<PAGE>
- -------------------------------------------------------------------------------
SUPPLEMENT DATED OCTOBER 1, 1997
TO PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 1, 1997
FOR
PINNACLE(VERSION II)
FLEXIBLE PREMIUM VARIABLE ANNUITY
ISSUED BY INTEGRITY LIFE INSURANCE COMPANY
AND
FUNDED THROUGH ITS SEPARATE ACCOUNT II
THIS SUPPLEMENT MODIFIES THE
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION
AND SHOULD BE READ AND RETAINED
- -------------------------------------------------------------------------------
<PAGE>
THE SECOND PARAGRAPH ON THE COVER PAGE OF THE PROSPECTUS IS REPLACED BY THE
FOLLOWING:
Contributions to the Variable Account Options are invested in shares of
corresponding portfolios of the following list of Funds or Insurance Trust
Funds (FUNDS): BT Insurance Funds Trust (BT FUNDS TRUST); Variable Insurance
Products Fund (VIP), Variable Insurance Products Fund II (VIP II), and
Variable Insurance Products Fund III (VIP III), part of the Fidelity
Investments-Registered Trademark- group of companies (collectively,
FIDELITY'S VIP FUNDS); The Legends Fund, Inc. (LEGENDS FUND); Janus Aspen
Series; JPM Series Trust II (JPM SERIES); and Morgan Stanley Universal Funds,
Inc. (MORGAN STANLEY UNIVERSAL FUNDS). The values allocated to the Options
reflect the investment performance of the Funds' Portfolios. Bankers Trust
Global Investment Management, a unit of Bankers Trust Company, is the
investment manager of the BT Funds Trust. Fidelity Management and Research
Company serves as investment adviser to Fidelity's VIP Funds. ARM Capital
Advisors, Inc., a member of the ARM Financial Group, is the investment
adviser of the Legends Fund. Janus Capital Corporation serves as investment
adviser to the Janus Aspen Series. J.P. Morgan Investment Management Inc. is
the investment adviser to the JPM Series. Morgan Stanley Asset Management
Inc. serves as investment adviser to the Morgan Stanley Universal Funds
except for Morgan Stanley High Yield Portfolio, for which Miller Anderson &
Sherrerd, LLP serves as investment adviser. The prospectuses for the Funds
describe the investment objectives, policies and risks of each of the Funds'
portfolios. There are 27 Variable Account Options available:
BT FUNDS TRUST
EAFE-Registered Trademark- Equity Index Fund
Equity 500 Index Fund
Small Cap Index Fund
FIDELITY'S VIP FUNDS
VIP Equity-Income Portfolio
VIP II Contrafund Portfolio
VIP III Growth & Income Portfolio
VIP III Growth Opportunities Portfolio
LEGENDS FUND
ARM Capital Advisors Money Market Portfolio
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Morgan Stanley Asian Growth Portfolio
Morgan Stanley Worldwide High Income Portfolio
Nicholas-Applegate Balanced Portfolio
Pinnacle Fixed Income Portfolio
Renaissance Balanced Portfolio
Zweig Asset Allocation Portfolio
Zweig Equity (Small Cap) Portfolio
Zurich Kemper Value Portfolio
JANUS ASPEN SERIES
Janus Capital Appreciation Portfolio
Janus Balanced Portfolio
Janus Worldwide Growth Portfolio
Janus Money Market Portfolio
JPM SERIES
JPM International Equity Portfolio
JPM Bond Portfolio
MORGAN STANLEY UNIVERSAL FUNDS
Morgan Stanley Asian Equity Portfolio
Morgan Stanley Emerging Markets Debt Portfolio
Morgan Stanley High Yield Portfolio
Morgan Stanley U.S. Real Estate Portfolio
THERE CAN BE NO ASSURANCE THAT THE ARM CAPITAL ADVISORS MONEY MARKET AND JANUS
MONEY MARKET PORTFOLIOS WILL ACHIEVE THEIR INVESTMENT OBJECTIVES OR BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
2
<PAGE>
- -------------------------------------------------------------------------------
THE THIRD PARAGRAPH UNDER "CHARGES AND FEES" IN PART 1 IS REPLACED BY THE
FOLLOWING:
Investment management fees and other expenses are deducted from amounts
invested by the Separate Account in the Funds. For providing investment
management services to the BT Funds Trust, Bankers Trust Company (BANKERS
TRUST) receives fees from the EAFE-Registered Trademark- Equity Index Fund,
Equity 500 Index Fund, and the Small Cap Index Fund (each a BT FUND and
together BT FUNDS) based on the net assets of each Fund after waivers at a
rate of .34% for the EAFE-Registered Trademark- Equity Index Fund, .11% for
the Equity 500 Index Fund, and .22% for the Small Cap Index Fund.
For providing investment management services to the Portfolios of the Legends
Fund, ARM Capital Advisors, Inc. (ARM CAPITAL ADVISORS), the investment
manager of the Legends Fund, receives fees from the Portfolios ranging from
an annual rate of .50% to 1.05% of the average net assets of the Portfolio.
For providing investment management services to the Portfolios of Fidelity's
VIP Funds, Fidelity Management and Research Company (FMR) receives fees from
the Portfolios based on the average net assets of each Portfolio. The highest
annual rate at which any of the Portfolios of Fidelity's VIP Funds paid
advisory fees in 1996 was .61% of average net assets.
For providing investment management services to the Portfolios of the Janus
Aspen Series, Janus Capital Corporation (JANUS) receives fees from the
Portfolios based on the net assets of each Portfolio. For the fiscal year
ended December 31, 1996, the highest annual rate at which any of the
Portfolios paid advisory fees was .79% of average net assets. Please see
Table of Annual Fees and Expenses in this Supplement for rates associated
with specific Portfolios.
For providing investment management services to the JPM Series, J.P. Morgan
Investment Management Inc. (JPMIM) receives fees based on the net assets of
the Portfolios at a rate of .30% from the JPM Bond Portfolio and .60% from
the JPM International Equity Portfolio.
For providing investment management services to the Morgan Stanley Universal
Funds, Morgan Stanley Asset Management Inc. (MSAM) receives fees from the
Portfolios at an annual rate of up to .80% for the Morgan Stanley Asian
Equity, Morgan Stanley Emerging Markets Debt, and Morgan Stanley U.S. Real
Estate Portfolios. Miller Anderson & Sherrerd, LLP (MAS) serves as
investment adviser to the Morgan Stanley High Yield Portfolio and receives
fees at an annual rate of up to .50% of the Portfolio's average net assets.
3
<PAGE>
THE TABLE OF ANNUAL FEES AND EXPENSES IN PART 1 IS AMENDED TO INCLUDE FEES
AND EXPENSES OF THE FOLLOWING PORTFOLIOS (REFER TO THE MAY 1, 1997,
PROSPECTUS FOR FEES AND EXPENSES OF ALL OF THE LEGENDS FUND PORTFOLIOS):
Table of Annual Fees and Expenses
Contract Owner Transaction Expenses
- -----------------------------------
Sales Load on Purchases. . . . . . . . . . . . . . . $0
Deferred Sales Load (1). . . . . . . . . . . 7% Maximum
Exchange Fee (2) . . . . . . . . . . . . . . . . . . $0
Annual Administrative Charge (3) . . . . . . . . . $30
Separate Account Annual Expenses (as a
percentage of average account value) (4)
- ----------------------------------------
Mortality and Expense Risk Fees. . . . . . . . . .1.20%
Administrative Expenses. . . . . . . . . . . . . . .15%
-----
Total Separate Account Annual Expenses . . . . . .1.35%
-----
-----
Fund Annual Expenses After Waivers/Reimbursements
(as a percentage of average net assets)
- ---------------------------------------
<TABLE>
<CAPTION>
Management Other Total Annual
Portfolio Fees(5) Expenses Expenses
- --------- -------- -------- --------
<S> <C> <C> <C>
EAFE-Registered Trademark- Equity Index. . 0.34%(6)(13) 0.31%(6)(13) 0.65%(6)(13)
Equity 500 Index . . . . . . . . . . . . . 0.11%(6)(13) 0.19%(6)(13) 0.30%(6)(13)
Small Cap Index. . . . . . . . . . . . . . 0.22%(6)(13) 0.23%(6)(13) 0.45%(6)(13)
VIP Equity-Income. . . . . . . . . . . . . 0.51%(6) 0.07% 0.58%(6)
VIP II Contrafund. . . . . . . . . . . . . 0.61%(6) 0.13% 0.74%(7)
VIP III Growth & Income. . . . . . . . . . 0.50%(6) 0.20%(6) 0.70%(6)(7)(8)
VIP III Growth Opportunities . . . . . . . 0.61% 0.16% 0.77%(7)
Janus Capital Appreciation . . . . . . . . 0.75%(9) 0.30%(9) 1.05%(9)
Janus Balanced . . . . . . . . . . . . . . 0.79%(10) 0.15%(10) 0.94%(10)
Janus Worldwide Growth . . . . . . . . . . 0.66%(10) 0.14%(10) 0.80%(10)
Janus Money Market . . . . . . . . . . . . 0.00%(10) 0.50%(10) 0.50%(10)
JPM International Equity . . . . . . . . . 0.60% 0.60% 1.20%(11)
JPM Bond . . . . . . . . . . . . . . . . . 0.30% 0.45% 0.75%(11)
Morgan Stanley Asian Equity. . . . . . . . 0.80%(12) 0.40%(12) 1.20%(12)
Morgan Stanley Emerging Markets Debt . . . 0.80%(12) 0.50%(12) 1.30%(12)
Morgan Stanley High Yield. . . . . . . . . 0.50%(12) 0.30%(12) 0.80%(12)
Morgan Stanley U.S. Real Estate. . . . . . 0.80%(12) 0.30%(12) 1.10%(12)
</TABLE>
- -------------------------
(1) See "Deductions and Charges - Contingent Withdrawal Charge" in Part 4.
You may make a partial withdrawal of up to 10% of the Account Value in any
contract year or the investment gain under the contract during the previous
contract year, whichever is greater, less withdrawals during the current
contract year, without assessment of any withdrawal charge.
(2) After the first twelve transfers during a contract year, Integrity has
the right to impose a transfer charge of $20 per transfer. This charge would
not apply to transfers made for dollar cost averaging or individual asset
rebalancing. See "Deductions and Charges - Transfer Charge" in Part 4.
(3) The annual administrative charge is $30. This charge applies only if the
Account Value is less than $50,000 at the end of any contract year prior to
your Retirement Date. See "Deductions and Charges - Annual Administrative
Charge" in Part 4.
4
<PAGE>
(4) See "Deductions and Charges - Separate Account Charges" in Part 4. If
your contract is issued on or after January 1, 1995, Mortality and Expense
Risk Fees will reduce to 0.95% so that Total Separate Account Annual Expenses
will then be 1.10% after your contract has been in effect for six years.
(5) The stated management fee is the highest applicable rate, or, with
respect to the Janus Portfolios for the year ended December 31, 1996. The
fee for certain portfolios may be reduced as assets increase. See Part 3 -
Your Investment Options of this Supplement for the applicable fee rates for
particular portfolios.
(6) Estimated
(7) A portion of the brokerage commissions that certain funds pay was used
to reduce the Funds' expenses. In addition, certain Funds have entered into
arrangements with their custodian and transfer agent whereby interest earned
on uninvested cash balances was used to reduce custodian and transfer agent
expenses. Including these reductions, the total operating expenses presented
in the table would have been 0.56% for VIP Equity-Income Portfolio, 0.71% for
VIP II Contrafund Portfolio, and 0.76% for VIP III Growth Opportunities
Portfolio.
(8) Annualized
(9) The fees and expenses for the Janus Capital Appreciation Portfolio are
based on the estimated gross expenses before estimated expense offset
arrangements that the Institutional Shares of the Portfolio expect to incur
in their initial fiscal year, net of fee waivers or reductions or waivers
from Janus. Fee reductions reduce the management fee to the level of the
corresponding Janus retail fund. Other waivers, if applicable, are first
applied against the management fee and then against other expenses. Without
such waivers or reductions, the Management Fee, Other Expenses, and Total
Annual Expenses are estimated to be 1.00%, .30% and 1.30%, respectively.
Janus may modify or terminate the waivers or reductions at any time upon at
least 90 days' notice to the Trustees.
(10) The fees and expenses in the table above are based on gross expenses
before expense offset arrangements for the fiscal year ended December 31,
1996. Fee reductions for the Janus Balanced, Janus Worldwide Growth, and
Janus Money Market Portfolios reduce the management fee to the level of the
corresponding Janus retail fund. Other waivers, if applicable, are first
applied against the management fee and then against other expenses. Without
such waivers or reductions, the Management Fee, Other Expenses, and Total
Annual Expenses would have been .77%, .14%, and .91% for Worldwide Growth
Portfolio, .92%, .15% and 1.07% for Balanced Portfolio, and .25%, .53% and
.78% for the Money Market Portfolio. Janus may modify or terminate the
waivers or reductions at any time upon at least 90 days' notice to the
Trustees.
(11) The information in the foregoing table has been restated to reflect an
agreement by Morgan Guaranty Trust Company of New York, an affiliate of
JPMIM, to reimburse the Trust to the extent certain expenses exceed in any
fiscal year 1.20% and .75% of the average daily net assets of JPM
International Equity Portfolio and JPM Bond Portfolio, respectively.
(12) The Advisers have voluntarily waived receipt of their management fees
and agreed to reimburse the Portfolios, if necessary, if such fees would
cause the total annual operating expenses of the Portfolios to exceed the
respective percentage of average daily net assets set forth in the schedule
table for the Morgan Stanley Universal Funds in Part 3 - Your Investment
Options of this supplement.
(13) The fees and expenses in the table show the costs that an investor will
bear directly or indirectly as a shareholder of the Fund. Bankers Trust has
voluntarily agreed to waive a portion of its management fee with respect to
each Fund. Without such waiver, each Fund's management fee would be equal to
the following: EAFE Equity Index - 0.45%; Equity 500 Index - 0.20% and Small
Cap Index - 0.35%. The expense table reflects a voluntary undertaking by
Bankers Trust to waive or reimburse expenses such that the total annual
expenses of the Fund for the fiscal year will not exceed the following
percentages of the Funds' average daily net assets; EAFE Equity Index -
0.65%; Equity 500 Index - 0.30% and Small Cap Index - 0.45%. In the absence
of this undertaking, "Total Annual Expenses" would be the following: EAFE
Equity Index - 0.85%; Equity 500 Index - 0.54% and Small Cap Index - 0.73%.
The example should not be considered a representation of past or future
expenses and actual expenses may be greater or less than those shown.
5
<PAGE>
EXAMPLES
The examples below show the expenses that would be borne by the Annuitant per
$1,000 investment, assuming a $60,000 average contract value and a 5% annual
rate of return on assets.
EXPENSES PER $1,000 INVESTMENT IF YOU SURRENDER YOUR CONTRACT AT THE END OF THE
APPLICABLE PERIOD:
<TABLE>
<CAPTION>
Portfolio 1 year 3 years 5 years 10 years
- --------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
EAFE-Registered Trademark- Equity Index. . . $90.99 $114.75 $140.98 $238.35
Equity 500 Index . . . . . . . . . . . . . . $87.41 $103.87 $122.66 $200.80
Small Cap Index. . . . . . . . . . . . . . . $88.94 $108.54 $130.54 $217.06
VIP Equity-Income. . . . . . . . . . . . . . $90.28 $112.58 $137.34 $230.95
VIP II Contrafund . . . . . . . . . . . . . $91.92 $117.53 $145.65 $247.79
VIP III Growth & Income . . . . . . . . . . $91.51 $116.30 $143.57 $243.61
VIP III Growth Opportunities. . . . . . . . $92.22 $118.46 $147.20 $250.92
Janus Capital Appreciation . . . . . . . . . $95.09 $127.08 $161.59 $279.66
Janus Balanced . . . . . . . . . . . . . . . $93.97 $123.70 $155.95 $268.47
Janus Worldwide Growth . . . . . . . . . . . $92.53 $119.39 $148.75 $254.04
Janus Money Market . . . . . . . . . . . . . $89.46 $110.10 $133.16 $222.42
JPM International Equity . . . . . . . . . . $96.63 $131.68 $169.22 $294.73
JPM Bond . . . . . . . . . . . . . . . . . . $92.02 $117.84 $146.16 $248.84
Morgan Stanley Asian Equity. . . . . . . . . $96.63 $131.68 $169.22 $294.73
Morgan Stanley Emerging Markets Debt . . . . $97.65 $134.74 $174.29 $304.64
Morgan Stanley High Yield. . . . . . . . . . $92.53 $119.39 $148.75 $254.04
Morgan Stanley U.S. Real Estate. . . . . . . $95.61 $128.62 $164.14 $284.71
</TABLE>
EXPENSES PER $1,000 INVESTMENT IF YOU ELECT THE NORMAL FORM OF ANNUITY OR DO
NOT SURRENDER YOUR CONTRACT AT THE END OF THE APPLICABLE PERIOD:
<TABLE>
<CAPTION>
Portfolio 1 year 3 years 5 years 10 years
- --------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
EAFE-Registered Trademark- Equity Index. . . $20.99 $64.75 $110.98 $238.35
Equity 500 Index . . . . . . . . . . . . . . $17.41 $53.87 $ 92.66 $200.80
Small Cap Index. . . . . . . . . . . . . . . $18.94 $58.54 $100.54 $217.06
VIP Equity-Income. . . . . . . . . . . . . . $20.28 $62.58 $107.34 $230.95
VIP II Contrafund . . . . . . . . . . . . . $21.92 $67.53 $115.65 $247.79
VIP III Growth & Income . . . . . . . . . . $21.51 $66.30 $113.57 $243.61
VIP III Growth Opportunities. . . . . . . . $22.22 $68.46 $117.20 $250.92
Janus Capital Appreciation . . . . . . . . . $25.09 $77.08 $131.59 $279.66
Janus Balanced . . . . . . . . . . . . . . . $23.97 $73.70 $125.95 $268.47
Janus Worldwide Growth . . . . . . . . . . . $22.53 $69.39 $118.75 $254.04
Janus Money Market . . . . . . . . . . . . . $19.46 $60.10 $103.16 $222.42
JPM International Equity . . . . . . . . . . $26.63 $81.68 $139.22 $294.73
JPM Bond . . . . . . . . . . . . . . . . . . $22.02 $67.84 $116.16 $248.84
Morgan Stanley Asian Equity. . . . . . . . . $26.63 $81.68 $139.22 $294.73
Morgan Stanley Emerging Markets Debt . . . . $27.65 $84.74 $144.29 $304.64
Morgan Stanley High Yield. . . . . . . . . . $22.53 $69.39 $118.75 $254.04
Morgan Stanley U.S. Real Estate. . . . . . . $25.61 $78.62 $134.14 $284.71
</TABLE>
6
<PAGE>
These examples assume the current level of fixed charges that are borne by
the Separate Account and the investment management fees and other expenses of
the Funds as they were for their most recent fiscal years ended. ACTUAL FUND
EXPENSES MAY BE GREATER OR LESS THAN THOSE ON WHICH THESE EXAMPLES WERE
BASED. The annual rate of return assumed in the examples is not an estimate
or guarantee of future investment performance. The table also assumes an
estimated $60,000 average contract value, so that the administrative charge
per $1,000 of net asset value in the Separate Account is $0.50. Such per
$1,000 charge would be higher for smaller Account Values and lower for higher
values.
The above table and examples are intended to assist your understanding of the
various costs and expenses that apply to your contract, directly or
indirectly. These tables reflect expenses of the Separate Account as well as
those of the Funds. Premium taxes upon annuitization also may be applicable.
FINANCIAL INFORMATION
The Inception Date for each of the new Variable Account Options is October 1,
1997. The unit value for each Variable Account Option at inception is
$10.00. The number of units outstanding at December 31, 1997, since inception
and the unit value at the beginning and end of each period for each Variable
Account Options will be disclosed in the May 1, 1998 prospectus.
- -------------------------------------------------------------------------------
THE FIFTH PARAGRAPH IN PART 3 - YOUR INVESTMENT OPTIONS THAT BEGINS "THE
LEGENDS FUND'S INVESTMENT MANAGER AND SUB-ADVISERS" IS REPLACED BY THE
FOLLOWING:
THE LEGENDS FUND'S INVESTMENT MANAGER AND SUB-ADVISERS. ARM Capital Advisors
became the investment adviser to the Legends Fund on February 1, 1996. ARM
Capital Advisors is a wholly owned subsidiary of ARM Financial Group, Inc.
(ARM), and is registered as an investment adviser under the Investment
Advisers Act of 1940. Its offices are located at 200 Park Avenue, 20th Floor,
New York, New York 10166. On May 21, 1997, ARM entered into a purchase
agreement pursuant to which ARM has agreed to transfer substantially all of
the assets and operations of ARM Capital Advisors to a newly formed
subsidiary, ARM Capital Advisors, LLC, and to sell an 80% interest in such
company to ARM Capital Advisors Holdings, LLC, an entity controlled by Emad
A. Zikry, the current President of ARM Capital Advisors. After consummation
of the pending sale, ARM Capital Advisors will be renamed Integrity Capital
Advisors, Inc., and will continue to provide investment management services
to the Legends Fund. The transaction is expected to close during the third
quarter of 1997.
- -------------------------------------------------------------------------------
PART 3 - YOUR INVESTMENT OPTIONS IS AMENDED TO INCLUDE FUND DESCRIPTIONS FOR
THE FOLLOWING PORTFOLIOS:
BT Insurance Funds Trust
BT Funds Trust is an open-end management investment company registered under
the 1940 Act. Each of the BT Funds is a separate "series" or portflio of the
Trust. The BT Funds Trust does not impose a sales charge or "load" for
buying and selling its shares. Shares of the BT Funds Trust are bought and
sold by the Separate Account at their respective net asset values.
THE BANKERS TRUST FUNDS' INVESTMENT MANAGER. Bankers Trust Global Investment
Management, a unit of Bankers Trust, serves as the investment manager to the
BT Funds Trust. Bankers Trust, a New York banking corporation with executive
offices at 130 Liberty Street (One Bankers Trust Plaza), New York, New York
10006, is a wholly owned subsidiary of Bankers Trust New York Corporation.
As of June 30, 1997, Bankers Trust New York Corporation was the seventh
largest bank holding company in the United States with total assets of
approximately $129 billion. Bankers Trust conducts a variety of general
banking and trust activities and is a major wholesaler supplier of financial
services to the international and domestic institutional markets, servicing
the needs of corporations, governments, financial institutions and private
clients through a global network of over 80 offices in more than 50 countries.
7
<PAGE>
As compensation for its services to the BT Funds, Bankers Trust receives a
fee from each BT Fund, accrued daily and paid monthly. The BT Funds are
subject to the following management fee schedule (after expenses):
Funds Management Fee
----- --------------
EAFE-Registered Trademark- Equity Index 0.34%
Equity 500 Index 0.11%
Small Cap Index 0.22%
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Set forth below is a summary of the
investment objectives of the BT Funds Trust. There can be no assurance that
these objectives will be achieved. YOU SHOULD READ THE BT FUNDS TRUST
PROSPECTUSES CAREFULLY BEFORE INVESTING.
EAFE-Registered Trademark- EQUITY INDEX FUND
The EAFE-Registered Trademark- Equity Index Fund seeks to replicate as
closely as possible (before the deduction of expenses) the total return of
the Morgan Stanley Capital International Europe, Australia, Far East (EAFE)
Index, a capitalization-weighted index containing approximately 1,100 equity
securities of companies located outside the United States. The BT Fund will
be invested primarily in equity securities of business enterprises organized
and domiciled outside of the United States or for which the principal trading
market is outside the United States. Statistical methods will be employed to
replicate the EAFE Index by buying most of the EAFE Index securities.
Securities purchased for the Portfolio will generally, but not necessarily,
be traded on a foreign securities exchange.
The Fund is not sponsored, endorsed, sold or promoted by Morgan Stanley.
Morgan Stanley makes no representation or warranty, express or implied, to
the owners of the Fund or any member of the public regarding the advisability
of investing in securities generally or in the Fund particularly or the
ability of the EAFE Index to track general stock market performance. Morgan
Stanley is the licenser of certain trademarks, service marks and trade names
of Morgan Stanley and of the EAFE Index which is determined, composed and
calculated by Morgan Stanley without regard to the issuer of the Fund or the
Fund itself. Morgan Stanley has no obligation to take the needs of the
issuer of the Fund or the owners of the Fund into consideration in
determining, composing or calculating the EAFE Index. Inclusion of a security
in the EAFE Index in no way implies an opinion by Morgan Stanley as to its
attractiveness as an investment. Morgan Stanley is not responsible for and
has not participated in the determination of the timing of, prices at, or
quantities of the Fund to be issued or in the determination or calculation of
the equation by which the Fund is redeemable for cash. Morgan Stanley has no
obligation or liability to owners of the Fund in connection with the
administration, marketing or trading of the Fund. The Fund is neither
sponsored by nor affiliated with Morgan Stanley.
Although Morgan Stanley shall obtain information for inclusion in or for use
in the calculation of the indices from sources which Morgan Stanley considers
reliable, Morgan Stanley does not guarantee the accuracy and/or the
completeness of the indices or any data included therein. Morgan Stanley
makes no warranty, express or implied, as to results to be obtained by
licensee, licensee's customers and counterparties, owners of the products, or
any other person or entity from the use of the indices or any data included
therein in connection with the rights licensed hereunder or for any other
use. Morgan Stanley makes no express or implied warranties, and hereby
expressly disclaims all warranties of merchantability or fitness for a
particular purpose with respect to the indices or any data included therein.
Without limiting any of the foregoing, in no event shall Morgan Stanley have
any liability for any direct, indirect, special, punitive, consequential or
any other damages (including lost profits) even if notified of the
possibility of such damages.
For more information about the performance of the EAFE Index, see the EAFE
Equity Index Fund's Prospectus and Statement of Additional Information.
EQUITY 500 INDEX FUND
The Equity 500 Index Fund seeks to replicate as closely as possible (before
the deduction of expenses) the total return of the Standard & Poor's 500
Composite Stock Price Index (the S&P 500), an index emphasizing
large-capitalization stocks. The BT Fund will include the common stock of
those companies included in the S&P 500, other than Bankers Trust New York
Corporation, selected on the basis of computer generated statistical data,
that are deemed representative of the industry diversification of the entire
S&P 500.
ABOUT THE S&P 500. The S&P 500 is a well-known stock market index that
includes common stocks of 500 companies from several industrial sectors
representing a significant portion of the market value of all common stocks
publicly traded in the United States, most of which are listed on the New
York Stock Exchange. Stocks in the S&P 500 are weighted according to their
market capitalization (i.e., the number of shares outstanding multiplied by
the stock's current price). Bankers Trust believes that the performance of
the S&P 500 is representative of the performance of publicly traded common
stocks in general. The composition of the S&P 500 is determined by S&P and is
based on such factors as the market capitalization and trading activity of
each stock and its adequacy as a representation of stocks in a particular
industry group, and may be changed from time to time.
The Fund is not sponsored, endorsed, sold or promoted by S&P. S&P makes no
representation or warranty, express or implied, to the shareholders of the
Fund or any member of the public regarding the advisability of investing in
securities generally or in the Fund particularly or the ability of the S&P
500 to track general stock market performance.
S&P does not guarantee the accuracy and/or the completeness of the S&P 500 or
any data included therein.
S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE RESULTS TO BE OBTAINED
BY THE FUND, OWNERS OF THE FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE
OF THE S&P 500 OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED
WARRANTIES AND HEREBY EXPRESSLY DISCLAIMS ALL SUCH WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO
THE S&P 500 OR ANY DATA INCLUDED THEREIN.
For more information about the performance of the S&P 500, see the Equity 500
Index Fund's Prospectus and Statement of Additional Information.
SMALL CAP INDEX FUND
The Small Cap Index Fund seeks to replicate as closely as possible (before
deduction of expenses) the total return of the Russell 2000 Small Stock Index
(the RUSSELL 2000), an index consisting of 2,000 small-capitalization common
stocks. The Fund will include the common stock of companies included in the
Russell 2000, on the basis of computer-generated statistical data, that are
deemed representative of the industry diversification of the entire Russell
2000.
The Fund is neither sponsored by nor affiliated with the Frank Russell
Company. Frank Russell's only relationship to the Fund is the licensing of
the use of the Russell 2000. Frank Russell Company is the owner of the
trademarks and copyrights relating to the Russell indices.
The Fund invests in a statistically selected sample of the 2,000 stocks
included in the Russell 2000. The stocks of the Russell 2000 to be included
in the Fund will be selected utilizing a statistical sampling technique known
as "optimization." This process selects stocks for the Fund so that various
industry weightings, market capitalizations and fundamental characteristics
(e.g., price-to-book, price-to-earnings and debt-to-asset ratios and dividend
yields) closely approximate those of the Russell 2000. For instance, if 10%
of the capitalization of the Russell 2000 consists of utility companies with
relatively small capitalizations, then the Fund is constructed so that
approximately 10% of the Fund's assets are invested in the stocks of utility
companies with relatively small capitalizations. The stocks held by the Fund
are weighted to make the Fund's aggregate investment characteristics similar
to those of the Russell 2000 as a whole.
For more information about the performance of the Russell 2000, see the Small
Cap Index Fund's Prospectus and Statement of Additional Information.
FIDELITY VARIABLE INSURANCE PRODUCTS FUNDS
Each of Fidelity's VIP Funds is an open-end diversified management investment
company registered under the 1940 Act. Such registration does not involve
supervision by the SEC of the investments or investment policies of
Fidelity's VIP Funds. Fidelity's VIP Funds are each a "series" type of
investment company with diversified portfolios. Fidelity's VIP Funds do not
impose a sales charge or "load" for buying and selling their shares. The
shares of the Portfolios of Fidelity's VIP Funds are bought and sold by the
Separate Account at their respective net asset values.
FIDELITY'S VIP FUNDS' INVESTMENT ADVISER. FMR, a registered investment
adviser under the Investment Advisers Act of 1940, serves as the investment
adviser to each Fund. FMR, whose principal address is 82 Devonshire Street,
Boston, Massachusetts, is a wholly owned subsidiary of FMR Corp. and is part
of Fidelity Investments-Registered Trademark-, one of the largest investment
management organizations in the United States. Fidelity
Investments-Registered Trademark-includes a number of different companies,
which provide a variety of financial services and products to individuals and
corporations.
FMR provides investment research and portfolio management services to mutual
funds and other clients. At April 30, 1997, FMR advised funds having more
than 29 million shareholder accounts with a total value of more than $432
billion. For certain of the
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<PAGE>
Portfolios, FMR has entered into sub-advisory agreements with affiliated
companies that are part of the Fidelity Investments-Registered
Trademark-organization. FMR, not the Portfolios, pays the sub-advisers for
their services to the Portfolios.
The Portfolios of Fidelity's VIP Funds pay monthly advisory fees to FMR. The
advisory fee payable by each of the Portfolios is composed of a group fee rate
and an individual fund fee rate. The group fee rate is based on the average
monthly net assets of all mutual funds advised by FMR. For the VIP Equity-Income
and VIP II Contrafund Portfolios, the group fee rate cannot rise above .52%.
The group fee rate drops as total assets under management increase.
Set forth in the table below is the individual fund fee rate for the
portfolios and their 1996 aggregate advisory rate, comprised of the
individual and group rates, as a percentage of average net assets:
1997
Portfolio Individual Rate Aggregate Rate
--------- --------------- --------------
VIP Equity-Income 0.20% 0.51%
VIP II Contrafund 0.30% 0.61%
VIP III Growth & Income 0.20% 0.50%
VIP III Growth Opportunities 0.30% 0.61%
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Set forth below is a summary of the
investment objectives of the Portfolios of Fidelity's VIP Funds. There can be
no assurance that these objectives will be achieved. YOU SHOULD READ
FIDELITY'S VIP FUNDS' PROSPECTUS CAREFULLY BEFORE INVESTING.
VIP EQUITY-INCOME PORTFOLIO
VIP Equity-Income Portfolio seeks reasonable income by investing primarily in
income producing equity securities, with the potential for capital
appreciation as a consideration. It normally invests at least 65% of its
assets in income-producing common or preferred stock and the remainder in
debt securities.
VIP II CONTRAFUND PORTFOLIO
VIP II Contrafund Portfolio is a growth fund which seeks to increase the
value of your investment over the long term by investing in equity securities
of companies that are undervalued or out of favor. This approach focuses on
companies that are currently out of public favor but show potential for
capital appreciation. VIP II Contrafund Portfolio invests primarily in common
stock and securities convertible into common stock, but it has the
flexibility to invest in any type of security that may produce capital
appreciation.
VIP III GROWTH & INCOME PORTFOLIO
VIP III Growth & Income Portfolio seeks long-term growth of capital with some
current income. It invests primarily in stocks of companies that offer
potential for growth in earnings while paying dividends, but offer the
potential for capital appreciation on future income. Investments may include
common and preferred stocks, convertible securities, fixed-income securities
and foreign securities.
VIP III GROWTH OPPORTUNITIES PORTFOLIO
VIP III Growth Opportunities Portfolio seeks to provide capital growth by
investing primarily in common stocks and securities convertible into common
stock. It has the flexibility to adjust its investment mix between growth,
cyclical and value stocks as market conditions change. The portfolio seeks
growth through either appreciation of the security itself or an increase in
the company's earnings or gross sales.
JANUS ASPEN SERIES
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Each of the Portfolios of the Janus Aspen Series (the JANUS TRUST) currently
offers two classes of shares. The Institutional Shares are sold under the
name "Janus Aspen Series." The Janus Trust is registered with the SEC as an
open-end management investment company. The Janus Trust sells and redeems
its Shares at net asset value without any sales charges, commissions or
redemption fees.
THE JANUS TRUST INVESTMENT ADVISER. Janus, a registered investment adviser
under the Investment Advisers Act of 1940, serves as the investment adviser
to each Fund. Janus, whose principal address is 100 Fillmore Street, Denver,
Colorado 80206-4928, is approximately 83% owned by Kansas City Southern
Industries, Inc., and approximately 12% owned by Thomas H. Bailey, President
and Chairman of the Board of Janus. Janus has served as investment adviser
to Janus Fund since its inception in 1970 and currently serves as investment
adviser to all of the Janus retail funds, as well as adviser or subadviser to
other mutual funds and individual, corporate, charitable and retirement
accounts. Janus has been in the investment advisory business for over 26
years and as of September 1997 managed over $60 billion in assets.
The Portfolios of the Janus Trust pay a management fee to Janus which is
calculated daily. Each of the Portfolios is subject to the following
management fee schedule (expressed as an annual rate):
Average Daily Net Annual Rate Expense Limit
Portfolio Assets of Portfolio Percentage(%) Percentage(%)
--------- ------------------- ------------- -------------
Janus Capital Appreciation First $ 30 Million 1.00* 1.25%
Janus Balanced Next $270 Million 0.75 N/A
Janus Worldwide Growth Next $200 Million 0.70 N/A
Over $500 Million 0.65
----------------------------------------------------------------------------
Janus Money Market All Asset Levels 0.25 0.50
* Janus has agreed to reduce each of the Capital Appreciation, Balanced, and
Worldwide Growth Portfolio's advisory fees to the extent that such fee
exceeds the effective rate of the Janus retail fund corresponding to such
Portfolio. Janus may terminate this fee reduction or any of the expense
limitations set forth above at any time upon at least 90 days' notice to the
Trustees. The effective rate is the advisory fee calculated by the
corresponding retail fund as of the last day of each calendar quarter
(expressed as an annual rate). The effective rates of Janus Olympus Fund,
Janus Balanced Fund and Janus Worldwide Fund were .75%, .78% and .66%,
respectively, for the quarter ended March 31, 1997. Janus has agreed to
limit the expenses of the Janus Capital Appreciation Portfolio's
Institutional Shares to an annual rate of 1.25% of average net assets through
at least April 30, 1998.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Set forth below is a summary of the
investment objectives of the Portfolios of the Janus Trust. There can be no
assurance that these objectives will be achieved. YOU SHOULD READ THE JANUS
TRUST'S PROSPECTUSES CAREFULLY BEFORE INVESTING.
JANUS CAPITAL APPRECIATION PORTFOLIO
Janus Capital Appreciation Portfolio seeks long-term growth of capital. It
is a non-diversified portfolio that pursues its objective by investing
primarily in common stocks of issuers of any size, which may include larger
well-established issuers and/or smaller emerging growth companies. The
Portfolio invests primarily in common stocks of foreign and domestic
companies, and may invest to a lesser degree in other types of securities
including preferred stock, warrants, convertible securities and debt
securities when its portfolio manager perceives an opportunity for capital
growth from such securities or to receive a return on idle cash.
JANUS BALANCED PORTFOLIO
Janus Balanced Portfolio seeks long-term capital growth, consistent with
preservation of capital and balanced by current income. It is a diversified
portfolio that, under normal circumstances, pursues its objective by
investing 40-60% of its assets in securities selected primarily for their
growth potential and 40-60% of its assets in securities selected primarily
for their income potential. This Portfolio normally invests at least 25% of
its assets in fixed-income senior securities, which include debt securities
and preferred stocks.
JANUS WORLDWIDE GROWTH PORTFOLIO
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<PAGE>
Janus Worldwide Growth Portfolio seeks long-term growth of capital in a
manner consistent with the preservation of capital. It is a diversified
portfolio that pursues its objective primarily through investments in common
stocks of foreign and domestic issuers. The Portfolio has the flexibility to
invest on a worldwide basis in companies and other organizations of any size,
regardless of country of organization or place of principal business
activity. Janus Worldwide Growth Portfolio normally invests in issuers from
at least five different countries, including the United States. The
Portfolio may at any time invest in fewer than five countries or even a
single country.
JANUS MONEY MARKET PORTFOLIO
Janus Money Market Portfolio seeks maximum current income to the extent
consistent with stability of capital. There can be no assurance that the
Portfolio will achieve its investment objective or be able to maintain a
stable net asset value of $1.00 per share. The Portfolio will invest only in
eligible high quality, short-term money market instruments that present
minimal credit risks, as determined by Janus, the Portfolio's investment
adviser, pursuant to procedures adopted by the Trustees. The Portfolio may
invest only in U.S. dollar-denominated instruments that have a remaining
maturity of 397 days or less and will maintain a dollar-weighted average
portfolio maturity of 90 days or less.
JPM SERIES TRUST II
JPM Series is an open-end management investment company organized as a
Delaware Business Trust. Shares of each Portfolio are both offered and
redeemed at their net asset value without the addition of any sales load or
redemption charge. The shares of the Portfolios of JPM Series are bought and
sold by the Separate Account at their respective net asset values.
THE JPM SERIES INVESTMENT ADVISER. The JPM Series' investment adviser is
JPMIM, a registered investment adviser which maintains its principal office
at 522 Fifth Avenue, New York, New York 10036. JPMIM is a wholly owned
subsidiary of J.P. Morgan & Co. Incorporated (J.P. MORGAN & CO.), a bank
holding company organized under the laws of Delaware. Through offices in New
York City and abroad, J.P. Morgan & Co., through JPMIM and its other
subsidiaries, offers a wide range of services to governmental, institutional,
corporate and individual customers and acts as investment adviser to
individual and institutional clients. As of December 31, 1996, J.P. Morgan &
Co. and its subsidiaries had total combined assets under management of
approximately $208 billion. J.P. Morgan & Co. has a long history of service
as adviser, underwriter and lender to an extensive roster of major companies
and as a financial adviser to national governments. The firm, through its
predecessor firms, has been in business for over a century and has been
managing investments since 1913.
As compensation for JPMIM's services under the Investment Advisory Agreement,
the JPM Series has agreed to pay JPMIM a monthly fee at the annual rate set
forth below as a percentage of the average daily net assets of the relevant
Portfolio:
Portfolio Management Fee
--------- --------------
JPM Bond Portfolio 0.30%
JPM International Equity Portfolio 0.60%
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Set forth below is a summary of the
investment objectives of the Portfolios of the JPM Series. There can be no
assurance that these objectives will be achieved. YOU SHOULD READ THE JPM
SERIES' PROSPECTUS CAREFULLY BEFORE INVESTING.
JPM BOND PORTFOLIO
JPM Bond Portfolio seeks to provide a high total return consistent with
moderate risk of capital and maintenance of liquidity. Total return will
consist of realized and unrealized capital gains and losses plus income less
expenses. Although the net asset value of the Portfolio will fluctuate, the
Portfolio attempts to preserve the value of its investments to the extent
consistent with its objective.
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<PAGE>
JPM INTERNATIONAL EQUITY PORTFOLIO
JPM International Equity Portfolio seeks to provide a high total return from
a portfolio of equity securities of foreign corporations. Total return will
consist of realized and unrealized capital gains and losses plus income less
expenses. The Portfolio is designed for investors with long-term, investment
horizon who want to diversify their investments by adding international
equities and take advantage of investment opportunities outside the U.S. The
Portfolio seeks to achieve its investment objective through country
allocation and stock valuation and selection.
MORGAN STANLEY UNIVERSAL FUNDS, INC.
Each of the Morgan Stanley Universal Funds is an open-end management
investment company registered under the 1940 Act. Such registration does not
involve supervision by the SEC of the investments or investment policies of
the Morgan Stanley Universal Funds. The shares of the Portfolios of the
Morgan Stanley Universal Funds are bought and sold by the Separate Account at
their respective net asset values.
THE MORGAN STANLEY UNIVERSAL FUNDS' INVESTMENT ADVISERS. The Adviser assigned
to a Portfolio provides investment advice and portfolio management services
pursuant to an Investment Advisory Agreement. MSAM serves as the Adviser for
the Emerging Markets Debt, U.S. Real Estate, and Asian Equity Portfolios.
MAS serves as the Adviser for the High Yield Portfolio. MSAM, with principal
offices at 1221 Avenue of the Americas, New York, New York 10020, conducts a
worldwide investment management business, providing a broad range of
portfolio management services to customers in the United States and abroad.
MSAM is a wholly owned subsidiary of Morgan Stanley, Dean Witter, Discover &
Co. (MSDW), which is a publicly owned financial services corporation listed
on the New York and Pacific stock exchanges. MAS is a Pennsylvania limited
liability partnership with principal offices at One Tower Bridge, West
Conshohocken, Pennsylvania 19428. As of January 1996, MAS is also indirectly
wholly owned by MSDW. MAS provides investment advisory services to employee
benefit plans, endowment funds, foundations and other institutional investors
and has served as investment adviser to several open-end investment companies
since 1984. As of June 30, 1997, MSAM and its investment advisory affiliates
(exclusive of MAS, Van Kampen American Capital, and Dean Witter Intercapital)
managed assets of approximately $80.3 billion, and MAS managed assets of
approximately $50.9 billion.
The Adviser assigned to a Portfolio is entitled to receive from such
Portfolio a management fee, payable quarterly, at an annual rate as a
percentage of average daily net assets. Each of the Portfolios is subject to
the following management fee schedule:
<TABLE>
<CAPTION>
ASSETS OF PORTFOLIO MORGAN STANLEY MORGAN STANLEY MORGAN STANLEY MORGAN STANLEY
HIGH YIELD U.S. REAL ESTATE ASIAN EQUITY EMERGING MARKETS DEBT
<S> <C> <C> <C> <C>
First $500 Million 0.50% 0.80% 0.80% 0.80%
Next $500 Million 0.45% 0.75% 0.75% 0.75%
More than $1 Billion 0.40% 0.70% 0.70% 0.70%
Maximum Total Annual 0.80% 1.10% 1.20% 1.30%
Operating Expenses
After Fee Waivers*
</TABLE>
* The Advisers have voluntarily waived receipt of their management fees and
agreed to reimburse the Portfolios, if necessary, if such fees would cause
the total annual operating expenses of the Portfolio to exceed the respective
percentage of average daily net assets set forth in the table. The fee
waivers are voluntary and may be terminated by MSAM or MAS at any time
without notice.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Set forth below is a summary of the
investment objectives of the Portfolios of the Morgan Stanley Universal
Funds. There can be no assurance that these objectives will be achieved. YOU
SHOULD READ THE MORGAN STANLEY UNIVERSAL FUNDS' PROSPECTUS CAREFULLY BEFORE
INVESTING.
MORGAN STANLEY ASIAN EQUITY PORTFOLIO
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<PAGE>
Morgan Stanley Asian Equity Portfolio seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers (excluding Japan)
using an approach that is oriented to the selection of individual stocks that
the Adviser believes are undervalued. The Portfolio intends to invest
primarily in equity securities that are traded on recognized stock exchanges
of countries in Asia and in equity securities of companies organized under
the laws of an Asian country whose business is conducted principally in Asia.
MORGAN STANLEY EMERGING MARKETS DEBT PORTFOLIO
Morgan Stanley Emerging Markets Debt Portfolio seeks high total return by
investing primarily in fixed income securities of government and
government-related issuers located in emerging market countries, which
securities provide a high level of current income, while at the same time
holding the potential for capital appreciation if the perceived
creditworthiness of the issuer improves due to improving economic, financial,
political, social or other conditions in the country in which the issuer is
located.
MORGAN STANLEY HIGH YIELD PORTFOLIO
Morgan Stanley High Yield Portfolio seeks above-average total return over a
market cycle of three to five years by investing primarily in a diversified
portfolio of high yield securities, including corporate bonds and other fixed
income securities and derivatives. High yield securities are rated below
investment grade and are commonly referred to as "junk bonds." The
Portfolio's average weighted maturity will ordinarily exceed five years and
will usually be between five and fifteen years.
MORGAN STANLEY U.S. REAL ESTATE PORTFOLIO
Morgan Stanley U.S. Real Estate Portfolio seeks above-average current income
and long-term capital appreciation by investing primarily in equity
securities of U.S. and non-U.S. companies principally engaged in the U.S.
real estate industry, including real estate investment trusts ("REITs").
- -------------------------------------------------------------------------------
PART 8 - ADDITIONAL INFORMATION IS AMENDED TO INCLUDE THE FOLLOWING SECTION:
ASSET ALLOCATION AND REBALANCING PROGRAM
We also offer an Asset Allocation and Rebalancing Program developed in
consultation with Callan Associates (MODEL(s)). Callan Associates is an
independent research and consulting firm, specializing in the strategic asset
allocation decision.
You may select one of five proposed Models: Conservative, Moderately
Conservative, Moderate, Moderately Aggressive, or Aggressive. Your current
contribution allocations will be initially allocated as approved by you,
among the Options currently established for each Model. You and your
financial planner also have the option to design a program that is tailored
to your specific retirement needs.
To ensure conformity with current Model instructions, the value in the
Variable Account Options will be automatically rebalanced at least annually
by transfers among such Variable Account Options. You will receive a
confirmation notice after each rebalancing. GRO Accounts attributable to the
Model will not rebalance. Instead, GRO Accounts shall renew for the same
duration at the then-current Guaranteed Interest Rate. See "Fixed Accounts -
Renewals of GRO Accounts" in Part 3.
No transfer charge will apply to transfers under the Asset Allocation and
Rebalancing Program, nor will such transfers count toward the twelve
transfers you may make in a contract year before we may impose a transfer
charge. See "Transfer Charges" in Part 4.
To enroll under the Asset Allocation and Rebalancing Program, you must
deliver the appropriate administrative form to our Administrative Office.
You should be aware that other allocation programs, such as dollar cost
averaging, as well as transfers and withdrawals that you make, may not work
in concert with the Individual Asset Rebalancing program. You should,
therefore, monitor your use of such other programs, transfers, and
withdrawals while the Individual Asset Rebalancing program is in effect.
This program is not available in concert with the Individual Asset
Rebalancing program. We reserve the right to terminate or amend this program
in whole or in part, or to place restrictions on contributions to the
program. This program may not be available in all states.
You may terminate participation in this program upon one day's prior written
notice.
13
