in materials approved by the Company for
distribution including sales literature or other promotional materials, except
as required by legal process or regulatory authorities or with the written
permission of the Company.
2.8 So long as, and to the extent that the Securities and Exchange
Commission interprets the 1940 Act to require pass-through voting privileges for
variable policyowners, the Company will provide pass-through voting privileges
to owners of policies whose cash values are invested, through the Accounts, in
shares of the Trust. The Trust shall require all Participating Insurance
Companies to calculate voting privileges in the same manner and the Company
shall be responsible for assuring that the Accounts calculate voting privileges
in the manner established by the Trust. With respect to each Account, the
Company will vote Shares of the Trust held by the Account and for which no
timely voting instructions from policyowners are received as well as Shares it
owns that are held by that Account, in the same proportion as those Shares for
which voting instructions are received. The Company and its agents will in no
way recommend or oppose or interfere with the solicitation of proxies for Trust
shares held by Contract owners without the prior written consent of the Trust,
which consent may be withheld in the Trust's sole discretion.
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 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.
-5-
<PAGE>
3.3 The Company represents and warrants that the Contracts or interests in
the Accounts (1) are or, prior to issuance, will be registered as securities
under the 1933 Act or, alternatively (2) are not registered because they are
properly exempt from registration under the 1933 Act or will be offered
exclusively in transactions that are properly exempt from registration under the
1933 Act. The Company further represents and warrants that the Contracts will be
issued and sold in compliance in all material respects with all applicable
federal and state laws; and the sale of the Contracts shall comply in all
material respects with state insurance suitability requirements.
3.4 The 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.
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<PAGE>
4.2 The Company agrees to promptly report any potential or existing
conflicts of which it is aware to the Trustees. The Company will assist the
Trustees in carrying out their responsibilities under the Exemptive Order by
providing the Trustees with all information reasonably necessary for the
Trustees to consider any issues raised including, but not limited to,
information as to a decision by the Company to disregard Contract owner voting
instructions.
4.3 If it is determined by a majority of the Trustees, or a majority of its
disinterested Trustees, that a material irreconcilable conflict exists that
affects the interests of Contract owners, the Company shall, in cooperation with
other Participating Insurance Companies whose contract owners are also affected,
at its expense and to the extent reasonably practicable (as determined by the
Trustees) take whatever steps are necessary to remedy or eliminate the
irreconcilable material conflict, which steps could include: (a) withdrawing the
assets allocable to some or all of the Accounts from the Trust or any Portfolio
and reinvesting such assets in a different investment medium, including (but not
limited to) another Portfolio of the Trust, or submitting the question of
whether or not such segregation should be implemented to a vote of all affected
Contract owners and, as appropriate, segregating the assets of any appropriate
group (I.E., annuity contract owners, life insurance contract owners, or
variable contract owners of one or more Participating Insurance Companies) that
votes in favor of such segregation, or offering to the affected Contract owners
the option of making such a change; and (b) establishing a new registered
management investment company or managed separate account.
4.4 If a material irreconcilable conflict arises because of a decision by
the Company to disregard Contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Trust's election, to withdraw the affected Account's
investment in the Trust and terminate this Agreement with respect to such
Account; provided, however that such withdrawal and termination shall be limited
to the extent required by the foregoing material irreconcilable conflict as
determined by a majority of the disinterested Trustees. Any such withdrawal and
termination must take place within six (6) months after the Trust gives written
notice that this provision is being implemented. Until the end of such six (6)
month period, the Trust shall continue to accept and implement orders by the
Company for the purchase and redemption of shares of the Trust.
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.
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<PAGE>
4.6 For purposes of Sections 4.3 through 4.6 of this Agreement, a majority
of the disinterested Trustees shall determine whether any proposed action
adequately remedies any irreconcilable material conflict, but in no event will
the Company be required to establish a new funding medium for the Contracts if
an offer to do so has been declined by vote of a majority of Contract owners
materially adversely affected by the irreconcilable material conflict. In the
event that the Trustees determine that any proposed action does not adequately
remedy any irreconcilable material conflict, then the Company will withdraw the
Account's investment in the Trust and terminate this Agreement within six (6)
months after the Trustees inform the Company in writing of the foregoing
determination; provided, however, that such withdrawal and termination shall be
limited to the extent required by any such material irreconcilable conflict as
determined by a majority of the disinterested Trustees.
4.7 The Company shall at least annually submit to the Trustees such
reports, materials or data as the Trustees may reasonably request so that the
Trustees may fully carry out the duties imposed upon them by the Exemptive
Order, and said reports, materials and data shall be submitted more frequently
if deemed appropriate by the Trustees.
4.8 If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940
Act or the rules promulgated thereunder with respect to mixed or shared funding
(as defined in the Exemptive Order) on terms and conditions materially different
from those contained in the Exemptive Order, then the Trust and/or the
Participating Insurance Companies, as appropriate, shall take such steps as may
be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3,
as adopted, to the extent such rules are applicable.
ARTICLE V
INDEMNIFICATION
5.1 INDEMNIFICATION BY THE COMPANY. The Company agrees to indemnify and
hold harmless the Trust and each of its Trustees, officers, employees and agents
and each person, if any, who controls the Trust within the meaning of Section 15
of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this
Article V) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Company) or expenses
(including the reasonable costs of investigating or defending 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
-8-
<PAGE>
by the Company on behalf of the Contracts or Accounts (or any amendment or
supplement to any of the foregoing) (collectively, "Company Documents" for the
purposes of this Article V), or arise out of or are based upon the omission or
the alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, provided
that this indemnity shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission was made in reliance
upon and was accurately derived from written information furnished to the
Company by or on behalf of the Trust for use in Company Documents or otherwise
for use in connection with the sale of the Contracts or Trust Shares; or
(b) arise out of or result from statements or representations (other
than statements or representations contained in and accurately derived from
Trust Documents as defined in Section 5.2(a)) or wrongful conduct of the
Company or persons under its control, with respect to the sale or
acquisition of the Contracts or Trust Shares; or
(c) arise out of or result from any untrue statement or alleged untrue
statement of a material fact contained in Trust Documents as defined in
Section 5.2(a) or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading if such statement or omission was made in
reliance upon and accurately derived from written information furnished to
the Trust by or on behalf of the Company; or
(d) arise out of or result from any failure by the Company to provide
the services or furnish the materials required under the terms of this
Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this Agreement or
arise out of or result from any other material breach of this Agreement by
the Company.
5.2 INDEMNIFICATION BY THE TRUST. The Trust agrees to indemnify and hold
harmless the Company and each of its directors, officers, employees and agents
and each person, if any, who controls the Company within the meaning of Section
15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this
Article V) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Trust) or expenses
(including the reasonable costs of investigating or defending any alleged loss,
claim, damage, liability or expense and reasonable legal counsel fees incurred
in connection therewith) (collectively, "Losses"), to which the Indemnified
Parties may become subject under any statute or regulation, or at common law or
otherwise, insofar as such Losses:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the registration
statement or prospectus for the Trust (or any amendment or supplement
thereto), (collectively, "Trust Documents"
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<PAGE>
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
(b) arise out of or result from statements or representations (other
than statements or representations contained in and accurately derived from
Company Documents) or wrongful conduct of the Trust or persons under its
control, with respect to the sale or acquisition of the Contracts or Trust
Shares; or
(c) arise out of or result from any untrue statement or alleged untrue
statement of a material fact contained in Company Documents or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading if such
statement or omission was made in reliance upon and accurately derived from
written information furnished to the Company by or on behalf of the Trust;
or
(d) arise out of or result from any failure by the Trust to provide
the services or furnish the materials required under the terms of this
Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Trust in this Agreement or arise
out of or result from any other material breach of this Agreement by the
Trust.
5.3 Neither the Company nor the Trust shall be liable under the
indemnification provisions of Sections 5.1 or 5.2, as applicable, with respect
to any Losses incurred or assessed against an Indemnified Party that arise from
such Indemnified Party's willful misfeasance, bad faith or negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this Agreement.
5.4 Neither the Company nor the Trust shall be liable under the
indemnification provisions of 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.
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5.5 In case any such action is brought against the Indemnified Parties, the
indemnifying party shall be entitled to participate, at its own expense, in the
defense of such action. The indemnifying party also shall be entitled to assume
the defense thereof, with counsel reasonably satisfactory to the party named in
the action. After notice from the indemnifying party to the Indemnified Party of
an election to assume such defense, the Indemnified Party shall bear the fees
and expenses of any additional counsel retained by it, and the indemnifying
party will not be liable to the Indemnified Party under this Agreement for any
legal or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
ARTICLE VI
TERMINATION
6.1 This Agreement may be terminated by either party for any reason by
ninety (90) days advance written notice delivered to the other party.
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
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<PAGE>
If to the Company:
----------------------------
----------------------------
----------------------------
----------------------------
Attention: ___________________
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 arising, directly or indirectly, under this Agreement,
of any and every nature whatsoever, shall be satisfied solely out of the assets
of the Trust and that no Trustee, officer, agent or holder of shares of
beneficial interest of the Trust shall be personally liable for any such
liabilities.
8.6 Each party shall cooperate with each other party and all appropriate
governmental authorities (including without limitation the Securities and
Exchange Commission, the National Association of Securities Dealers, Inc., and
state insurance regulators) and shall permit such authorities reasonable access
to its 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.
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<PAGE>
8.9 Neither this Agreement nor any rights or obligations hereunder may be
assigned by either party without the prior written approval of the other party.
8.10 No provisions of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by both
parties.
IN WITNESS WHEREOF, the parties have caused their duly authorized officers
to execute this Participation Agreement as of the date and year first above
written.
JANUS ASPEN SERIES
By:
-----------------------------------------
Name:
---------------------------------------
Title:
---------------------------------------
(INSURANCE COMPANY)
By:
-----------------------------------------
Name:
---------------------------------------
Title:
---------------------------------------
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<PAGE>
SCHEDULE A
SEPARATE ACCOUNTS AND ASSOCIATED CONTRACTS
CONTRACTS FUNDED
NAME OF SEPARATE ACCOUNT BY SEPARATE ACCOUNT
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<PAGE>
DISTRIBUTION AND SHAREHOLDER SERVICES AGREEMENT
SERVICE SHARES OF JANUS ASPEN SERIES
(for Insurance Companies)
This Agreement is made as of ______________, by and between Janus
Distributors, Inc. (the "Distributor"), a Colorado corporation, and
__________________________ (the "Company"), a ____________________ corporation.
RECITALS
A. The Company has entered into a participation agreement with Janus
Aspen Series (the "Trust"), an open-end investment company registered under the
Investment Company Act of 1940 (the "1940 Act") with respect to the purchase of
a class of shares designated "Service Shares" of one or more series of the Trust
(each a "Portfolio") by certain separate accounts of the Company ("Accounts").
B. The Distributor serves as the distributor to Service Shares.
C. The Company desires to provide certain distribution and shareholder
services to owners ("Contract Owners") of variable life insurance policies or
variable annuity contracts ("Contracts") in connection with their allocation of
contract values in the Service Shares of the Portfolios and Distributor desires
Company to provide such services, subject to the conditions of this Agreement.
D. Pursuant to Rule 12b-1 under the 1940 Act, the Service Shares of each
Portfolio have adopted a Distribution and Shareholder Servicing Plan (the "12b-1
Plan") which, among other things, authorizes the Distributor to enter into this
Agreement with organizations such as Company and to compensate such
organizations out of each Portfolio's average daily net assets attributable to
the Service Shares.
AGREEMENT
1. SERVICES OF COMPANY
(a) The Company shall provide any combination of the following
support services, as agreed upon by the parties from time to time, to Contract
Owners who allocate contract values to the Service Shares of the Portfolios:
delivering prospectuses, statements of additional information, shareholder
reports, proxy statements and marketing materials to prospective and existing
Contract Owners; providing educational materials regarding the Service Shares;
providing facilities to answer questions from prospective and existing Contract
Owners about the Portfolios;
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<PAGE>
receiving and answering correspondence; complying with federal and state
securities laws pertaining to the sale of Service Shares; assisting Contract
Owners in completing application forms and selecting account options; and
providing Contract Owner record-keeping and similar administrative services.
(b) The Company will provide such office space and equipment,
telephone facilities, and personnel as may be reasonably necessary or beneficial
in order to provide such services to Contract Owners.
(c) The Company will furnish to the Distributor, the Trust or
their designees such information as the Distributor may reasonably request, and
will otherwise cooperate with the Distributor in the preparation of reports to
the Trust's Board of Trustees concerning this Agreement, as well as any other
reports or filings that may be required by law.
2. INDEMNIFICATION. The Company shall indemnify Distributor, the Trust,
and their affiliates, directors, trustees, employees and shareholders for any
loss (including without limitation, litigation costs and expenses and attorneys'
and experts' fees) directly resulting from Company's negligent or willful act,
omission or error, or Company's breach of this Agreement. Such indemnification
shall survive termination of the Agreement.
3. MAINTENANCE OF RECORDS. The Company shall maintain and preserve all
records as required by law to be maintained and preserved in connection with
providing the services herein. Upon the reasonable request of Distributor or the
Trust, Company shall provide Distributor, the Trust or the representative of
either, copies of all such records.
4. FEES. In consideration of Company's performance of the services
described in this Agreement, Distributor shall pay to the Company a monthly fee
("Distribution Fee") calculated as follows: the average aggregate amount
invested in each month in the Service Shares of each Portfolio by the Accounts
is multiplied by a pro-rata fee factor. The pro-rata fee factor is calculated
by: (a) dividing the per annum factor set forth on Exhibit A for the Service
Shares of each Portfolio by the number of days in the applicable year, and (b)
multiplying the result by the actual number of days in the applicable month. The
average aggregate amount invested over a one-month period shall be computed by
totaling the aggregate investment by the Accounts (share net asset value
multiplied by total number of shares held) on each calendar day during the month
and dividing by the total number of calendar days during such month.
Distributor will calculate the fee at the end of each month and will
make such reimbursement to the Company. The reimbursement check will be
accompanied by a statement showing the calculation of the monthly amounts
payable by Distributor and such other supporting data as may be reasonably
requested by the Company.
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<PAGE>
5. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. The Company represents,
warrants, and covenants that:
(a) It and its employees and agents meet the requirements of
applicable law, including but not limited to federal and state securities law
and state insurance law, for the performance of services contemplated herein;
(b) It will not purchase Service Shares with Account assets
derived from tax-qualified retirement plans except indirectly, through Contracts
purchased in connection with such plans and the Service Fee does not include any
payment to the Company that is prohibited under the Employee Retirement Income
Securities Act of 1974 ("ERISA") with respect to any assets of a Contract Owner
invested in a Contract using the Portfolios as investment vehicles;
(c) If required by applicable law, the Company will disclose
to each Contract Owner the existence of the Distribution Fee received by the
Company pursuant to this Agreement in a form consistent with the requirements of
applicable law.
6. TERMINATION.
(a) Unless sooner terminated with respect to any Portfolio, this
Agreement will continue with respect to a Portfolio if only the continuance of a
form of this Agreement is specifically approved at least annually by the vote of
a majority of the members of the Board of Trustees of the Trust who are not
"interested persons" (as such term is defined in the 1940 Act) and who have no
direct or indirect financial interest in the 12b-1 Plan relating to such
Portfolio or any agreement relating to such 12b-1 Plan, including this
Agreement, cast in person at a meeting called for the purpose of voting on such
approval.
(b) This Agreement will automatically terminate with respect
to a Portfolio in the event of its assignment (as such term is defined in the
1940 Act) with respect to such Portfolio. This Agreement may be terminated with
respect to any Portfolio by the Distributor or by the Company, without penalty,
upon 60 days' prior written notice to the other party. This Agreement may also
be terminated with respect to any Portfolio at any time without penalty by the
vote of a majority of the members of the Board of Trustees of the Trust who are
not "interested persons" (as such term is defined in the 1940 Act) and who have
no direct or indirect financial interest in the 12b-1 Plan relating to such
Portfolio or any agreement relating to such Plan, including this Agreement, or
by a vote of a majority of the Service Shares of such Portfolio on 60 days'
written notice.
(c) In addition, either party may terminate this Agreement
immediately if at any time it is determined by any federal or state regulatory
authority that compensation to be paid under this Agreement is in violation of
or inconsistent with any federal or state law.
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<PAGE>
7. MISCELLANEOUS.
(a) No modification of any provision of this Agreement will be
binding unless in writing and executed by the parties. No waiver of any
provision of this Agreement will be binding unless in writing and executed by
the party granting such waiver.
(b) This Agreement shall be binding upon and shall inure to
the benefit of the parties and their respective successors and assigns;
provided, however that neither this Agreement nor any rights, privileges,
duties, or obligations of the parties may be assigned by either party without
the written consent of the other party or as expressly contemplated by this
Agreement.
(c) This Agreement shall be governed by and interpreted in
accordance with the laws of the State of Colorado, exclusive of conflicts of
laws.
(d) This Agreement may be executed in several counterparts,
each of which shall be an original but all of which together shall constitute
one and the same instrument.
JANUS DISTRIBUTORS, INC.
------------------------------
By: By:
-------------------------- ---------------------------
Name: KELLEY ABBOTT HOWES Name:
---------------------- ------------------------
Title: VICE PRESIDENT Title:
---------------------- ------------------------
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<PAGE>
EXHIBIT A TO DISTRIBUTION AND SHAREHOLDER SERVICES AGREEMENT
NAME OF PORTFOLIO FEE FACTOR*
All Portfolios of Janus Aspen Series 0.25%
(Service Shares)
*Shall not exceed 0.25%
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<PAGE>
PARTICIPATION AGREEMENT
AMONG
MFS VARIABLE INSURANCE TRUST,
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
AND
MASSACHUSETTS FINANCIAL SERVICES COMPANY
THIS AGREEMENT, made and entered into this ____ day of ____ 2000, by and
among MFS VARIABLE INSURANCE TRUST, a Massachusetts business trust (the
"Trust"), NATIONAL INTEGRITY LIFE INSURANCE COMPANY, a life insurance company
organized under the laws of the State of New York (the "Company") on its own
behalf and on behalf of each of the segregated asset accounts of the Company set
forth in Schedule A hereto, as may be amended from time to time (the
"Accounts"), and MASSACHUSETTS FINANCIAL SERVICES COMPANY, a Delaware
corporation ("MFS").
WHEREAS, the Trust is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
and its shares are registered or will be registered under the Securities Act of
1933, as amended (the "1933 Act");
WHEREAS, shares of beneficial interest of the Trust are divided into
several series of shares, each representing the interests in a particular
managed pool of securities and other assets;
WHEREAS, certain series of shares of the Trust are divided into two
separate share classes, an Initial Class and a Service Class, and the Trust on
behalf of the Service Class has adopted a Rule 12b-1 plan under the 1940 Act
pursuant to which the Service Class pays a distribution fee;
WHEREAS, the series of shares of the Trust (each, a "Portfolio," and,
collectively, the "Portfolios") and the classes of shares of those Portfolios
(the "Shares") offered by the Trust to the Company and the Accounts are set
forth on Schedule A attached hereto;
WHEREAS, MFS is duly registered as an investment adviser under the
Investment Advisers Act of 1940, as amended, and any applicable state securities
law, and is the Trust's investment adviser;
WHEREAS, the Company will issue certain variable annuity and/or variable
life insurance contracts (individually, the "Policy" or, collectively, the
"Policies") which, if required by applicable law, will be registered under the
1933 Act;
WHEREAS, the Accounts are duly organized, validly existing segregated asset
accounts, established by resolution of the Board of Directors of the Company, to
set aside and invest assets attributable to the aforesaid variable annuity
and/or variable life insurance contracts that are allocated to the Accounts (the
Policies and the Accounts covered by this Agreement, and each corresponding
Portfolio covered by this Agreement in which the Accounts invest, is specified
in Schedule A attached hereto as may be modified from time to time);
<PAGE>
WHEREAS, the Company has registered or will register the Accounts as unit
investment trusts under the 1940 Act (unless exempt therefrom);
WHEREAS, MFS Fund Distributors, Inc. (the "Underwriter") 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. (the "NASD");
WHEREAS, Touchstone Securities, Inc. ("Touchstone"), the underwriter for
the individual variable annuity and the variable life policies, is registered as
a broker-dealer with the SEC under the 1934 Act and is a member in good standing
of the NASD; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase the Shares of the Portfolios as
specified in Schedule A attached hereto on behalf of the Accounts to fund the
Policies, and the Trust intends to sell such Shares to the Accounts at net asset
value;
NOW, THEREFORE, in consideration of their mutual promises, the Trust, MFS,
and the Company agree as follows:
ARTICLE I. SALE OF TRUST SHARES
1.1. The Trust agrees to sell to the Company those Shares which the
Accounts order (based on orders placed by Policy holders on that Business
Day, as defined below) and which are available for purchase by such
Accounts, executing such orders on a daily basis at the net asset value
next computed after receipt by the Trust or its designee of the order for
the Shares. For purposes of this Section 1.1, the Company shall be the
designee of the Trust for receipt of such orders from Policy owners and
receipt by such designee shall constitute receipt by the Trust; PROVIDED
that the Trust receives notice of such orders 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, Inc. (the "NYSE") is open for trading and on
which the Trust calculates its net asset value pursuant to the rules of the
SEC.
1.2. The Trust agrees to make the Shares available indefinitely for
purchase at the applicable net asset value per share by the Company and the
Accounts on those days on which the Trust calculates its net asset value
pursuant to rules of the SEC and the Trust shall calculate such net asset
value on each day which the NYSE is open for trading. Notwithstanding the
foregoing, the Board of Trustees of the Trust (the "Board") may refuse to
sell any Shares to the Company and the Accounts, or suspend or terminate
the offering of the Shares 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 in the best interest of
the Shareholders of such Portfolio.
1.3. The Trust and MFS agree that the Shares will be sold only to insurance
companies which have entered into participation agreements with the Trust
and MFS (the "Participating Insurance Companies") and their separate
accounts, qualified pension and retirement plans and MFS or its affiliates.
The Trust and MFS will not sell Trust shares to any insurance company or
separate account unless an agreement containing provisions substantially
the same as Articles III and VII of
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<PAGE>
this Agreement is in effect to govern such sales. The Company will not
resell the Shares except to the Trust or its agents.
1.4. The Trust agrees to redeem for cash, on the Company's request, any
full or fractional Shares held by the Accounts (based on orders placed by
Policy owners on that Business Day), executing such requests on a daily
basis at the net asset value next computed after receipt by the Trust or
its designee of the request for redemption. For purposes of this Section
1.4, the Company shall be the designee of the Trust for receipt of requests
for redemption from Policy owners and receipt by such designee shall
constitute receipt by the Trust; provided that the Trust receives notice of
such request for redemption by 9:30 a.m. New York time on the next
following Business Day.
1.5. Each purchase, redemption and exchange order placed by the Company
shall be placed separately for each Portfolio and shall not be netted with
respect to any Portfolio. However, with respect to payment of the purchase
price by the Company and of redemption proceeds by the Trust, the Company
and the Trust shall net purchase and redemption orders with respect to each
Portfolio and shall transmit one net payment for all of the Portfolios in
accordance with Section 1.6 hereof.
1.6. In the event of net purchases, the Company shall pay for the Shares by
2:00 p.m. New York time on the next Business Day after an order to purchase
the Shares is made in accordance with the provisions of Section 1.1.
hereof. In the event of net redemptions, the Trust shall pay the redemption
proceeds by 2:00 p.m. New York time on the next Business Day after an order
to redeem the shares is made in accordance with the provisions of Section
1.4. hereof. All such payments shall be in federal funds transmitted by
wire.
1.7. Issuance and transfer of the Shares will be by book entry only. Stock
certificates will not be issued to the Company or the Accounts. The Shares
ordered from the Trust will be recorded in an appropriate title for the
Accounts or the appropriate subaccounts of the Accounts.
1.8. The Trust shall furnish same day notice (by wire or telephone followed
by written confirmation) to the Company of any dividends or capital gain
distributions payable on the Shares. The Company hereby elects to receive
all such dividends and 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.
1.9. The Trust or its custodian shall make the net asset value per share
for each Portfolio available to the Company on each Business Day 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 6:30 p.m. New York time. In the event that the Trust is unable to meet
the 6:30 p.m. time stated herein, it shall provide additional time for the
Company to place orders for the purchase and redemption of Shares. Such
additional time shall be equal to the additional time which the Trust takes
to make the net asset value available to the Company. If the Trust provides
materially incorrect share net asset value information, the Trust shall
make an adjustment to the number of shares purchased or redeemed for the
Accounts to reflect the correct net asset value per share. Any material
error in the calculation or reporting of net asset value per share,
dividend or capital gains information shall be reported promptly upon
discovery to the Company.
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<PAGE>
ARTICLE II. CERTAIN REPRESENTATIONS, WARRANTIES AND COVENANTS
2.1. The Company represents and warrants that the Policies are or will be
registered under the 1933 Act or are exempt from or not subject to
registration thereunder, and that the Policies will be issued, sold, and
distributed in compliance in all material respects with all applicable
state and federal laws, including without limitation the 1933 Act, the
Securities Exchange Act of 1934, as amended (the "1934 Act"), and the 1940
Act. The Company further represents and warrants that it is an insurance
company duly organized and in good standing under applicable law and that
it has legally and validly established the Account as a segregated asset
account under applicable law and has registered or, prior to any issuance
or sale of the Policies, will register the Accounts as unit investment
trusts in accordance with the provisions of the 1940 Act (unless exempt
therefrom) to serve as segregated investment accounts for the Policies, and
that it will maintain such registration for so long as any Policies are
outstanding. The Company shall amend the registration statements under the
1933 Act for the Policies and the registration statements under the 1940
Act for the Accounts from time to time as required in order to effect the
continuous offering of the Policies or as may otherwise be required by
applicable law. The Company shall register and qualify the Policies for
sales in accordance with the securities laws of the various states only if
and to the extent deemed necessary by the Company.
2.2. The Company represents and warrants that the Policies are currently
and at the time of issuance will be treated as life insurance, endowment or
annuity contract under applicable provisions of the Internal Revenue Code
of 1986, as amended (the "Code"), that it will maintain such treatment and
that it will notify the Trust or MFS immediately upon having a reasonable
basis for believing that the Policies have ceased to be so treated or that
they might not be so treated in the future.
2.3. The Company represents and warrants that Touchstone, the underwriter
for the individual variable annuity and the variable life policies, is a
member in good standing of the NASD and is a registered broker-dealer with
the SEC. The Company represents and warrants that the Company and
Touchstone will sell and distribute such policies in accordance in all
material respects with all applicable state and federal securities laws,
including without limitation the 1933 Act, the 1934 Act, and the 1940 Act.
2.4. The Trust and MFS represent and warrant that the 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 Commonwealth of
Massachusetts and all applicable federal and state securities laws and that
the Trust is and shall remain registered under the 1940 Act. The Trust
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 Trust shall register and qualify the
Shares for sale in accordance with the laws of the various states only if
and to the extent deemed necessary by the Trust.
2.5. MFS represents and warrants that the Underwriter is a member in good
standing of the NASD and is registered as a broker-dealer with the SEC. The
Trust and MFS represent that the Trust and the Underwriter will sell and
distribute the Shares in accordance in all material respects with all
applicable state and federal securities laws, including without limitation
the 1933 Act, the 1934 Act, and the 1940 Act.
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<PAGE>
2.6. The Trust represents that it is lawfully organized and validly
existing under the laws of The Commonwealth of Massachusetts and that it
does and will comply in all material respects with the 1940 Act and any
applicable regulations thereunder.
2.7. MFS represents and warrants that it is and shall remain duly
registered under all applicable federal securities laws and that it shall
perform its obligations for the Trust in compliance in all material
respects with any applicable federal securities laws and with the
securities laws of The Commonwealth of Massachusetts. MFS represents and
warrants that it is not subject to state securities laws other than the
securities laws of The Commonwealth of Massachusetts and that it is exempt
from registration as an investment adviser under the securities laws of The
Commonwealth of Massachusetts.
2.8. No less frequently than annually, the Company shall submit to the
Board such reports, material or data as the Board may reasonably request so
that it may carry out fully the obligations imposed upon it by the
conditions contained in the exemptive application pursuant to which the SEC
has granted exemptive relief to permit mixed and shared funding (the "Mixed
and Shared Funding Exemptive Order").
ARTICLE III. PROSPECTUS AND PROXY STATEMENTS; VOTING
3.1. At least annually, the Trust or its designee shall provide the
Company, free of charge, with as many copies of the current prospectus
(describing only the Portfolios listed in Schedule A hereto) for the Shares
as the Company may reasonably request for distribution to existing Policy
owners whose Policies are funded by such Shares. The Trust or its designee
shall provide the Company, at the Company's expense, with as many copies of
the current prospectus for the Shares as the Company may reasonably request
for distribution to prospective purchasers of Policies. If requested by the
Company in lieu thereof, the Trust or its designee shall provide such
documentation (including a "camera ready" copy of the new prospectus as set
in type or, at the request of the 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 each year (or more frequently if the
prospectus for the Shares is supplemented or amended) to have the
prospectus for the Policies and the prospectus for the Shares printed
together in one document; the expenses of such printing to be apportioned
between (a) the Company and (b) the Trust or its designee in proportion to
the number of pages of the Policy and Shares' prospectuses, taking account
of other relevant factors affecting the expense of printing, such as
covers, columns, graphs and charts; the Trust or its designee to bear the
cost of printing the Shares' prospectus portion of such document for
distribution to owners of existing Policies funded by the Shares and the
Company to bear the expenses of printing the portion of such document
relating to the Accounts; PROVIDED, however, that the Company shall bear
all printing expenses of such combined documents where used for
distribution to prospective purchasers or to owners of existing Policies
not funded by the Shares. In the event that the Company requests that the
Trust or its designee provides the Trust's prospectus in a "camera ready"
or diskette format, the Trust shall be responsible for providing the
prospectus in the format in which it or MFS is accustomed to formatting
prospectuses and shall bear the expense of providing the prospectus in such
format (E.G., typesetting expenses), and the Company shall bear the expense
of adjusting or changing the format to conform with any of its
prospectuses.
3.2. The prospectus for the Shares shall state that the statement of
additional information for the Shares is available from the Trust or its
designee. The Trust or its designee, at its expense, shall
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<PAGE>
print and provide such statement of additional information to the Company
(or a master of such statement suitable for duplication by the Company) for
distribution to any owner of a Policy funded by the Shares. The Trust or
its designee, at the Company's expense, shall print and provide such
statement to the Company (or a master of such statement suitable for
duplication by the Company) for distribution to a prospective purchaser who
requests such statement or to an owner of a Policy not funded by the
Shares.
3.3. The Trust or its designee shall provide the Company free of charge
copies, if and to the extent applicable to the Shares, of the Trust's proxy
materials, reports to Shareholders and other communications to Shareholders
in such quantity as the Company shall reasonably require for distribution
to Policy owners.
3.4. Notwithstanding the provisions of Sections 3.1, 3.2, and 3.3 above, or
of Article V below, the Company shall pay the expense of printing or
providing documents to the extent such cost is considered a distribution
expense. Distribution expenses would include by way of illustration, but
are not limited to, the printing of the Shares' prospectus or prospectuses
for distribution to prospective purchasers or to owners of existing
Policies not funded by such Shares.
3.5. The Trust hereby notifies the Company that it may be appropriate to
include in the prospectus pursuant to which a Policy is offered disclosure
regarding the potential risks of mixed and shared funding.
3.6. If and to the extent required by law, the Company shall:
(a) solicit voting instructions from Policy owners;
(b) vote the Shares in accordance with instructions received
from Policy owners; and
(c) vote the Shares for which no instructions have been
received in the same proportion as the Shares of such
Portfolio for which instructions have been received
from Policy owners;
so long as and to the extent that the SEC continues to interpret the 1940
Act to require pass through voting privileges for variable contract owners.
The Company will in no way recommend action in connection with or oppose or
interfere with the solicitation of proxies for the Shares held for such
Policy owners. The Company reserves the right to vote shares held in any
segregated asset 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 holding Shares calculates voting privileges
in the manner required by the Mixed and Shared Funding Exemptive Order. The
Trust and MFS will notify the Company of any changes of interpretations or
amendments to the Mixed and Shared Funding Exemptive Order.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. 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, MFS, any other investment adviser to the
Trust, or any affiliate of MFS are named, at least three (3) Business Days
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prior to its use. No such material shall be used if the Trust, MFS, or
their respective designees reasonably objects to such use within three (3)
Business Days after receipt of such material.
4.2. The Company shall not give any information or make any representations
or statement on behalf of the Trust, MFS, any other investment adviser to
the Trust, or any affiliate of MFS or concerning the Trust or any other
such entity in connection with the sale of the Policies other than the
information or representations contained in the registration statement,
prospectus or statement of additional information for the Shares, as such
registration statement, prospectus and statement of additional information
may be amended or supplemented from time to time, or in reports or proxy
statements for the Trust, or in sales literature or other promotional
material approved by the Trust, MFS or their respective designees, except
with the permission of the Trust, MFS or their respective designees. The
Trust, MFS or their respective designees each agrees to respond to any
request for approval on a prompt and timely basis. The Company shall adopt
and implement procedures reasonably designed to ensure that information
concerning the Trust, MFS or any of their affiliates which is intended for
use only by brokers or agents selling the Policies (I.E., information that
is not intended for distribution to Policy owners or prospective Policy
owners) is so used, and neither the Trust, MFS nor any of their affiliates
shall be liable for any losses, damages or expenses relating to the
improper use of such broker only materials.
4.3. The Trust 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 the Accounts is
named, at least three (3) Business Days prior to its use. No such material
shall be used if the Company or its designee reasonably objects to such use
within three (3) Business Days after receipt of such material.
4.4. The Trust and MFS shall not give, and agree that the Underwriter shall
not give, any information or make any representations on behalf of the
Company or concerning the Company, the Accounts, or the Policies in
connection with the sale of the Policies other than the information or
representations contained in a registration statement, prospectus, or
statement of additional information for the Policies, as such registration
statement, prospectus and statement of additional information may be
amended or supplemented from time to time, or in reports for the Accounts,
or in sales literature or other promotional material approved by the
Company or its designee, except with the permission of the Company. The
Company or its designee agrees to respond to any request for approval on a
prompt and timely basis. The parties hereto agree that this Section 4.4. is
neither intended to designate nor otherwise imply that MFS is an
underwriter or distributor of the Policies.
4.5. The Company and the Trust (or its designee in lieu of the Company or
the Trust, as appropriate) will each provide to the other 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 Policies, or to the Trust or its Shares, prior to or contemporaneously
with the filing of such document with the SEC or other regulatory
authorities. The Company and the Trust shall also each promptly inform the
other of the results of any examination by the SEC (or other regulatory
authorities) that relates to the Policies, the Trust or its Shares, and the
party that was the subject of the examination shall provide the other party
with a copy of relevant portions of any "deficiency letter" or other
correspondence or written report regarding any such examination.
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4.6. The Trust and MFS will provide the Company with as much notice as is
reasonably practicable of any proxy solicitation for any Portfolio, and of
any material change in the Trust's registration statement, particularly any
change resulting in change to the registration statement or prospectus or
statement of additional information for any Account. The Trust and MFS will
cooperate with the Company so as to enable the Company to solicit proxies
from Policy owners or to make changes to its prospectus, statement of
additional information or registration statement, in an orderly manner. The
Trust and MFS will make reasonable efforts to attempt to have changes
affecting Policy prospectuses become effective simultaneously with the
annual updates for such prospectuses.
4.7. For purpose of this Article IV and Article VIII, 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), and sales literature (such as brochures, circulars,
reprints or excerpts or any other advertisement, sales literature, or
published articles), distributed or made generally available to customers
or the public, educational or training materials or communications
distributed or made generally available to some or all agents or employees.
ARTICLE V. FEES AND EXPENSES
5.1. The Trust shall pay no fee or other compensation to the Company under
this Agreement, and the Company shall pay no fee or other compensation to
the Trust, except that, to the extent the Trust or any Portfolio has
adopted and implemented a plan pursuant to Rule 12b-1 under the 1940 Act to
finance distribution and for Shareholder servicing expenses, then the Trust
may make payments to the Company or to the underwriter for the Policies in
accordance with such plan. Each party, however, shall, in accordance with
the allocation of expenses specified in Articles III and V hereof,
reimburse other parties for expenses initially paid by one party but
allocated to another party. In addition, nothing herein shall prevent the
parties hereto from otherwise agreeing to perform, and arranging for
appropriate compensation for, other services relating to the Trust and/or
to the Accounts.
5.2. The Trust or its designee shall bear the expenses for the cost of
registration and qualification of the Shares under all applicable federal
and state laws, including preparation and filing of the Trust's
registration statement, and payment of filing fees and registration fees;
preparation and filing of the Trust's proxy materials and reports to
Shareholders; setting in type and printing its prospectus and statement of
additional information (to the extent provided by and as determined in
accordance with Article III above); setting in type and printing the proxy
materials and reports to Shareholders (to the extent provided by and as
determined in accordance with Article III above); the preparation of all
statements and notices required of the Trust by any federal or state law
with respect to its Shares; all taxes on the issuance or transfer of the
Shares; and the costs of printing and distributing the Trust's prospectuses
and proxy materials to owners of Policies funded by the Shares and any
expenses permitted to be paid or assumed by the Trust pursuant to a plan,
if any, under Rule 12b-1 under the 1940 Act. The Trust shall not bear any
expenses of marketing the Policies.
5.3. The Company shall bear the expenses of printing and distributing the
Shares' prospectus or prospectuses in connection with new sales of the
Policies and of distributing the Trust's
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Shareholder reports to Policy owners. The Company shall bear all expenses
associated with the registration, qualification, and filing of the Policies
under applicable federal securities and state insurance laws; the cost of
preparing, printing and distributing the Policy prospectus and statement of
additional information; and the cost of preparing, printing and
distributing annual individual account statements for Policy owners as
required by state insurance laws.
5.4. MFS will quarterly reimburse the Company certain of the administrative
costs and expenses incurred by the Company as a result of operations
necessitated by the beneficial ownership by Policy owners of shares of the
Portfolios in the Trust, equal to 0.20% per annum of the aggregate net
assets of the Trust attributable to such Policy owners. In no event shall
such fee be paid by the Trust, its shareholders or by the Policy holders.
ARTICLE VI. DIVERSIFICATION AND RELATED LIMITATIONS
6.1. The Trust and MFS represent and warrant that each Portfolio of the
Trust will meet the diversification requirements of Section 817 (h) (1) of
the Code and Treas. Reg. 1.817-5, relating to the diversification
requirements for variable annuity, endowment, or life insurance contracts,
as they may be amended from time to time (and any revenue rulings, revenue
procedures, notices, and other published announcements of the Internal
Revenue Service interpreting these sections), as if those requirements
applied directly to each such Portfolio.
6.2. The Trust and MFS represent that each Portfolio will elect to be
qualified as a Regulated Investment Company under Subchapter M of the Code
and that they will maintain such qualification (under Subchapter M or any
successor or similar provision).
ARTICLE VII. POTENTIAL MATERIAL CONFLICTS
7.1. The Trust agrees that the Board, constituted with a majority of
disinterested trustees, will monitor each Portfolio of the Trust for the
existence of any material irreconcilable conflict between the interests of
the variable annuity contract owners and the variable life insurance policy
owners of the Company and/or affiliated companies ("contract owners")
investing in the Trust. The Board shall have the sole authority to
determine if a material irreconcilable conflict exists, and such
determination shall be binding on the Company only if approved in the form
of a resolution by a majority of the Board, or a majority of the
disinterested trustees of the Board. The Board will give prompt notice of
any such determination to the Company.
7.2. The Company agrees that it will be responsible for assisting the Board
in carrying out its responsibilities under the conditions set forth in the
Trust's exemptive application pursuant to which the SEC has granted the
Mixed and Shared Funding Exemptive Order by providing the Board, as it may
reasonably request, with all information necessary for the Board to
consider any issues raised and agrees that it will be responsible for
promptly reporting any potential or existing conflicts of which it is aware
to the Board including, but not limited to, an obligation by the Company to
inform the Board whenever contract owner voting instructions are
disregarded. The Company also agrees that, if a material irreconcilable
conflict arises, it will at its own cost remedy such conflict up to and
including (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 to a vote of all affected contract
owners whether to
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withdraw assets from the Trust or any Portfolio and reinvesting such assets
in a different investment medium and, as appropriate, segregating the
assets attributable to any appropriate group of contract owners that votes
in favor of such segregation, or offering to any of the affected contract
owners the option of segregating the assets attributable to their contracts
or policies, and (b) establishing a new registered management investment
company and segregating the assets underlying the Policies, unless a
majority of Policy owners materially adversely affected by the conflict
have voted to decline the offer to establish a new registered management
investment company.
7.3. A majority of the disinterested trustees of the Board shall determine
whether any proposed action by the Company adequately remedies any material
irreconcilable conflict. In the event that the Board determines that any
proposed action does not adequately remedy any material irreconcilable
conflict, the Company will withdraw from investment in the Trust each of
the Accounts designated by the disinterested trustees 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 to
remedy any such material irreconcilable conflict as determined by a
majority of the disinterested trustees of the Board.
7.4. 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 Mixed and Shared Funding Exemptive Order)
on terms and conditions materially different from those contained in the
Mixed and Shared Funding Exemptive Order, then (a) the Trust and/or the
Participating Insurance Companies, as appropriate, shall take such steps as
may be necessary to comply with Rule 6e-2 and 6e-3(T), as amended, and Rule
6e-3, as adopted, to the extent such rules are applicable; and (b) Sections
3.5, 3.6, 7.1, 7.2, 7.3 and 7.4 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
The Company agrees to indemnify and hold harmless the Trust, MFS, any
affiliates of MFS, and each of their respective directors/trustees,
officers and each person, if any, who controls the Trust or MFS within the
meaning of Section 15 of the 1933 Act, and any agents or employees of the
foregoing (each an "Indemnified Party," or 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 expenses (including reasonable counsel
fees) to which any Indemnified Party 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 Shares or the
Policies 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, prospectus or statement of additional
information for the Policies or contained in the Policies or
sales
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literature or other promotional material for the Policies
(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 reasonable
reliance upon and in conformity with information furnished to the
Company or its designee by or on behalf of the Trust or MFS for
use in the registration statement, prospectus or statement of
additional information for the Policies or in the Policies or
sales literature or other promotional material (or any amendment
or supplement) or otherwise for use in connection with the sale
of the Policies or Shares; or
(b) arise out of or as a result of statements or representations
(other than statements or representations contained in the
registration statement, prospectus, statement of additional
information or sales literature or other promotional material of
the Trust not supplied by the Company or its designee, or persons
under its control and on which the Company has reasonably relied)
or wrongful conduct of the Company or persons under its control,
with respect to the sale or distribution of the Policies or
Shares; or
(c) arise out of any untrue statement or alleged untrue statement of
a material fact contained in the registration statement,
prospectus, statement of additional information, or sales
literature or other promotional literature of the 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 statement or statements
therein not misleading, if such statement or omission was made in
reliance upon information furnished to the Trust by or on behalf
of the Company; or
(d) 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; or
(e) arise as a result of any failure by the Company to provide the
services and furnish the materials under the terms of this
Agreement;
as limited by and in accordance with the provisions of this Article VIII.
8.2. INDEMNIFICATION BY THE TRUST
The Trust 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, and
any agents or employees of the foregoing (each an "Indemnified Party," or
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 Trust) or expenses
(including reasonable counsel fees) to which any Indemnified Party may
become subject under any statute, at common law or otherwise, insofar as
such losses, claims,
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damages, liabilities or expenses (or actions in respect thereof) or
settlements are related to the sale or acquisition of the Shares or the
Policies 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, prospectus, statement of additional
information or sales literature or other promotional material of
the 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 statement 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 reasonable
reliance upon and in conformity with information furnished to
the Trust, MFS, the Underwriter or their respective designees by
or on behalf of the Company for use in the registration
statement, prospectus or statement of additional information for
the Trust or in sales literature or other promotional material
for the Trust (or any amendment or supplement) or otherwise for
use in connection with the sale of the Policies or Shares; or
(b) arise out of or as a result of statements or representations
(other than statements or representations contained in the
registration statement, prospectus, statement of additional
information or sales literature or other promotional material for
the Policies not supplied by the Trust, MFS, the Underwriter or
any of their respective designees or persons under their
respective control and on which any such entity has reasonably
relied) or wrongful conduct of the Trust or persons under its
control, with respect to the sale or distribution of the Policies
or Shares; or
(c) arise out of any untrue statement or alleged untrue statement of
a material fact contained in the registration statement,
prospectus, statement of additional information, or sales
literature or other promotional literature of the Accounts or
relating to the Policies, 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 Trust, MFS or the
Underwriter; or
(d) arise out of or result from any material breach of any
representation and/or warranty made by the Trust in this
Agreement (including a failure, whether unintentional or in good
faith or otherwise, to comply with the diversification
requirements specified in Article VI of this Agreement) or arise
out of or result from any other material breach of this Agreement
by the Trust; or
(e) arise out of or result from the materially incorrect or untimely
calculation or reporting of the daily net asset value per share
or dividend or capital gain distribution rate; or
(f) arise as a result of any failure by the Trust to provide the
services and furnish the materials under the terms of the
Agreement;
as limited by and in accordance with the provisions of this Article VIII.
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8.3. In no event shall the Trust be liable under the indemnification
provisions contained in this Agreement to any individual or entity,
including without limitation, the Company, or any Participating Insurance
Company or any Policy holder, with respect to any losses, claims, damages,
liabilities or expenses that arise out of or result from (i) a breach of
any representation, warranty, and/or covenant made by the Company hereunder
or by any Participating Insurance Company under an agreement containing
substantially similar representations, warranties and covenants; (ii) the
failure by the Company or any Participating Insurance Company to maintain
its segregated asset account (which invests in any Portfolio) as a legally
and validly established segregated asset account under applicable state law
and as a duly registered unit investment trust under the provisions of the
1940 Act (unless exempt therefrom); or (iii) the failure by the Company or
any Participating Insurance Company to maintain its variable annuity and/or
variable life insurance contracts (with respect to which any Portfolio
serves as an underlying funding vehicle) as life insurance, endowment or
annuity contracts under applicable provisions of the Code.
8.4. Neither the Company nor the Trust shall be liable under the
indemnification provisions contained in this Agreement with respect to any
losses, claims, damages, liabilities or expenses to which an Indemnified
Party would otherwise be subject by reason of such Indemnified Party's
willful misfeasance, willful misconduct, 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.
8.5. Promptly after receipt by an Indemnified Party under this Section 8.5.
of notice of commencement of any action, such Indemnified Party will, if a
claim in respect thereof is to be made against the indemnifying party under
this section, notify the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve it
from any liability which it may have to any Indemnified Party otherwise
than under this section. 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 satisfactory to such Indemnified Party. After notice
from the indemnifying party of its intention to assume the defense of an
action, the Indemnified Party shall bear the expenses of any additional
counsel obtained by it, and the indemnifying party shall not be liable to
such Indemnified Party under this section for any legal or other expenses
subsequently incurred by such Indemnified Party in connection with the
defense thereof other than reasonable costs of investigation.
8.6. Each of the parties agrees promptly to notify the other parties of the
commencement of any litigation or proceeding against it or any of its
respective officers, directors, trustees, employees or 1933 Act control
persons in connection with the Agreement, the issuance or sale of the
Policies, the operation of the Accounts, or the sale or acquisition of
Shares.
8.7. A successor by law of the parties to this Agreement shall be entitled
to the benefits of the indemnification contained in this Article VIII. The
indemnification provisions contained in this Article VIII shall survive any
termination of this Agreement.
ARTICLE IX. APPLICABLE LAW
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9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of The Commonwealth of
Massachusetts.
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 and the terms hereof shall be interpreted and construed in
accordance therewith.
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ARTICLE X. NOTICE OF FORMAL PROCEEDINGS
The Trust, MFS, and the Company agree that each such party shall promptly
notify the other parties to this Agreement, in writing, of the institution of
any formal proceedings brought against such party or its designees by the NASD,
the SEC, or any insurance department or any other regulatory body regarding such
party's duties under this Agreement or related to the sale of the Policies, the
operation of the Accounts, or the purchase of the Shares.
ARTICLE XI. TERMINATION
11.1. This Agreement shall terminate with respect to the Accounts, or one,
some, or all Portfolios:
(a) at the option of any party upon six (6) months' advance written
notice to the other parties; or
(b) at the option of the Company to the extent that the Shares of
Portfolios are not reasonably available to meet the
requirements of the Policies or are not "appropriate funding
vehicles" for the Policies, as reasonably determined by the
Company. Without limiting the generality of the foregoing, the
Shares of a Portfolio would not be "appropriate funding
vehicles" if, for example, such Shares did not meet the
diversification or other requirements referred to in Article VI
hereof; or if the Company would be permitted to disregard
Policy owner voting instructions pursuant to Rule 6e-2 or 6e-3
(T) under the 1940 Act. Prompt notice of the election to
terminate for such cause and an explanation of such cause shall
be furnished to the Trust by the Company; or
(c) at the option of the Trust or MFS upon institution of formal
proceedings against the Company by the NASD, the SEC, or any
insurance department or any other regulatory body regarding the
Company's duties under this Agreement or related to the sale of
the Policies, the operation of the Accounts, or the purchase of
the Shares; or
(d) at the option of the Company upon institution of formal
proceedings against the Trust by the NASD, the SEC, or any
state securities or insurance department or any other
regulatory body regarding the Trust's or MFS' duties under this
Agreement or related to the sale of the Shares; or
(e) at the option of the Company, the Trust or MFS upon receipt of
any necessary regulatory approvals and/or the vote of the
Policy owners having an interest in the Accounts (or any
subaccounts) to substitute the shares of another investment
company for the corresponding Portfolio Shares in accordance
with the terms of the Policies for which those Portfolio
Shares had been selected to serve as the underlying investment
media. The Company will give thirty (30) days' prior written
notice to the Trust of the Date of any proposed vote or other
action taken to replace the Shares; or
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(f) termination by either the Trust or MFS by written notice to the
Company, if either one or both of the Trust or MFS
respectively, shall determine, in their sole judgment exercised
in good faith, that the Company has suffered a material adverse
change in its business, operations, financial condition, or
prospects since the date of this Agreement or is the subject of
material adverse publicity; or
(g) termination by the Company by written notice to the Trust and
MFS, if the Company shall determine, in its sole judgment
exercised in good faith, that the Trust or MFS 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
(h) at the option of any party to this Agreement, upon another
party's material breach of any provision of this Agreement; or
(i) upon assignment of this Agreement, unless made with the written
consent of the parties hereto.
11.2. The notice shall specify the Portfolio or Portfolios, Policies and,
if applicable, the Accounts as to which the Agreement is to be terminated.
11.3. It is understood and agreed that the right of any party hereto to
terminate this Agreement pursuant to Section 11.1(a) may be exercised for
cause or for no cause.
11.4. Except as necessary to implement Policy owner initiated transactions,
or as required by state insurance laws or regulations, the Company shall
not redeem the Shares attributable to the Policies (as opposed to the
Shares attributable to the Company's assets held in the Accounts), and the
Company shall not prevent Policy owners from allocating payments to a
Portfolio that was otherwise available under the Policies, until thirty
(30) days after the Company shall have notified the Trust of its intention
to do so.
11.5. Notwithstanding any termination of this Agreement, the Trust and MFS
shall, at the option of the Company, continue to make available additional
shares of the Portfolios pursuant to the terms and conditions of this
Agreement, for all Policies in effect on the effective date of termination
of this Agreement (the "Existing Policies"), except as otherwise provided
under Article VII of this Agreement. Specifically, without limitation, the
owners of the Existing Policies shall be permitted to transfer or
reallocate investment under the Policies, redeem investments in any
Portfolio and/or invest in the Trust upon the making of additional purchase
payments under the Existing Policies.
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ARTICLE XII. NOTICES
Any notice shall be sufficiently given when sent by registered or certified
mail, overnight courier or facsimile 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:
MFS VARIABLE INSURANCE TRUST
500 Boylston Street
Boston, Massachusetts 02116
Facsimile No.: (617) 954-6624
Attn: Stephen E. Cavan, Secretary
If to the Company:
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
515 W. Market Street, 8th Floor
Louisville, Kentucky 40202
Facsimile No.: (502) 582-7903
Attn: Kevin L. Howard, Senior Vice President and Counsel
If to MFS:
MASSACHUSETTS FINANCIAL SERVICES COMPANY
500 Boylston Street
Boston, Massachusetts 02116
Facsimile No.: (617) 954-6624
Attn: Stephen E. Cavan, General Counsel
ARTICLE XIII. MISCELLANEOUS
13.1. Subject to the requirement of legal process and regulatory authority,
each party hereto shall treat as confidential the names and addresses of
the owners of the Policies and all information reasonably identified as
confidential in writing by any other party hereto and, except as permitted
by this Agreement or as otherwise required by applicable law or regulation,
shall not disclose, disseminate or utilize such names and addresses and
other confidential information without the express written consent of the
affected party until such time as it may come into the public domain.
13.2. 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.
13.3. This Agreement may be executed simultaneously in one or more
counterparts, each of which taken together shall constitute one and the
same instrument.
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13.4. 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.
13.5. The Schedule attached hereto, as modified from time to time, is
incorporated herein by reference and is part of this Agreement.
13.6. Each party hereto shall cooperate with each other party in connection
with inquiries by appropriate governmental authorities (including without
limitation the SEC, the NASD, and state insurance regulators) relating to
this Agreement or the transactions contemplated hereby.
13.7. 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.
13.8. A copy of the Trust's Declaration of Trust is on file with the
Secretary of State of The Commonwealth of Massachusetts. The Company
acknowledges that the obligations of or arising out of this instrument are
not binding upon any of the Trust's trustees, officers, employees, agents
or shareholders individually, but are binding solely upon the assets and
property of the Trust in accordance with its proportionate interest
hereunder. The Company further acknowledges that the assets and liabilities
of each Portfolio are separate and distinct and that the obligations of or
arising out of this instrument are binding solely upon the assets or
property of the Portfolio on whose behalf the Trust has executed this
instrument. The Company also agrees that the obligations of each Portfolio
hereunder shall be several and not joint, in accordance with its
proportionate interest hereunder, and the Company agrees not to proceed
against any Portfolio for the obligations of another Portfolio.
-18-
<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.
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
By its authorized officer,
By:
----------------------------------
Title:
-------------------------------
MFS VARIABLE INSURANCE TRUST,
ON BEHALF OF THE PORTFOLIOS
By its authorized officer and not individually,
By:
----------------------------------
James R. Bordewick, Jr.
Assistant Secretary
MASSACHUSETTS FINANCIAL SERVICES COMPANY
By its authorized officer,
By:
----------------------------------
Jeffrey L. Shames
Chairman and Chief Executive Officer
-19-
<PAGE>
As of ____________________
SCHEDULE A
ACCOUNTS, POLICIES AND PORTFOLIOS
SUBJECT TO THE PARTICIPATION AGREEMENT
<TABLE>
<CAPTION>
- --------------------------------------- -------------------------------- ---------------------------- -----------------------------
NAME OF SEPARATE
ACCOUNT AND DATE POLICIES FUNDED SHARE CLASS PORTFOLIOS
ESTABLISHED BY BY SEPARATE ACCOUNT (INITIAL OR SERVICE CLASS) APPLICABLE TO POLICIES
BOARD OF DIRECTORS
- --------------------------------------- -------------------------------- ---------------------------- -----------------------------
<S> <C> <C> <C>
SERVICE CLASS
- --------------------------------------- -------------------------------- ---------------------------- -----------------------------
</TABLE>
-20-
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Financial Statements"
in Post- Effective Amendment No. 12 to the Registration Statement (Form N-4 No.
33-51126) and Amendment No. 13 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 March 31, 2000,
with respect to the statutory basis financial statements of National Integrity
Life Insurance Company, and (b) dated April 12, 2000, 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 1999 filed
with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Louisville, Kentucky
April 24, 2000
