<PAGE>
- --------------------------------------------------------------------------------
SUPPLEMENT DATED OCTOBER 1, 1997
TO PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 1, 1997
FOR
PINNACLE(VERSION III)
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 AND EXAMPLES IN PART 1 ARE 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
- -----------------------------------
<TABLE>
<S> <C>
Sales Load on Purchases . . . . . . . . . . . . . . . . . . . . . . $0
Deferred Sales Load (1) . . . . . . . . . . . . . . . . . . 8% Maximum
Exchange Fee (2). . . . . . . . . . . . . . . . . . . . . . . . . . $0
Annual Administrative Charge (3). . . . . . . . . . . . . . . . . $30
</TABLE>
Separate Account Annual Expenses (as a
percentage of average account value) (4)
- ----------------------------------------
<TABLE>
<S> <C>
Mortality and Expense Risk Fees . . . . . . . . . . . . . . . . 1.20%
Administrative Expenses . . . . . . . . . . . . . . . . . . . . .15%
----
Total Separate Account Annual Expenses. . . . . . . . . . . . . 1.35%
----
----
</TABLE>
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 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, individual asset rebalancing,
or systematic transfers. 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.
(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>
BT EAFE-Registered Trademark- Index . . . $100.99 $124.75 $150.98 $238.35
BT Equity 500 Index . . . . . . . . . . . $ 97.41 $113.87 $132.66 $200.80
BT Russell 2000 Index . . . . . . . . . . $ 98.94 $118.54 $140.54 $217.06
Fidelity VIP Equity-Income. . . . . . . . $100.28 $122.58 $147.34 $230.95
Fidelity VIP II Contrafund. . . . . . . . $101.92 $127.53 $155.65 $247.79
Fidelity VIP III Growth & Income. . . . . $101.51 $126.30 $153.57 $243.61
Fidelity VIP III Growth Opportunities . . $102.22 $128.46 $157.20 $250.92
Janus Capital Appreciation. . . . . . . . $105.09 $137.08 $171.59 $279.66
Janus Balanced . . . . . . . . . . . . . $103.97 $133.70 $165.95 $268.47
Janus Worldwide Growth. . . . . . . . . . $102.53 $129.39 $158.75 $254.04
Janus Money Market . . . . . . . . . . . $ 99.46 $120.10 $143.16 $222.42
JPM International Equity . . . . . . . . $106.63 $141.68 $179.22 $294.73
JPM Bond. . . . . . . . . . . . . . . . . $102.02 $127.84 $156.16 $248.84
Morgan Stanley Asian Equity . . . . . . . $106.63 $141.68 $179.22 $294.73
Morgan Stanley Emerging Markets Debt. . . $107.65 $144.74 $184.29 $304.64
Morgan Stanley High Yield . . . . . . . . $102.53 $129.39 $158.75 $254.04
Morgan Stanley U.S. Real Estate . . . . . $105.61 $138.62 $174.14 $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>
BT EAFE-Registered Trademark- Index . . . $20.99 $64.75 $110.98 $238.35
BT Equity 500 Index . . . . . . . . . . . $17.41 $53.87 $ 92.66 $200.80
BT Russell 2000 Index . . . . . . . . . . $18.94 $58.54 $100.54 $217.06
Fidelity VIP Equity-Income. . . . . . . . $20.28 $62.58 $107.34 $230.95
Fidelity VIP II Contrafund. . . . . . . . $21.92 $67.53 $115.65 $247.79
Fidelity VIP III Growth & Income. . . . . $21.51 $66.30 $113.57 $243.61
Fidelity 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>
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
Fund as they were for the fiscal year ended June 30, 1996. 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
6
<PAGE>
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
Portfolios. Premium taxes upon annuitization also may be applicable.
FINANCIAL INFORMATION
The Inception Date for each of the new Variable Account Options is October 7,
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 portfolio of
the BT Funds 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):
<TABLE>
<CAPTION>
Funds Management Fee
----- --------------
<S> <C>
EAFE-Registered Trademark- Equity Index 0.34%
Equity 500 Index 0.11%
Small Cap Index 0.22%
</TABLE>
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
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
8
<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:
<TABLE>
<CAPTION>
1997
Portfolio Individual Rate Aggregate Rate
--------- --------------- --------------
<S> <C> <C>
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%
</TABLE>
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
9
<PAGE>
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):
<TABLE>
<CAPTION>
Average Daily Net Annual Rate Expense Limit
Portfolio Assets of Portfolio Percentage (%) Percentage (%)
- --------- ------------------- -------------- --------------
<S> <C> <C> <C>
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
</TABLE>
* 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
10
<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:
<TABLE>
<CAPTION>
Portfolio Management Fee
--------- --------------
<S> <C>
JPM Bond Portfolio 0.30%
JPM International Equity Portfolio 0.60%
</TABLE>
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.
11
<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 0.80% 1.10% 1.20% 1.30%
Annual 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
12
<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
