<PAGE>
As filed with the Securities and Exchange Commission
on October 22, 1997
Registration No. 33-51268
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. ___ [ ]
Post-Effective Amendment No. _8_ [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. _9_ [X]
(Check appropriate box or boxes)
Separate Account II of Integrity Life Insurance Company
(Exact Name of Registrant)
Integrity Life Insurance Company
(Name of Depositor)
515 West Market Street, Louisville, KY 40202
(Address of Depositor's Principal Executive Offices) (Zip Code)
Depositor's Telephone Number, including Area Code (502) 582-7900
John McGeeney
Integrity Life Insurance Company
515 West Market Street
Louisville, Kentucky 40202
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon after the effective
date of this Registration Statement as is practicable.
It is proposed that this filing will become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b) of Rule 485
/X/ on November 1, 1997 pursuant to paragraph (b) of Rule 485
/ / 60 days after filing pursuant to paragraph (a)(1) of Rule 485
/ / on (date) pursuant to paragraph (a)(1) of Rule 485
If appropriate, check the following box:
/ / this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
The registrant has registered an indefinite amount of securities under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company
Act of 1940. The Rule 24f-2 Notice for the issuer's most recent fiscal year
was filed on February 19, 1997.
<PAGE>
CROSS REFERENCE SHEET - PINNACLE (VERSION II)
Showing Location in Part A (Prospectus) and Part B (Statement of Additional
Information) of Information required By Form N-4
PART A: INFORMATION REQUIRED IN PROSPECTUS - PINNACLE (VERSION II)
<TABLE>
<CAPTION>
Form N-4 Item No. Location in Prospectus
<S> <C>
1. Cover Page Cover Page
2. Definitions Part 1 - Summary
3. Synopsis Part 1 - Summary; Table of Annual Fees and
Expenses; Examples
4. Condensed Financial Information Part 1 - Financial Information
5. General Description of Registrant, Part 2 - Integrity and the Separate Account;
Annuity Contracts Part 3 - Your Investment Options
6. Deductions Part 4 - Deductions and Charges
7. General Description of Variable Part 5 - Terms of Your Variable
Annuity contracts Annuity Contract
8. Annuity Period Part 5 - Terms of Your Variable
Annuity Contract
9. Death Benefit Part 5 - Terms of Your Variable
Annuity Contract
10. Purchases and Contract Value Part 5 - Terms of Your Variable
Annuity Contract
11. Redemptions Part 5 - Terms of Your Variable
Annuity Contract
12. Taxes Part 7 - Tax Aspects of the Contracts
13. Legal Proceedings Not Applicable
14. Table of Contents of the Statement Table of Contents
of Additional Information
</TABLE>
<PAGE>
PART B: INFORMATION REQUIRED IN STATEMENT OF ADDITIONAL
INFORMATION - PINNACLE (VERSION II)
<TABLE>
<CAPTION>
Form N-4 Item No. Location in Statement of Additional Information
<S> <C>
15. Cover Page Cover Page
16. Table of Contents Cover Page
17. General Information and History Part 1 - Integrity and Custodian
18. Services Part 1 - Integrity and Custodian
19. Purchase of Securities Being Offered Part 2 - Distribution of the Contracts
20. Underwriters Part 2 - Distribution of the Contracts
21. Calculation of Performance Data Part 3 - Performance Information
22. Annuity Payments Part 4 - Determination of Annuity Unit Values
23. Financial Statements Part 6 - Financial Statements
</TABLE>
<PAGE>
Prospectus
PINNACLE(VERSION II)
FLEXIBLE PREMIUM VARIABLE ANNUITY
issued by INTEGRITY LIFE INSURANCE COMPANY
This prospectus describes a flexible premium variable annuity offered by
Integrity Life Insurance Company, an indirect wholly owned subsidiary of ARM
Financial Group, Inc. The individual contracts and group certificates
(CONTRACTS) offered by this prospectus provide several types of benefits,
some of which have tax-favored status under the Internal Revenue Code of
1986, as amended. Contributions under the contracts may be allocated to the
various investment divisions of our Separate Account II (VARIABLE ACCOUNT
OPTIONS, or individually, OPTION) or to our fixed rate Guaranteed Rate
Options (GROS), or both.
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 21 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
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
LEGENDS FUND
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Zweig Asset Allocation Portfolio
Zweig Equity (Small Cap) Portfolio
Zurich Kemper Value 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
<PAGE>
THERE CAN BE NO ASSURANCE THAT THE JANUS MONEY MARKET PORTFOLIO WILL ACHIEVE
ITS INVESTMENT OBJECTIVE OR BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF
$1.00 PER SHARE.
Your allocation to a GRO accumulates at a fixed interest rate we declare at
the beginning of the duration you select. A market value adjustment (MARKET
VALUE ADJUSTMENT) will be made for withdrawals, surrenders, transfers and
certain other transactions before the expiration of your GRO Account, but
your value under a GRO Account may not be decreased below an amount equal to
your allocation plus interest compounded at an annual effective rate of 3%
(MINIMUM VALUE), less previous withdrawals and any applicable contingent
withdrawal charges.
This prospectus contains information about the contracts that you should know
before investing. You should read this prospectus and any supplements, and
retain them for future reference. This prospectus is not valid unless
provided with the current prospectus for the Funds, which you should also
read.
For further information and assistance, you should contact our Administrative
Office at Integrity Life Insurance Company, P.O. Box 740074, Louisville,
Kentucky 40201-0074. The express mail address is Integrity Life Insurance
Company, 515 West Market Street, Louisville, Kentucky 40202-3319. You may
also call the following toll-free number: 1-800-325-8583.
A registration statement relating to the contracts, which includes a
Statement of Additional Information (SAI) dated November 1, 1997, has been
filed with the Securities and Exchange Commission. The SAI is incorporated
by reference into this prospectus. A copy of the SAI is available free of
charge by writing to or calling our Administrative Office. A table of
contents for the SAI follows the table of contents for this prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is November 1, 1997.
<PAGE>
TABLE OF CONTENTS
PART 1 - SUMMARY PAGE
Your Variable Annuity Contract .............................. 1
Your Benefits ............................................... 1
How Your Contract is Taxed .................................. 1
Your Contributions ......................................... 1
Your Investment Options ...................................... 1
Variable Account Options ..................................... 1
Account Value, Adjusted Account Value and Cash Value ........ 2
Transfers ................................................... 2
Charges and Fees ............................................ 2
Withdrawals ................................................. 3
Your Initial Right to Revoke ................................. 3
Table of Annual Fees and Expenses ........................... 4
Financial Information ....................................... 8
PART 2 - INTEGRITY AND THE SEPARATE ACCOUNT
Integrity Life Insurance Company ............................ 9
The Separate Account and the Variable Account Options ........ 9
Assets of Our Separate Account ............................... 9
Changes In How We Operate ................................... 9
PART 3 - YOUR INVESTMENT OPTIONS
The Legends Fund ............................................ 10
The Legends Fund's Investment Manager and Sub-Advisers ... 10
Investment Objectives of the Portfolios .................. 11
BT Insurance Funds Trust .................................... 12
Bankers Trust Funds' Investment Manager .................. 12
Investment Objectives of the Portfolios .................. 12
Fidelity Variable Insurance Products Funds ................... 14
Fidelity's VIP Funds' Investment Adviser ................. 14
Investment Objectives of the Portfolios ................. 15
Janus Aspen Series ......................................... 15
The Janus Trust Investment Adviser ....................... 16
Investment Objectives of the Portfolios .................. 16
JPM Series Trust II ........................................ 17
The JPM Series Investment Adviser ....................... 17
Investment Objectives of the Portfolios .................. 17
Morgan Stanley Universal Funds, Inc. ......................... 18
The Morgan Stanley Universal Funds' Investment Adviser ... 18
Investment Objectives of the Portfolios ................. 19
Guaranteed Rate Options ..................................... 20
Renewals of GRO Accounts ................................ 20
Market Value Adjustments ................................. 21
PART 4 - DEDUCTIONS AND CHARGES
Separate Account Charges .................................... 21
Annual Administrative Charge ................................. 22
Fund Charges ................................................ 22
State Premium Tax Deduction .................................. 22
Contingent Withdrawal Charge ................................ 22
Transfer Charge ............................................. 23
Tax Reserve .................................................. 23
<PAGE>
PART 5 - TERMS OF YOUR VARIABLE ANNUITY PAGE
Contributions Under Your Contract ............................ 24
Your Account Value ......................................... 24
Your Purchase of Units in Our Separate Account .............. 24
How We Determine Unit Value ................................. 24
Transfers .................................................... 25
Withdrawals ................................................. 25
Assignments ................................................. 26
Death Benefits and Similar Benefit Distributions ............ 26
Annuity Benefits ............................................. 26
Annuities ................................................... 27
Annuity Payments ............................................ 27
Timing of Payment ........................................... 28
How You Make Requests and Give Instructions .................. 28
PART 6 - VOTING RIGHTS
Fund Voting Rights ........................................... 28
How We Determine Your Voting Shares ......................... 28
How Fund Shares Are Voted .................................. 29
Separate Account Voting Rights ............................... 29
PART 7 - TAX ASPECTS OF THE CONTRACTS
Introduction ................................................ 29
Your Contract is an Annuity .................................. 29
Taxation of Annuities Generally .............................. 30
Distribution-at-Death Rules ................................. 30
Diversification Standards .................................... 31
Tax-Favored Retirement Programs ............................ 31
Individual Retirement Annuities ........................ 31
Tax Sheltered Annuities ................................ 31
Simplified Employee Pensions ............................ 32
Corporate and Self-Employed (H.R. 10 and Keogh) Pension
and Profit Sharing Plans .............................. 32
Deferred Compensation Plans of State and Local
Governments and Tax-Exempt Organizations .............. 32
Distributions Under Tax-Favored Retirement Programs .......... 32
Federal and State Income Tax Withholding ..................... 33
Impact of Taxes to Integrity ................................. 33
Transfers Among Investment Options ........................... 33
PART 8 - ADDITIONAL INFORMATION
Systematic Withdrawals ...................................... 33
Dollar Cost Averaging ....................................... 34
Customized Asset Rebalancing ................................ 34
Systematic Contributions ..................................... 34
Performance Information ..................................... 34
Appendix A - Illustration of a Market Value Adjustment ....... 36
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED
TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS.
<PAGE>
SAI TABLE OF CONTENTS
Part 1 - Integrity and Custodian
Part 2 - Distribution of the Contracts
Part 3 - Performance Information
Part 4 - Determination of Annuity Unit Values
Part 5 - Death Benefit Information for Contracts Issued Prior to January 1,
1996
Part 6 - Financial Statements
If you would like to receive a copy of the Statement of Additional
Information, please complete the form below and send it to:
Administrative Office
Integrity Life Insurance Company
P.O. Box 740074
Louisville, KY 40201-0074
ATTN: Request for SAI of Separate Account II
Name:
----------------------------------------------------------------------
Address:
-------------------------------------------------------------------
City: State: Zip:
-------------------------------- ---------- -----------------
<PAGE>
PART 1 -- SUMMARY
YOUR VARIABLE ANNUITY CONTRACT
In this prospectus, WE, OUR and US mean Integrity Life Insurance Company
(INTEGRITY), an indirect wholly owned subsidiary of ARM Financial Group, Inc.
(ARM). We offer individual variable annuity contracts. In certain states, we
offer certificates under a group variable annuity contract instead of
contracts. When we use the words contract or certificate, we are referring to
both the individual contracts and the group certificates.
You can invest for retirement by purchasing a contract if you properly
complete a Customer Profile form (an application or enrollment form may be
required in some states) and make a minimum initial contribution. In this
prospectus, YOU and YOUR mean the Annuitant, the person upon whose life the
Annuity Benefit and the Death Benefit are based, usually the Owner of the
contract. If the Annuitant does not own the contract, all of the rights under
the contract belong to the Owner until annuity payments begin.
Your retirement or endowment date (RETIREMENT DATE) will be no later than
your 85th birthday or the tenth contract anniversary, whichever is later,
unless you notify us of a different date.
YOUR BENEFITS
Your contract provides an Account Value, an annuity benefit, and a death
benefit. See "Your Account Value," "Death Benefits and Similar Benefit
Distributions" and "Annuity Benefits" in Part 5.
Your benefits may be received under a contract subject to the usual rules for
taxation of annuities, including the tax-deferral of earnings until
withdrawal. The contract also can provide your benefits under certain
tax-favored retirement programs, which are subject to special rules covering
such matters as eligibility and contribution amounts. See Part 7, "Tax
Aspects of the Contracts" for detailed information.
HOW YOUR CONTRACT IS TAXED
Under current law, any increases in the value of your contributions to your
contract are tax deferred and will not be included in your taxable income
until withdrawn. See Part 7, "Tax Aspects of the Contracts."
YOUR CONTRIBUTIONS
The minimum initial contribution in most states is currently $10,000.
Subsequent contributions of at least $1,000 can be made. Special rules for
lower minimum initial and subsequent contributions apply for certain
tax-favored retirement plans. See "Contributions Under Your Contract" in
Part 5.
YOUR INVESTMENT OPTIONS
You may allocate contributions to the Variable Account Options or to the
GROs, or both. The Variable Account Options and the GROs are together
referred to as the INVESTMENT OPTIONS. Contributions may be allocated to up
to nine Investment Options at any one time. See "Contributions Under Your
Contract" in Part 5. To select Investment Options most suitable for you, see
Part 3, "Your Investment Options."
VARIABLE ACCOUNT OPTIONS
The Variable Account Options (also referred to as DIVISIONS) invest in shares
of corresponding investment portfolios of the Funds, each a "series" type of
mutual fund. Each investment portfolio is referred to as a PORTFOLIO. The
investment objective of each Variable Account Option and its corresponding
Portfolio is the same. Your value in a Variable Account Option will vary
depending on the performance of the corresponding Portfolio. For a full
description of a Fund, see each Fund's prospectus and the Fund's Statement of
Additional Information.
1
<PAGE>
ACCOUNT VALUE, ADJUSTED ACCOUNT VALUE AND CASH VALUE
The sum of your values under the GROs plus your values in the Variable
Options is referred to as the ACCOUNT VALUE. Your ADJUSTED ACCOUNT VALUE is
your Account Value, as increased or decreased (but not below the Minimum
Value) by any Market Value Adjustments. Your CASH VALUE is equal to your
Adjusted Account Value, reduced by any applicable contingent withdrawal
charge and will be reduced by the pro rata portion of the annual
administrative charge, if applicable. See "Charges and Fees" below.
TRANSFERS
You may transfer all or portions of your Account Value among the Investment
Options, subject to the conditions described under "Transfers" in Part 5.
Transfers from any Investment Option must be for at least $250. Transfers may
be arranged through our telephone transfer service. See Part 5, "Transfers."
Transfers may also be made under special services we offer to dollar cost
average or rebalance your investment in the Variable Account Options. See
Part 8, "Additional Information - Dollar Cost Averaging" and "Additional
Information - Customized Asset Rebalancing."
CHARGES AND FEES
If your Account Value is less than $50,000 as of the last day of any contract
year prior to your Retirement Date, an annual administrative expense charge
of $30 is deducted from your contract. See Part 4, "Deductions and Charges."
A charge at an effective annual rate of 1.35% of the Account Value of the
assets in each Variable Account Option is made daily. We make this charge to
cover mortality and expense risks (1.20%) and certain administrative expenses
(.15%). The charge will never be greater than an effective annual rate of
1.35% of the Account Value of the assets in each Variable Account Option. If
your contract is issued on or after January 1, 1995, the effective annual
rate will reduce to 1.10% after your contract has been in effect for six
years. See Part 4, "Deductions and Charges."
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,
the 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. The
expenses reflect a voluntary undertaking by Bankers Trust to waive or
reimburse expenses.
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 .65% 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. The highest annual
rate at which any of the Janus Portfolios paid advisory fees in 1996 was .79%
of average net assets. Please see Table of Annual Fees and Expenses 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.
A Fund's advisory fees cannot be increased without the consent of its
shareholders. See "Table of Annual Fees and Expenses" below and "The Funds'
Investment Managers and Sub-Advisers" in Part 3.
2
<PAGE>
If you frequently transfer funds from one Investment Option to another,
certain transfers may become subject to a charge. We will not, however,
charge more than $20 per transfer. See "Transfer Charge" in Part 4.
When you make withdrawals from your contract, a contingent withdrawal charge
may be deducted from your Account Value. This sales charge will be in
addition to the Market Value Adjustment applicable to early withdrawals from
GRO Accounts. See "Withdrawals" below and "Guaranteed Rate Options" in Part 3.
WITHDRAWALS
You may make an unlimited number of withdrawals from your contract as
frequently as you wish. Each withdrawal must be for at least $300. A sales
charge of up to 7% of the contribution amount withdrawn, in excess of any
free withdrawal amount (defined below), will be deducted from your Account
Value, unless one of the exceptions applies. This charge defrays marketing
expenses. See "Contingent Withdrawal Charge" in Part 4. Most withdrawals made
by you prior to age 59-1/2 are also subject to a 10% federal tax penalty. In
addition, some tax-favored retirement programs limit withdrawals. See Part 7,
"Tax Aspects of the Contracts." For partial withdrawals, the total amount
deducted from your Account Value will include the withdrawal amount
requested, any applicable Market Value Adjustment, and any applicable
withdrawal charge, so that the net amount you receive will be the amount
requested.
The FREE WITHDRAWAL AMOUNT is a non-cumulative amount which you may take as a
partial withdrawal each contract year without being subject to the contingent
withdrawal charge or any Market Value Adjustment. It is equal to the greater
of (i) 10% of the Account Value, minus cumulative prior withdrawals in the
current contract year, and (ii) the investment gain under the contract during
the prior contract year, minus such cumulative withdrawals. However, as
explained above, a tax penalty still applies if you are under age 59-1/2.
YOUR INITIAL RIGHT TO REVOKE
Within ten days after you receive your contract, you may cancel it by
returning it to our Administrative Office. The 10-day period may be extended
if required by state law. We will refund all your contributions with an
adjustment for any investment gain or loss on the contributions put into each
Variable Account Option from the date units were purchased until the date
your contract is received by us, including any charges deducted. If state law
instead requires a refund of your contributions without any adjustment, we
will return that amount to you. For allocations to any of the GROs, we will
refund to you the amount of your contributions.
3
<PAGE>
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)(7) 0.31%(6)(7) 0.65%(6)(7)
Equity 500 Index. . . . . . . . . . . . . . . . . . . . . . . . . . . 0.11%(6)(7) 0.19%(6)(7) 0.30%(6)(7)
Small Cap Index . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.22%(6)(7) 0.23%(6)(7) 0.45%(6)(7)
VIP Equity-Income . . . . . . . . . . . . . . . . . . . . . . . . . . 0.51%(6) 0.07% 0.58%(6)
VIP II Contrafund . . . . . . . . . . . . . . . . . . . . . . . . . . 0.61%(6) 0.13% 0.74%(8)
VIP III Growth & Income . . . . . . . . . . . . . . . . . . . . . . . 0.50%(6) 0.20%(6) 0.70%(6)(8)
VIP III Growth Opportunities. . . . . . . . . . . . . . . . . . . . . 0.61% 0.16% 0.77%(8)
Harris Bretall Sullivan & Smith Equity Growth . . . . . . . . . . . . 0.65% 0.38% 1.03%(9)
Zurich Kemper Value . . . . . . . . . . . . . . . . . . . . . . . . . 0.65% 0.40% 1.05%(9)
Zweig Asset Allocation. . . . . . . . . . . . . . . . . . . . . . . . 0.90% 0.38% 1.28%(9)
Zweig Equity (Small Cap). . . . . . . . . . . . . . . . . . . . . . . 1.05% 0.50% 1.55%(9)
Janus Capital Appreciation. . . . . . . . . . . . . . . . . . . . . . 0.75%(10) 0.30%(10) 1.05%(10)
Janus Balanced. . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.79%(11) 0.15%(11) 0.94%(11)
Janus Worldwide Growth. . . . . . . . . . . . . . . . . . . . . . . . 0.66%(11) 0.14%(11) 0.80%(11)
Janus Money Market. . . . . . . . . . . . . . . . . . . . . . . . . . 0.00%(11) 0.50%(11) 0.50%(11)
JPM International Equity. . . . . . . . . . . . . . . . . . . . . . . 0.60% 0.60% 1.20%(12)
JPM Bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.30% 0.45% 0.75%(12)
Morgan Stanley Asian Equity . . . . . . . . . . . . . . . . . . . . . 0.80%(13) 0.40%(13) 1.20%(13)
Morgan Stanley Emerging Markets Debt. . . . . . . . . . . . . . . . . 0.80%(13) 0.50%(13) 1.30%(13)
Morgan Stanley High Yield . . . . . . . . . . . . . . . . . . . . . . 0.50%(13) 0.30%(13) 0.80%(13)
Morgan Stanley U.S. Real Estate . . . . . . . . . . . . . . . . . . . 0.80%(13) 0.30%(13) 1.10%(13)
</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 customized 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 .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 is for the year ended December 31, 1996. The
fee for certain portfolios may be reduced as assets increase. See Part 3 -
Your Investment Options for the applicable fee rates for particular
portfolios.
(6) Estimated
(7) 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.
(8) A portion of the brokerage commissions that certain of Fidelity's VIP
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.
(9) The Manager of the Legends Fund has agreed to reimburse each of the
Legends Fund Portfolios for operating expenses (excluding management fees)
above an annual rate of .50% of average net assets for all Portfolios of the
Legends Fund. Without reimbursements, total annual expenses for the Fund's
fiscal year ended June 30, 1997 would have been 1.82% for the Zweig Equity
(Small Cap) Portfolio. The Manager has reserved the right to withdraw or
modify its policy of expense reimbursement for the Portfolios, but has no
current intention to do so during 1998. In the Legends Fund's prospectus, see
"Management of the Fund."
(10) 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.
(11) 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 and Janus Worldwide Growth
Portfolios reduce the management fee to the level of the corresponding Janus
retail fund. Other waivers, if applicable, are first applied against the
management fee and then against other expenses. Without 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.
(12) 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.
(13) 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.
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.
CUMULATIVE EXPENSES PER $1,000 INVESTMENT IF YOU SURRENDER YOUR CONTRACT AT
THE END OF THE APPLICABLE PERIOD:
<TABLE>
<CAPTION>
PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- - -------- ------ ------- ------- ---------
<S> <C> <C> <C> <C>
EAFE-Registered Trademark- Equity Index . . . . . $ 90.99 $114.75 $140.98 $238.35
Equity 500 Index. . . . . . . . . . . . . . . . . $ 87.41 $103.87 $122.66 $200.80
Small Cap Index . . . . . . . . . . . . . . . . . $ 88.94 $108.54 $130.54 $217.06
VIP Equity-Income . . . . . . . . . . . . . . . . $ 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
Harris Bretall Sullivan & Smith Equity Growth . . $ 95.09 $127.08 $161.59 $279.66
Zurich Kemper Value . . . . . . . . . . . . . . . $ 96.12 $130.15 $166.68 $289.73
Zweig Asset Allocation. . . . . . . . . . . . . . $ 97.24 $133.52 $172.26 $300.69
Zweig Equity (Small Cap). . . . . . . . . . . . . $ 100.22 $142.36 $186.85 $328.99
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>
6
<PAGE>
CUMULATIVE 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
(I.E., NO DEFERRED SALES LOAD ASSESSED):
<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
Harris Bretall Sullivan & Smith Equity Growth . . $25.09 $77.08 $131.59 $279.66
Zurich Kemper Value . . . . . . . . . . . . . . . $26.12 $80.15 $136.68 $289.73
Zweig Asset Allocation. . . . . . . . . . . . . . $27.24 $83.52 $142.26 $300.69
Zweig Equity (Small Cap). . . . . . . . . . . . . $30.22 $92.36 $156.85 $328.99
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 Funds as they were for their most recent fiscal years ended or estimated
expenses (after reimbursement) if applicable. 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.
7
<PAGE>
FINANCIAL INFORMATION
The table below shows the unit value for certain Variable Account Options at
inception, the number of units outstanding at December 31 of each year since
inception, and the unit value at the beginning and end of each period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994 1993 1992 INCEPTION*
---- ---- ---- ----- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
ZURICH KEMPER VALUE DIVISION
Unit value at beginning of period ............ $14.85 $10.34 $10.56 $10.07 - $10.00
Unit value at end of period ................... $18.24 $14.85 $10.34 $10.56 $10.07
Number of units outstanding at end of period... 1,119,634 806,752 733,336 547,498 3,540
HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH
DIVISION
Unit value at beginning of period ............. $13.21 $10.17 $9.91 $10.05 - $10.00
Unit value at end of period ................... $14.85 $13.21 $10.17 $9.91 $10.05
Number of units outstanding at end of period... 1,184,119 1,342,971 1,014,016 830,307 18,906
ZWEIG ASSET ALLOCATION DIVISION
Unit value at beginning of period ............. $13.44 $11.23 $11.33 $9.99 - $10.00
Unit value at end of period .................. $15.23 $13.44 $11.23 $11.33 $9.99
Number of units outstanding at end of period .. 2,434,199 2,541,023 2,558,692 1,518,392 11,385
ZWEIG EQUITY (SMALL CAP) DIVISION
Unit value at beginning of period ............. $12.58 $10.53 $10.74 - - $10.00
Unit value at end of period .................. $14.71 $12.58 $10.53 $10.74 -
Number of units outstanding at end of period... 592,469 587,830 567,827 425,500 -
</TABLE>
- - -------------------------------------------------------------
*Inception Dates for the Variable Account Options were December 14, 1992 for
the Zweig Asset Allocation, Zurich Kemper Value and Zweig Equity Options; and
December 8, 1992 for the Harris Bretall Sullivan & Smith Equity Growth
Option. The Inception Date for each of the following: EAFE-Registered
Trademark- Equity Index, Equity 500 Index, Small Cap Index, VIP
Equity-Income, VIP II Contrafund, VIP III Growth & Income,VIP III Growth
Opportunities, Janus Capital Appreciation, Janus Balanced, Janus Worldwide
Growth, Janus Money Market, JPM International Equity, JPM Bond, Morgan
Stanley Asian Equity, Morgan Stanley Emerging Markets Debt, Morgan Stanley
High Yield, and Morgan Stanley U.S. Real Estate 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.
8
<PAGE>
PART 2 - INTEGRITY AND THE SEPARATE ACCOUNT
INTEGRITY LIFE INSURANCE COMPANY
Integrity is a stock life insurance company organized under the laws of Ohio.
Its principal executive offices are located in Louisville, Kentucky. We are
authorized to sell life insurance and annuities in 45 states and the District
of Columbia. In addition to the contracts, we sell flexible premium annuity
contracts with an underlying investment medium other than the Funds, fixed
single premium annuity contracts, and flexible premium annuity contracts
offering both traditional fixed guaranteed interest rates along with fixed
equity indexed options. We are currently licensed to sell variable contracts
in 45 states and the District of Columbia. In addition to issuing annuity
products, we have entered into agreements with other insurance companies to
provide administrative and investment support for products to be designed,
underwritten and sold by these companies.
Integrity is an indirect wholly owned subsidiary of ARM. ARM specializes in
the asset accumulation business, providing retail and institutional customers
with products and services designed to serve the growing long-term savings
and retirement markets. At June 30, 1997, ARM had $5.6 billion of assets
under management.
THE SEPARATE ACCOUNT AND THE VARIABLE ACCOUNT OPTIONS
The Separate Account is established and maintained under the insurance laws
of the State of Ohio. It is a unit investment trust registered with the
Securities and Exchange Commission (the SEC) under the Investment Company Act
of 1940 (1940 ACT). A unit investment trust is a type of investment company.
SEC registration does not involve any supervision by the SEC of the
management or investment policies of the Separate Account. Each Variable
Account Option invests in shares of corresponding Portfolios of the Funds.
We may establish additional Options, some of which may not be available for
your allocations. The Variable Account Options currently available to you are
listed on the cover page of this prospectus.
ASSETS OF OUR SEPARATE ACCOUNT
Under Ohio law, we own the assets of our Separate Account and use them to
support the variable portion of your contract and other variable annuity
contracts. Annuitants under other variable annuity contracts will participate
in the Separate Account in proportion to the amounts relating to their
contracts. The Separate Account's assets supporting the variable portion of
these variable contracts may not be used to satisfy liabilities arising out
of any other business of ours. Under certain unlikely circumstances, one
Variable Account Option may be liable for claims relating to the operations
of another Option.
Income, gains and losses, whether or not realized, from assets allocated to
the Separate Account are credited to or charged against the Separate Account
without regard to our other income, gains or losses. We may permit charges
owed to us to stay in the Separate Account, and thus may participate
proportionately in the Separate Account. Amounts in the Separate Account in
excess of reserves and other liabilities belong to us, and we may transfer
them to our general account (GENERAL ACCOUNT).
CHANGES IN HOW WE OPERATE
We may modify how we or our Separate Account operate, subject to your approval
when required by the 1940 Act or other applicable law or regulation. You will be
notified if any changes result in a material change in the underlying
investments of a Variable Account Option. WE MAY:
- add Options to, or remove Options from, our Separate Account, combine two
or more Options within our Separate Account, or withdraw assets relating to
your contract from one Option and put them into another;
- register or end the registration of the Separate Account under the 1940
Act;
- operate our Separate Account under the direction of a committee or
discharge such a committee at any time (the committee may be composed of a
majority of persons who are "interested persons" of Integrity under the
1940 Act);
- restrict or eliminate any voting rights of Owners or others who have voting
rights that affect our Separate Account;
- cause one or more Options to invest in a mutual fund other than or in
addition to the Funds;
9
<PAGE>
- operate our Separate Account or one or more of the Options in any other
form the law allows, including a form that allows us to make direct
investments. We may make any legal investments we wish. In choosing these
investments, we will rely on our own or outside counsel for advice.
PART 3 - YOUR INVESTMENT OPTIONS
THE LEGENDS FUND
The Legends Fund, a Maryland corporation, is an open-end diversified
management investment company registered under the 1940 Act. Such
registration does not involve supervision by the SEC of the investments or
investment policies of the Legends Fund. The Legends Fund is a "series" type
of investment company with diversified portfolios. The Legends Fund does not
impose a sales charge or "load" for buying and selling its shares. The shares
of the Portfolios of the Legends Funds are bought and sold by the Separate
Account at their respective net asset values.
The Legends Fund is designed to serve as an investment vehicle for variable
annuity and variable life contracts of insurance companies. Shares of the
Portfolios of the Legends Fund currently are available to the separate
accounts of Integrity and National Integrity Life Insurance Company (NATIONAL
INTEGRITY), a wholly owned subsidiary of Integrity.
Shares of Portfolios of the Legends Fund are made available to the Separate
Account under a Participation Agreement (PARTICIPATION AGREEMENT). The
Participation Agreement is among the Legends Fund, ARM Securities Corporation
(ARM SECURITIES), a wholly owned subsidiary of ARM which is the principal
underwriter for Legends Fund shares, and Integrity. If state or federal law
precludes the sale of the Legends Fund's or any Portfolio's shares to the
Separate Account, or in certain other circumstances, sales of shares to the
Separate Account may be suspended and/or the Participation Agreement may be
terminated as to the Legends Fund or the affected Portfolio. Also, the
Participation Agreement may be terminated by any party thereto with one
year's written notice.
Notwithstanding termination of the Participation Agreement, the Legends Fund
and ARM Securities are obligated to continue to make the Legends Fund's
shares available for contracts outstanding on the date the Participation
Agreement terminates, unless the Participation Agreement was terminated due
to an irreconcilable conflict among contractowners of different separate
accounts. If for any reason the shares of any Portfolio are no longer
available for purchase by the Separate Account for outstanding contracts, the
parties to the Participation Agreement have agreed to cooperate to comply
with the 1940 Act in arranging for the substitution of another funding medium
as soon as reasonably practicable and without disruption of sales of shares
to the Separate Account or any Variable Account Option.
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 fourth
quarter of 1997.
ARM Capital Advisors has entered into a sub-advisory agreement with a
professional manager for investment of the assets of each of the Portfolios.
The sub-adviser for each Portfolio is listed under "Investment Objectives of
the Portfolios" below. The Portfolios pay monthly investment management fees
to ARM Capital Advisors, and ARM Capital Advisors pays the sub-advisers for
their services to the Portfolios. ARM Capital Advisors retains a management
fee at an annual rate of up to .25% of Portfolio net assets (depending upon
Portfolio) as compensation for providing certain services to the Portfolios.
The management fees paid by each Portfolio to ARM Capital Advisors as a
percentage of net assets are set forth below:
10
<PAGE>
LEGENDS FUND PORTFOLIO MANAGEMENT FEE
---------------------- --------------
Harris Bretall Sullivan & Smith Equity Growth ...... 0.65%
Zurich Kemper Value ............................... 0.65%
Zweig Asset Allocation ............................ 0.90%
Zweig Equity (Small Cap) ........................... 1.05%
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Set forth below is a summary of the
investment objectives of the Portfolios of the Fund. There can be no
assurance that these objectives will be achieved. YOU SHOULD READ THE FUND'S
PROSPECTUS CAREFULLY BEFORE INVESTING.
HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH PORTFOLIO
Harris Bretall Sullivan & Smith Equity Growth Portfolio seeks long-term
capital appreciation. It primarily invests in stocks of established companies
with proven records of superior and consistent growth. The Portfolio may
invest all or a portion of its assets in cash and cash equivalents if the
sub-adviser considers the equity markets to be overvalued. The Portfolio may
invest in U.S. government securities when this appears desirable in light of
the Portfolio's investment objective or when market conditions warrant.
Harris Bretall Sullivan & Smith, Inc. is the sub-adviser to the Portfolio.
ZURICH KEMPER VALUE PORTFOLIO
Zurich Kemper Value Portfolio seeks primarily long-term capital appreciation
with a secondary objective of current income. It invests principally in a
diversified portfolio of securities believed by the sub-adviser to be
undervalued. The sub-adviser's philosophy centers on identifying stocks of
large, well-known companies with solid financial strength and generous dividend
yields that have low price-earnings ratios and have been generally overlooked by
the market. Zurich Kemper Value Advisors, Inc. is the sub-adviser to the
Portfolio.
ZWEIG ASSET ALLOCATION PORTFOLIO
Zweig Asset Allocation Portfolio seeks long-term capital appreciation. It
invests primarily in Blue Chip Stocks, consistent with preservation of capital
and the reduction of portfolio exposure to market risk, as determined by the
sub-adviser to the Portfolio. Blue Chip Stocks are stocks which the sub-adviser
considers comparable to the stocks included in the S&P 500 at the time of
purchase, and that have a minimum of $400 million market capitalization, average
daily trading volume of 50,000 shares or $425 million in total assets, and which
are traded on the New York Stock Exchange (NYSE), American Stock Exchange
(AMEX), over-the-counter (OTC) or on foreign exchanges. Zweig/Glaser Advisers is
the sub-adviser to the Portfolio.
ZWEIG EQUITY (SMALL CAP) PORTFOLIO
Zweig Equity (Small Cap) Portfolio seeks long-term capital appreciation. It
invests primarily in Small Company Stocks, consistent with preservation of
capital and reduction of portfolio exposure to market risk, as determined by
the sub-adviser. Current income is not an objective. SMALL COMPANY STOCKS are
the 2,500 stock positions immediately after the 500 largest stocks ranked in
terms of market capitalization and/or trading volume, and which are traded on
the NYSE, AMEX, OTC or on foreign exchanges. Zweig/Glaser Advisers is the
sub-adviser to the Portfolio.
11
<PAGE>
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 adviser 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.
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 waivers):
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 Fund 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
12
<PAGE>
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-Registered Trademark- 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.
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<PAGE>
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 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.
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<PAGE>
Set forth in the table below is the individual fund fee rate for the
portfolios and their 1996 management fee rate, comprised of the individual
and group rates, as a percentage of average net assets:
PORTFOLIO INDIVIDUAL RATE 1996 MANAGEMENT FEE
- - --------- --------------- ---------------------
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
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.
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<PAGE>
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 $300 Million 0.75* 1.25%
Janus Balanced Next $200 Million 0.70 N/A
Janus Worldwide Growth Over $500 Million 0.65 N/A
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 Portfolios' advisory fees to the extent that such fee
exceeds the effective rate of the Janus retail fund corresponding to such
Portfolio, which are the Janus Olympus Fund, Janus Balanced Fund, and Janus
Worldwide Fund, respectively. 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. The Portfolio normally invests at least 25% of
its assets in fixed-income senior securities, which include debt securities
and preferred stocks.
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<PAGE>
JANUS WORLDWIDE GROWTH PORTFOLIO
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. 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.
17
<PAGE>
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.
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 a 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. 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 August 31,
1997, MSAM and its investment advisory affiliates (exclusive of MAS, Van Kampen
American Capital, and Dean Witter Intercapital) managed assets of approximately
$80.9 billion, and MAS managed assets of approximately $57.6 billion.
18
<PAGE>
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
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.
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<PAGE>
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").
GUARANTEED RATE OPTIONS
BECAUSE OF APPLICABLE EXEMPTIVE AND EXCLUSIONARY PROVISIONS, INTERESTS IN
CONTRACTS ATTRIBUTABLE TO GROS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933 ("1933 ACT"), NOR UNDER THE INVESTMENT COMPANY ACT OF 1940 ("1940 ACT").
THUS, NEITHER SUCH CONTRACTS NOR OUR GENERAL ACCOUNT, WHICH GUARANTEES THE
VALUES AND BENEFITS UNDER THOSE CONTRACTS, ARE GENERALLY SUBJECT TO REGULATION
UNDER THE PROVISIONS OF THE 1933 ACT OR THE 1940 ACT. ACCORDINGLY, WE HAVE BEEN
ADVISED THAT THE STAFF OF THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
REVIEWED THE DISCLOSURE IN THIS PROSPECTUS RELATING TO THE GROS OR THE GENERAL
ACCOUNT. DISCLOSURES REGARDING THE GROS OR THE GENERAL ACCOUNT MAY, HOWEVER, BE
SUBJECT TO CERTAIN GENERALLY APPLICABLE PROVISIONS OF THE FEDERAL SECURITIES
LAWS RELATING TO THE ACCURACY AND COMPLETENESS OF STATEMENTS MADE IN
PROSPECTUSES.
We offer GROs with durations of two, four, six and ten years. We may from time
to time change the durations available. Each allocation to a GRO locks in a
fixed effective annual interest rate declared by us (GUARANTEED INTEREST RATE)
for the duration you select (your GRO ACCOUNT). The duration of your GRO
Account is the GUARANTEE PERIOD. Each contribution or transfer to a GRO
establishes a new GRO Account at the then-current Guaranteed Interest Rate
declared by us. We will not declare an interest rate less than 3%. Each GRO
Account expires at the end of the duration you have selected. See "Renewals of
GRO Accounts" below. Values and benefits under your contract attributable to
GROs are guaranteed by the reserves in our GRO separate account as well as by
our General Account.
The value of each of your GRO Accounts is referred to as a GRO VALUE. The GRO
Value at the expiration of the GRO Account, assuming you have not transferred or
withdrawn any amounts, will be the amount allocated plus interest at the
Guaranteed Interest Rate. We credit interest daily at an effective annual rate
equal to the Guaranteed Interest Rate. We allocate interest at the end of each
contract year and at the time of any transfer, full or partial withdrawal,
payment of a death benefit or purchase of any annuity benefit.
We may declare a higher rate of interest in the first year for any Contribution
allocated to a GRO which will exceed the Guaranteed Interest Rate credited
during the remaining years of the Guarantee Period (ENHANCED RATE). This
Enhanced Rate will be guaranteed for the Guaranteed Period's first year and
declared at the time of purchase. We reserve the right to declare and credit
additional interest based on Contribution, Account Value, withdrawal dates,
economic conditions or on any other lawful, nondiscriminatory basis (ADDITIONAL
INTEREST). Any Enhanced Rate and Additional Interest credited to your GRO
Account will be separate from the Guaranteed Interest Rate and not used in the
Market Value Adjustment formula. THE ENHANCED RATE OR ADDITIONAL INTEREST MAY
NOT BE MADE APPLICABLE UNDER CONTRACTS ISSUED IN CERTAIN STATES.
Each group of GRO Accounts of the same duration is considered one GRO, (i.e. all
of your two-year GRO Accounts are one GRO while all of your four-year GRO
Accounts are another GRO).
You may obtain information about our current Guaranteed Interest Rates by
calling our Administrative Office.
ALLOCATIONS TO GROS MAY NOT BE MADE UNDER CONTRACTS ISSUED IN CERTAIN STATES.
RENEWALS OF GRO ACCOUNTS. When a GRO Account expires, a new GRO Account of the
same duration, at the then-current Guaranteed Interest Rate, will be established
unless you withdraw your GRO Value or transfer it to another Investment Option.
We will notify you in writing before the expiration of your GRO Accounts. You
must notify us prior to the expiration of your GRO Accounts of any changes you
desire to make. See "Transfers" in Part 5.
Any renewal of a GRO Account will be implemented on the expiration date of the
GRO Account. You will receive the current Guaranteed Interest Rate applicable on
the expiration date. If a GRO Account expires and it cannot be renewed for the
same duration, it will be renewed for the next shortest available duration,
unless you instruct us otherwise within 30 days prior to expiration of the GRO
Account. You may not choose, and we will not renew, a GRO Account that expires
after your Retirement Date.
20
<PAGE>
MARKET VALUE ADJUSTMENTS. A MARKET VALUE ADJUSTMENT is an adjustment, either up
or down, in your GRO Value prior to the expiration of your GRO Account. A Market
Value Adjustment will be made for each transfer, partial withdrawal in excess of
the free withdrawal amount, surrender, or purchase of an annuity benefit from a
GRO Account that occurs other than within 30 days prior to the expiration of the
GRO Account. There will be no Market Value Adjustment made for a death benefit.
The market adjusted value may be higher or lower than the GRO Value. In no
event, however, may the market adjusted value in each GRO Account be less than
the Minimum Value, an amount equal to your allocation to such GRO Account plus
3% interest, compounded annually, less previous withdrawals from such GRO
Account and less any applicable contingent withdrawal charges. The Minimum Value
for partial withdrawals or transfers will be calculated on a pro-rata basis.
The Market Value Adjustment applicable to a GRO Account prior to its expiration
reflects the relationship between the Guaranteed Interest Rate for such GRO
Account and the then-current Guaranteed Interest Rate applicable to a newly
elected GRO Account of a duration equal to the time remaining in your GRO
Account. The Market Value Adjustment will reduce the GRO Value (but not below
the Minimum Value) if the current Guaranteed Interest Rate is higher than the
Guaranteed Interest Rate being credited to amounts under your GRO Account.
Conversely, the Market Value Adjustment will increase the GRO Value if the
current Guaranteed Interest Rate is lower than the Guaranteed Interest Rate
being credited to amounts under your GRO Account.
The Market Value Adjustment (MVA) for a GRO Account is determined under the
following formula:
MVA = GRO Value x [(1 + A)(N/12) / (1 + B + .0025)(N/12) - 1], where
A is the Guaranteed Interest Rate being credited to the GRO Account subject
to the Market Value Adjustment,
B is the current Guaranteed Interest Rate, as of the effective date of the
application of the Market Value Adjustment, for current allocations to a
GRO Account, the length of which is equal to the number of whole months
remaining in your GRO Account. Subject to certain adjustments, if such
remaining period is not equal to an exact period for which we have declared
a new Guaranteed Interest Rate, B will be determined by interpolating
between the Guaranteed Interest Rates for GRO Accounts of durations closest
to (next higher and next lower) the remaining period described above.
N is the number of whole months remaining in your GRO Account.
For contracts issued in certain states, the formula above will be adjusted to
comply with applicable state requirements.
If the remaining term of your GRO Account is 30 days or less, the Market Value
Adjustment for your GRO Account shall be zero. If for any reason we are no
longer declaring current Guaranteed Interest Rates, then for purposes of
determining B we will use the yield to maturity of United States Treasury Notes
with the same remaining term as your GRO Account, interpolating when necessary,
in place of the current Guaranteed Interest Rate or Rates.
For illustrations of the application of the Market Value Adjustment formula, see
Appendix A.
PART 4 -- DEDUCTIONS AND CHARGES
SEPARATE ACCOUNT CHARGES
Integrity deducts from the unit value every calendar day an amount equal to an
effective annual rate of 1.35% of the Account Value in the Variable Account
Options. This daily expense rate cannot be increased without your consent. If
your contract is issued on or after January 1, 1995, the effective annual rate
will reduce to 1.10% after your contract has been in effect for six years.
Various portions of this total charge, as described below, pay for certain
services to the Separate Account and the contracts.
A daily charge equal to an effective annual rate of .15% of the value of each
Variable Account Option is deducted for administrative expenses not covered by
the annual administrative charge described below. The daily administrative
charge, like the annual administrative charge, is designed to reimburse
Integrity for expenses actually incurred, without profit.
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A daily charge equal to an effective annual rate of 1.20% of the value of each
Variable Account Option is deducted for Integrity's assuming the expense risk
(.85%) and the mortality risk (.35%) under the contract. If your contract is
issued on or after January 1, 1995, the effective annual rate will reduce to
.95% after your contract has been in effect for six years, of which .60% covers
expense risk and .35% covers mortality risk. The expense risk is the risk that
our actual expenses of administering the contracts will exceed the annual
administrative expense charge. In this context, mortality risk refers to the
cost of insuring the risk Integrity takes that annuitants, as a class of
persons, will live longer than estimated and therefore require Integrity to pay
out more annuity benefits than anticipated. The relative proportion of the
mortality and expense risk charges may be modified, but the total effective
annual risk charge of 1.20% of the value of the Variable Account Options may not
be increased on your Contract.
Integrity may realize a gain from these daily charges to the extent they are not
needed to meet the actual expenses incurred.
ANNUAL ADMINISTRATIVE CHARGE
If your Account Value is less than $50,000 on the last day of any contract year
prior to the your Retirement Date, Integrity charges an annual administrative
charge of $30. This charge is deducted from your Account Value in each
Investment Option on a pro-rata basis. The portion of the charge applicable to
the Variable Account Options will reduce the number of units credited to you.
The portion of the charge applicable to the GROs is withdrawn in dollars. The
annual administrative charge will be pro-rated based on the number of days that
have elapsed in the contract year in the event of the Annuitant's retirement,
death, or termination of a contract during a contract year.
FUND CHARGES
Our Separate Account purchases shares of the Funds at net asset value. That
price reflects investment management fees and other direct expenses that have
already been deducted from the assets of the Funds. The amount charged for
investment management may not be increased without the prior approval of a
Fund's shareholders. See Part 3 - Your Investment Options.
STATE PREMIUM TAX DEDUCTION
Integrity will not deduct state premium taxes from your contributions before
applying the contributions to the Investment Options, unless required to pay
such taxes under applicable state law. If the Annuitant elects an annuity
benefit, Integrity will deduct any applicable state premium taxes from the
amount otherwise available for an annuity benefit. State premium taxes, if
applicable, currently range up to 4%.
CONTINGENT WITHDRAWAL CHARGE
No sales charges are applied when you make a contribution to the contract.
Contributions withdrawn will be subject to a withdrawal charge of up to 7%. As
shown below, the percentage charge varies, depending upon the "age" of the
contributions included in the withdrawal--that is, the contract year in which
each contribution was made. The maximum percentage of 7% would apply if the
entire amount of the withdrawal consisted of contributions made during your
current contract year. No withdrawal charge applies when you withdraw
contributions made earlier than your fifth prior contract year. For purposes of
calculating the withdrawal charge, (1) the oldest contributions will be treated
as the first withdrawn and more recent contributions next, and (2) partial
withdrawals up to the free withdrawal amount will not be considered a withdrawal
of any contributions. For partial withdrawals, the total amount deducted from
your Account Value will include the withdrawal amount requested, any applicable
Market Value Adjustment, and any applicable withdrawal charge, so that the net
amount you receive will be the amount requested.
During any contract year, no charge will be applied to your partial withdrawals
that do not exceed the free withdrawal amount. On any Business Day, the free
withdrawal amount is the greater of (i) 10% of your Account Value and (ii) any
investment gain during the prior contract year, less withdrawals during the
current contract year. Investment gain is calculated as the increase in the
Account Value during the prior contract year, minus contributions during such
year, plus withdrawals made during such year. If any partial withdrawal exceeds
the free withdrawal amount, we will deduct the applicable contingent withdrawal
charge with respect to such excess amount. The contingent withdrawal charge is a
sales charge to defray our costs of selling and promoting the contracts. We do
not expect that revenues from contingent
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withdrawal charges will cover all of such costs. Any shortfall will be made
up from our General Account assets, including any profits from other charges
under the contracts.
CONTRACT YEAR IN WHICH CHARGE AS A % OF THE
WITHDRAWN CONTRIBUTION WAS MADE CONTRIBUTION WITHDRAWN
------------------------------- ----------------------
Current........................ 7%
First Prior.................... 6
Second Prior................... 5
Third Prior.................... 4
Fourth Prior................... 3
Fifth Prior.................... 2
Sixth Prior and Earlier........ 0
No contingent withdrawal charge will be applied to any amount withdrawn if the
Annuitant uses the withdrawal either to purchase from Integrity an immediate
annuity benefit with life contingencies or an immediate annuity without life
contingencies which provides for level payments over five or more years, with a
restricted prepayment option. Similarly, no charge will be applied if the
Annuitant dies and the withdrawal is made by the Annuitant's beneficiary. See
"Death Benefits and Similar Benefit Distributions" in Part 5.
Unless specifically instructed otherwise, Integrity will make withdrawals
(including any applicable charges) from the Investment Options in the same ratio
the Annuitant's Account Value in each Investment Option bears to the Annuitant's
total Account Value. The minimum withdrawal permitted is $300.
TRANSFER CHARGE
No charge is made for your first twelve transfers among the Variable Account
Options or the GROs during a contract year. We are, however, permitted to
charge up to $20 for each additional transfer during that contract year.
(However, no transfer charge will apply to transfers under our Dollar Cost
Averaging and Customized Asset Rebalancing programs, nor will such transfers
count towards the twelve transfers you may make in a contract year before we may
impose a transfer charge.) See "Transfers" in Part 5. Transfers from a GRO may
be subject to a Market Value Adjustment. See "Guaranteed Rate Options" in
Part 3.
TAX RESERVE
We have the right to make a charge in the future for taxes or for reserves set
aside for taxes, which will reduce the investment experience of the Variable
Account Options.
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PART 5 -- TERMS OF YOUR VARIABLE ANNUITY
CONTRIBUTIONS UNDER YOUR CONTRACT
You can make contributions of at least $1,000 at any time up to the Annuitant's
Retirement Date. Your first contribution, however, cannot be less than $10,000.
We will accept contributions of at least $50 for salary allotment programs. We
have special rules for minimum contribution amounts for tax-favored retirement
programs. See "Special Rules for Tax-Favored Retirement Programs" in Part 7.
We may limit the total contributions under one contract to $1,000,000 if you are
under age 76 or to $250,000 if you are 76 to 79 years of age. Once you reach
eight years before your Retirement Date, we may refuse to accept any
contribution made for you. Contributions may also be limited by various laws or
prohibited by Integrity for all Annuitants under the contract. If your
contributions are made under a tax-favored retirement program, we will not
measure them against the maximum limits set by law.
Contributions are applied to the various Investment Options selected by you and
are used to pay annuity and death benefits.
Each contribution is credited as of the date we have RECEIVED (as defined below)
at our Administrative Office both the contribution and instructions for
allocation among the Investment Options, provided that at any time you may have
amounts in not more than nine Investment Options. For purposes of calculating
the nine Investment Options, each of your GRO Accounts counts as one Investment
Option. Wire transfers of federal funds are deemed received on the day of
transmittal if credited to our account by 3 p.m. Eastern Time, otherwise they
are deemed received on the next Business Day. Contributions by check or mail are
deemed received not later than the second Business Day after they are delivered
to our Administrative Office. A BUSINESS DAY is any day other than a weekend or
a national bank holiday.
You can change your choice of Investment Options at any time by writing to the
Administrative Office. The request should indicate your contract number and the
specific change, and you should sign the request. When it is received by the
Administrative Office, the change will be effective for any contribution which
accompanies it and for all future contributions.
YOUR ACCOUNT VALUE
Your Account Value reflects various charges. See Part 4, "Deductions and
Charges." Annual deductions are made as of the last day of each contract year.
Withdrawal charges and Market Value Adjustments, if applicable, are made as of
the effective date of the transaction. Charges against our Separate Account are
reflected daily. Any amount allocated to a Variable Account Option will go up or
down in value depending on the investment experience of that Option. For
contributions allocated to the Variable Account Options, there are no guaranteed
values. The value of your contributions allocated to the GROs is guaranteed,
subject to any applicable Market Value Adjustments. See "Guaranteed Rate
Options" in Part 3.
YOUR PURCHASE OF UNITS IN OUR SEPARATE ACCOUNT
Allocations to the Variable Account Options are used to purchase units. On any
given day, the value you have in a Variable Account Option is the unit value
multiplied by the number of units credited to you in that Option. The units of
each Variable Account Option have different unit values.
The number of units purchased or redeemed (sold) in any Variable Account Option
is calculated by dividing the dollar amount of the transaction by the Option's
unit value, calculated after the close of business that day. The number of units
for a Variable Account Option at any time is the number of units purchased less
the number of units redeemed. The value of units fluctuates with the investment
performance of the corresponding Portfolios of the Funds which in turn reflects
the investment income and realized and unrealized capital gains and losses of
the Portfolios, as well as the Funds' expenses. The unit values also change
because of deductions and charges we make to our Separate Account. The number of
units credited to you, however, will not vary because of changes in unit values.
Units of a Variable Account Option are purchased when you allocate new
contributions or transfer prior contributions to that Option. Units are redeemed
when you make withdrawals or transfer amounts from a Variable Account Option. We
also redeem units to pay the death benefit when the Annuitant dies and to pay
the annual administrative charge.
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HOW WE DETERMINE UNIT VALUE
We determine unit values for each Variable Account Option on the Valuation Date.
The Valuation Date for purposes of determining unit values is 4 p.m. Eastern
Time on each day the New York Stock Exchange is open for business.
The unit value of each Variable Account Option for any day on which we determine
unit values is equal to the unit value for the last day on which a unit value
was determined multiplied by the net investment factor for that Option on the
current day. We determine a NET INVESTMENT FACTOR for each Option as follows:
- First, we take the value of the shares belonging to the Option in the
corresponding Portfolio at the close of business that day (before giving
effect to any transactions for that day, such as contributions or
withdrawals). For this purpose, we use the share value reported to us by the
Funds.
- Next, we add any dividends or capital gains distributions by the Fund on
that day.
- Then, we charge or credit for any taxes or amounts set aside as a reserve
for taxes.
- Then, we divide this amount by the value of the amounts in the Option at
the close of business on the last day on which a unit value was determined
(after giving effect to any transactions on that day).
- Finally, we subtract a daily asset charge for each calendar day since the
last day on which a unit value was determined (for example, a Monday
calculation will include charges for Saturday and Sunday). The daily charge
is .00003721, which is an effective annual rate of 1.35%. This charge is
for the mortality risk, administrative expenses and expense risk assumed by
us under the contract.
Generally, this means that we adjust unit values to reflect what happens to the
Funds, and also for the mortality and expense risk charge and any charge for
administrative expenses or taxes.
TRANSFERS
You may transfer your Account Value among the Variable Account Options and the
GROs, subject to Integrity's then current transfer restrictions. Transfers to a
GRO must be to a newly elected GRO (i.e. to a GRO that you have not elected
before) at the then-current Guaranteed Interest Rate, unless Integrity otherwise
consents. Transfers from a GRO other than within 30 days prior to the expiration
date of a GRO Account are subject to a Market Value Adjustment. See "Guaranteed
Rate Options" in Part 3. For amounts in GROs, transfers will be made according
to the order in which monies were originally allocated to any GRO.
The amount transferred must be at least $250 or, if less, the entire amount in
the Investment Option. After twelve transfers have been made by you during a
contract year, a charge of up to $20 may apply to each additional transfer
during that contract year, except that no charge will be made for transfers
under our Dollar Cost Averaging or Customized Asset Rebalancing programs,
described in Part 8. Once annuity payments begin, transfers are no longer
permitted.
Written transfer requests must be sent directly to the Administrative Office.
Each Annuitant's request for a transfer must specify the contract number, the
amounts to be transferred and the Investment Options to and from which the
amounts are to be transferred. Transfers may also be arranged through our
telephone transfer service provided you have established a Personal
Identification Number (PIN CODE). We will honor telephone transfer instructions
from any person who provides correct identifying information, and we are not
responsible in the event of a fraudulent telephone transfer which is believed to
be genuine in accordance with these procedures. Accordingly, you bear the risk
of loss if unauthorized persons make transfers on your behalf.
A transfer request will be effective as of the Business Day it is received by
our Administrative Office. A transfer request does not change the allocation of
current or future contributions among the Investment Options. Telephone
transfers may be requested from 8:30 a.m. - 5:00 p.m., Eastern Time, on any day
we are open for business. You will receive the Variable Account Options' unit
values as of the close of business on the day you call. Accordingly, transfer
requests received after 4:00 p.m. Eastern Time will be processed using unit
values as of the close of business on the next Business Day after the day you
call. All transfers will be confirmed in writing.
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WITHDRAWALS
You may make an unlimited number of withdrawals from your contract as frequently
as you wish. Each withdrawal must be for at least $300. A withdrawal charge of
up to 7% of the contribution amount withdrawn, as adjusted for any applicable
Market Value Adjustment and the withdrawal charge itself will be deducted from
your Account Value, unless one of the exceptions applies. See "Guaranteed Rate
Options" in Part 3 and "Contingent Withdrawal Charge" in Part 4. Most
withdrawals made by you prior to age 59-1/2 are also subject to a 10% federal
tax penalty. In addition, some tax-favored retirement programs limit
withdrawals. See Part 7, "Tax Aspects of the Contracts" for further information
regarding various tax consequences associated with the contracts.
ASSIGNMENTS
You may not assign the contract as collateral or security for a loan, but an
Owner whose contract is not related to a tax-favored program may otherwise
assign the contract before the Annuitant's Retirement Date. An assignment of the
contract as a gift may, however, have adverse tax consequences. See Part 7, "Tax
Aspects of the Contracts." Integrity will not be bound by an assignment unless
it is in writing, and we have received it at the Administrative Office.
DEATH BENEFITS AND SIMILAR BENEFIT DISTRIBUTIONS
A death benefit is available to a beneficiary if the Annuitant dies prior to the
Retirement Date.
The amount of the death benefit is the greatest of:
- your Account Value
- the highest Account Value at the beginning of any contract year, plus
subsequent contributions and minus subsequent withdrawals
- your total contributions less the sum of withdrawals
"Subsequent withdrawals" for purposes of calculation of a death benefit reflect
any market value adjustments applicable to such withdrawals.
See the Statement of Additional Information dated November 1, 1997 regarding
death benefit information for contracts issued prior to January 1, 1996.
The death benefit amount is determined as of the date proof of death and
instructions for payment of proceeds are received by the Administrative Office.
Death benefits (and benefit distributions required because of a separate Owner's
death) can be paid in a lump sum or as an annuity. If no benefit option is
selected for the beneficiary at the Annuitant's death, the beneficiary can
select an option.
The beneficiary of the death benefit under a contract is selected by the Owner.
An Owner may change beneficiaries by submitting the appropriate form to the
Administrative Office. If no Annuitant's beneficiary survives the Annuitant,
then the death benefit is generally paid to the Annuitant's estate. No death
benefit will be paid after the Annuitant's death if there is a contingent
Annuitant. In that case, the contingent Annuitant becomes the new Annuitant
under the contract.
Generally, the Owner also may select his or her own beneficiary. If the Owner
dies before the Annuitant's Retirement Date, an Owner's beneficiary will become
the Owner of the contract and may be required to receive benefit distributions.
ANNUITY BENEFITS
All annuity benefits under your contract are calculated as of the Retirement
Date selected by you. The Retirement Date can be changed by written notice to
the Administrative Office any time prior to the Retirement Date. The Retirement
Date may be no later than your 85th birthday or the tenth contract anniversary,
whichever is later. The terms of the contracts applicable to the various
retirement programs, along with the federal tax laws, establish certain minimum
and maximum retirement ages.
Annuity benefits may take the form of a lump sum payment or an annuity. A
lump sum payment will provide the Annuitant with the Cash Value under the
contract, shortly after the Retirement Date. The amount applied for the
purchase of an annuity benefit will be the Adjusted Account Value, except
that the Cash Value will be the amount applied if the annuity benefit does
not have
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a life contingency and either the term is less than five years or the annuity
can be commuted to a lump sum payment without a withdrawal charge applying.
ANNUITIES
Alternate forms of annuity benefits can provide for fixed or variable payments
which may be made monthly, quarterly, semi-annually or annually. Variable
payments will be funded through one or more Separate Account Divisions. For any
annuity, the minimum amount applied to the annuity must be $2,000 and the
minimum initial payment must be at least $20.
If you have not already selected a form of annuity, we will send you, within six
months prior to your Retirement Date, an appropriate notice form on which you
may indicate the type of annuity you desire or confirm to us that the normal
form of annuity, as defined below, is to be provided. However, if we do not
receive a completed form from you on or before your Retirement Date, we will
deem the Retirement Date to have been extended until we receive your written
instructions at our Administrative Office. During such extension, the values
under your contract in the various Investment Options will remain invested in
such options and amounts remaining in Variable Account Options will continue to
be subject to the investment risks associated with those Options. However, your
Retirement Date cannot be extended beyond your 85th birthday or the tenth
contract anniversary, whichever is later. You will receive a lump sum benefit if
you do not make an election by such date.
We currently offer the following types of annuities:
A PERIOD CERTAIN ANNUITY provides for fixed or variable payments, or both, to
the Annuitant or the Annuitant's beneficiary (the PAYEE) for a fixed period. The
amount is determined by the period selected. The Annuitant, or if the payee dies
before the end of the period selected, the payee's beneficiary, may elect to
receive the total present value of future payments in cash.
A PERIOD CERTAIN LIFE ANNUITY provides for fixed or variable payments, or both,
for at least the period selected and thereafter for the life of the payee or the
payee and another annuitant under a joint and survivor annuity. You may not
change or redeem the annuity once payments have begun. If the payee (or the
payee and the other annuitant under a joint and survivor annuity) dies before
the period selected ends, the remaining payments will go to another named payee
who may have the right to redeem the annuity and secure the present value of
future guaranteed payments in a lump sum. The NORMAL FORM OF ANNUITY is a fixed
life income annuity with 10 years of payments guaranteed, funded through our
General Account.
A LIFE INCOME ANNUITY provides fixed payments for the life of the payee or the
payee and another annuitant under a joint and survivor annuity. Once a life
income annuity is selected, the form of annuity cannot be changed or redeemed
for a lump sum payment by the Annuitant or any payee.
ANNUITY PAYMENTS
Fixed annuity payments will not change and are based upon annuity rates provided
in your contract. The size of payments will depend on the form of annuity that
was chosen and, in the case of a life income annuity, on the payee's age (or
payee and a joint annuitant in the case of a joint and survivor annuity) and sex
(except under most tax-favored retirement programs). If Integrity's current
annuity rates then in effect would yield a larger payment, those current rates
will apply instead of the tables.
Variable annuity payments are funded only in the Separate Account Divisions
through the purchase of annuity units. The Variable Account Option or Options
selected cannot be changed after annuity payments begin. The SAI provides
further information concerning the determination of annuity payments. The
number of units purchased is equal to the amount of the first annuity payment
divided by the new annuity unit value for the valuation period which includes
the due date of the first annuity payment. The amount of the first annuity
payment is determined in the same manner for a variable annuity as it is for a
fixed annuity. The number of annuity units stays the same for the annuity
payment period but the new annuity unit value changes to reflect the investment
income and the realized and unrealized capital gains and losses of the Variable
Account Option or Options selected, after charges made against it. Annuity unit
values assume a base rate of net investment return of 5%, except in states which
require a lower rate in which case 3.5% will be used. The annuity unit value
will rise or fall depending on whether the actual rate of net investment return
is higher or lower than the assumed base rate. In the SAI, see "Determination of
Annuity Unit Values."
If the age or sex of an annuitant has been misstated, any benefits will be
those which would have been purchased at the correct age and sex. Any
overpayments or underpayments made by us will be charged or credited with
interest at the rate of 6% per
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year. If we have made overpayments because of incorrect information about age
or sex, we will deduct the overpayment from the next payment or payments due.
We add underpayments to the next payment.
TIMING OF PAYMENT
We normally make payments from the Variable Account Options, or apply your
Adjusted Account Value to the purchase of an annuity within seven days after
receipt of the required form at our Administrative Office. Our action can be
deferred, however, for any period during which (1) the New York Stock Exchange
has been closed or trading on it is restricted; (2) sales of securities or
determination of the fair value of Separate Account assets is not reasonably
practicable because of an emergency; or (3) the SEC, by order, permits Integrity
to defer action in order to protect persons with interests in the Separate
Account. Integrity can defer payment of your GROs for up to six months, and
interest will be paid on any such payment delayed for 30 days or more.
HOW YOU MAKE REQUESTS AND GIVE INSTRUCTIONS
When you communicate in writing with our Administrative Office, use the address
on the first page of this prospectus. Your request or instruction cannot be
honored unless it is in proper and complete form. Whenever possible, use one of
our printed forms, which may be obtained from our Administrative Office.
PART 6 - VOTING RIGHTS
FUND VOTING RIGHTS
Integrity is the legal owner of the shares of the Funds held by the Separate
Account and, as such, has the right to vote on certain matters. Among other
things, we may vote to elect a Fund's Board of Directors, to ratify the
selection of independent auditors for a Fund, and on any other matters described
in a Fund's current prospectus or requiring a vote by shareholders under the
1940 Act.
Whenever a shareholder vote is taken, we give you the opportunity to tell us how
to vote the number of shares purchased as a result of contributions to your
contract. We will send you Fund proxy materials and a form for giving us voting
instructions.
If we do not receive instructions in time from all Owners, we will vote shares
in a Portfolio for which no instructions have been received in the same
proportion as we vote shares for which we have received instructions. Under
eligible deferred compensation plans and certain Qualified Plans, your voting
instructions must be communicated to us indirectly, through your employer, but
we are not responsible for any failure by your employer to solicit your
instructions or to communicate your instructions to us. We will vote any Fund
shares that we are entitled to vote directly, because of amounts we have
accumulated in our Separate Account, in the same proportions that other Owners
vote. If the federal securities laws or regulations or interpretations of them
change so that we are permitted to vote shares of a Fund in our own right or to
restrict Owner voting, we may do so.
HOW WE DETERMINE YOUR VOTING SHARES
You may participate in voting only on matters concerning the Portfolios in which
your contributions have been invested. We determine the number of Fund shares in
each Variable Account Option that are attributable to your contract by dividing
the amount of your Account Value allocated to that Option by the net asset value
of one share of the corresponding Portfolio as of the record date set by a
Fund's Board for a Fund's shareholders' meeting. The record date for this
purpose must be no more than 60 days before the meeting of a Fund. We count
fractional shares. After annuity payments have commenced, voting rights are
calculated in a similar manner based on the actuarially determined value of your
interest in each Variable Account Option.
HOW FUND SHARES ARE VOTED
All Fund shares are entitled to one vote; fractional shares have fractional
votes. Voting is on a Portfolio-by-Portfolio basis, except for certain matters
(for example, election of Directors) which require collective approval. On
matters on which the interests of the individual Portfolios differ, the approval
of the shareholders in one Portfolio is not needed in order to make a decision
in another Portfolio. To the extent shares of a Fund are sold to separate
accounts of other insurance companies, the shares voted by such companies in
accordance with instructions received from their contract holders will dilute
the effect of voting instructions received by Integrity from its Owners.
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SEPARATE ACCOUNT VOTING RIGHTS
Under the 1940 Act, certain actions (such as some of those described under
"Changes in How We Operate" in Part 2) may require Owner approval. In that case,
you will be entitled to a number of votes based on the value you have in the
Variable Account Options, as described above under "How We Determine Your Voting
Shares." We will cast votes attributable to amounts we have in the Variable
Account Options in the same proportions as votes cast by Owners.
PART 7 - TAX ASPECTS OF THE CONTRACTS
INTRODUCTION
The effect of federal income taxes on the amounts held under a contract, on
annuity payments, and on the economic benefits to the Owner, Annuitant, and the
beneficiary or other payee may depend on Integrity's tax status, on the type of
retirement plan, if any, for which the contract is purchased, and upon the tax
and employment status of the individuals concerned.
The following discussion of the federal income tax treatment of the contract is
not exhaustive, does not purport to cover all situations and is not intended to
be tax advice. It is based upon understanding of the present federal income tax
laws as currently interpreted by the Internal Revenue Service (IRS). No
representation is made regarding the likelihood of continuation of the present
federal income tax laws or of the current interpretations by the IRS or the
courts. Future legislation may affect annuity contracts adversely. Moreover, no
attempt has been made to consider any applicable state or other laws. Because of
the inherent complexity of such laws and the fact that tax results will vary
according to the particular circumstances of the individual involved and, if
applicable, the qualified plan, any person contemplating the purchase of a
contract, contemplating selection of annuity payments under the contract, or
receiving annuity payments under a contract should consult a qualified tax
adviser. INTEGRITY DOES NOT MAKE ANY GUARANTEE REGARDING THE TAX STATUS,
FEDERAL, STATE, OR LOCAL, OF ANY CONTRACT OR ANY TRANSACTION INVOLVING THE
CONTRACTS.
YOUR CONTRACT IS AN ANNUITY
Under the federal tax law, any individual can purchase an annuity with after-tax
dollars and exclude any annuity earnings in taxable income until an actual
distribution is taken from the annuity. Alternatively, the individual (or
employer) may purchase the annuity to fund a tax-favored retirement program
(contributions are with pre-tax dollars), such as an IRA or qualified plan.
This prospectus covers the basic tax rules that apply to an annuity purchased
directly with after-tax dollars, (NONQUALIFIED ANNUITY), and some of the special
tax rules which apply to an annuity purchased to fund a tax-favored retirement
program, (QUALIFIED ANNUITY). A qualified annuity may restrict your rights and
benefits in order to qualify for its special treatment under the federal tax
law.
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TAXATION OF ANNUITIES GENERALLY
Section 72 of the Internal Revenue Code of 1986, as amended (the CODE), governs
the taxation of annuities. In general, an Owner is not taxed on increases in
value under a contract until some form of withdrawal or distribution is made
under the contract. However, under certain circumstances, the increase in value
may be subject to current federal income tax. For example, corporations,
partnerships, trusts and other non-natural persons cannot defer the taxation of
current income credited to the contract unless an exception applies. In
addition, if an Owner transfers an annuity as a gift to someone other than a
spouse (or divorced spouse), any increase in its value will be taxed at the time
of transfer. The assignment or pledge of any portion of the value of a contract
will be treated as a distribution of that portion of the value of the contract.
Section 72 provides that the proceeds of a full or partial withdrawal from a
contract prior to the date on which annuity payments begin are treated first as
taxable income to the extent that the Account Value exceeds the "investment" or
"basis" in the contract and then as non-taxable recovery of the investment or
basis in the contract. Generally, the investment or basis in the contract
equals the contributions made by or on your behalf, less any amounts previously
withdrawn which were not treated as taxable income. Special rules may apply if
the contract includes contributions made prior to August 14, 1982 which were
rolled over to the contract in a tax-free exchange.
Once annuity payments begin, the Annuitant recovers a portion of the investment
tax-free from each payment. The non-taxable portion of each payment is based on
the ratio of the Annuitant's investment to his or her expected return under the
contract (exclusion Ratio). The remainder of each payment will be ordinary
income.
After you have recovered your total investment, future payments are fully
included in income. If the Annuitant dies prior to recovering the total
investment, a deduction for the remaining basis will generally be allowed on the
Annuitant's final federal income tax return.
Withholding of federal income taxes on all distributions may be required unless
the recipient who is eligible elects not to have any amounts withheld and
properly notifies Integrity of that election.
The taxable portion of a distribution is treated as ordinary income and is taxed
at ordinary income tax rates. In addition, a tax penalty of 10% applies to the
taxable portion of a distribution unless the distribution is: (1) on or after
the date on which the taxpayer attains age 59-1/2; (2) as a result of the death
of the Owner; (3) attributable to the taxpayer becoming disabled within the
meaning of Code Section 72(m)(7); (4) from certain qualified plans (note,
however, other penalties may apply); (5) under a qualified funding asset (as
defined in Section 130(d) of the Code); (6) purchased by an employer on
termination of certain types of qualified plans and held by the employer until
the employee separates from service; or (7) under an immediate annuity as
defined in Code Section 72(u)(4).
All annuity contracts issued by Integrity or its affiliates to one Annuitant
during any calendar year are treated as a single contract in measuring the
taxable income that results from surrenders and withdrawals under any one of the
contracts.
DISTRIBUTION-AT-DEATH RULES
Under section 72(s) of the Code, in order to be treated as an annuity, a
contract must provide the following distribution rules: (a) if any Owner dies
on or after the Retirement Date and before the entire interest in the contract
has been distributed, then the remaining portion of such interest must be
distributed at least as quickly as the method in effect on the date of the
Owner's death; and (b) if any Owner dies before the Retirement Date, the entire
interest in the contract must be distributed within five years after the date of
the Owner's death. To the extent such interest is payable to a beneficiary,
however, such interest may be annuitized over the life of that beneficiary or
over a period not extending beyond the life expectancy of that beneficiary, so
long as distributions commence within one year after the Owner's death. If the
beneficiary is the spouse of the Owner, the contract (along with the deferred
tax status) may be continued in the name of the spouse as the Owner.
If the Owner is not an individual, the "primary annuitant," as defined in the
Code, is considered the Owner. The primary annuitant is the individual who is of
primary importance in affecting the timing of the amount of payout under a
contract. In addition, when the Owner is not an individual, a change in the
primary annuitant is treated as the death of the Owner. Finally, in the case of
joint owners, the distribution-at-death rules will be applied at the death of
the first Owner.
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DIVERSIFICATION STANDARDS
Each Portfolio of the Funds will be required to adhere to regulations adopted by
the Treasury Department pursuant to Section 817(h) of the Code prescribing asset
diversification requirements for investment companies whose shares are sold to
insurance company separate accounts funding variable contracts. The investment
manager for the Fund monitors the investments in order to comply with the
regulations to assure that the contracts continue to be treated as annuities for
federal income tax purposes.
The IRS has stated in published rulings that a variable contract owner will
be considered the owner of separate account assets if the contract owner
possesses incidents of ownership in those assets, such as the ability to
exercise investment control over the assets. In those circumstances, income
and gains from the separate account assets would be includable in the
variable contract owner's gross income. The Treasury Department also
announced, in connection with the issuance of regulations concerning
diversification, that those regulations "do not provide guidance concerning
the circumstances in which investor control of the investments of a
segregated asset account may cause the investor (I.E., the Owner), rather
than the insurance company, to be treated as the owner of the assets in the
account." This announcement also stated that guidance would be issued by way
of regulations or rulings on the "extent to which policyholders may direct
their investments to particular subaccounts without being treated as owners
of the underlying assets." As of the date of this prospectus, no such
guidance has been issued.
TAX-FAVORED RETIREMENT PROGRAMS
The contract is designed for use in connection with certain types of retirement
plans which receive favorable treatment under the Code. Numerous special tax
rules apply to the participants in such qualified plans and to the contracts
used in connection with such qualified plans. These tax rules vary according to
the type of plan and the terms and conditions of the plan itself. Owners,
Annuitants, and beneficiaries are cautioned that the rights of any person to any
benefits under qualified plans may be subject to the terms and conditions of the
plans themselves, regardless of the terms and conditions of the contract. In
addition, loans from qualified contracts, where allowed, are subject to a
variety of limitations, including restrictions as to the amount that may be
borrowed, the duration of the loan, and the manner in which the loans must be
repaid. (Owners should always consult their tax advisors and retirement plan
fiduciaries prior to exercising their loan privileges.) Also, special rules
apply to the time at which distributions must commence and the form in which the
distributions must be paid. THEREFORE, NO ATTEMPT IS MADE TO PROVIDE MORE THAN
GENERAL INFORMATION ABOUT THE USE OF CONTRACTS WITH THE VARIOUS TYPES OF
QUALIFIED PLANS.
Integrity reserves the right to change its administrative rules, such as minimum
contribution amounts, as needed to comply with the Code as to tax-favored
retirement programs.
Following are brief descriptions of various types of qualified plans in
connection with which Integrity may issue a contract.
INDIVIDUAL RETIREMENT ANNUITIES
Code Section 408 permits eligible individuals to contribute to an individual
retirement program known as an IRA. An individual who receives compensation and
who has not reached age 70-1/2 by the end of the tax year may establish an IRA
and make contributions up to the deadline for filing his or her federal income
tax return for that year (without extensions). IRAs are subject to limitations
on the amount that may be contributed, the persons who may be eligible, and on
the time when distributions may commence. An individual may also rollover
amounts distributed from another IRA or another tax-favored retirement program
to an IRA contract. Your IRA contract will be issued with a rider outlining the
special terms of your contract which apply to IRAs.
TAX SHELTERED ANNUITIES
Section 403(b) of the Code permits the purchase of tax-sheltered annuities (TSA)
by public schools and certain charitable, educational and scientific
organizations described in Section 501(c)(3) of the Code. The contract is not
intended to accept other than employee contributions. Such contributions are not
includible in the gross income of the employee until the employee receives
distributions from the contract. The amount of contributions to the TSA is
limited to certain maximums imposed by Code sections 403(b), 415 and 402(g).
Furthermore, the Code sets forth additional restrictions governing such items as
transferability, distributions and withdrawals. Any employee should obtain
competent tax advice as to the tax treatment and suitability of such an
investment. Your contract will be issued with a rider outlining the special
terms which apply to a TSA.
SIMPLIFIED EMPLOYEE PENSIONS
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Section 408(k) of the Code allows employers to establish simplified employee
pension plans (SEP-IRAS) for their employees, using the employees' IRAs for such
purposes, if certain criteria are met. Under these plans the employer may,
within specified limits, make deductible contributions on behalf of the
employees to IRAs. Employers intending to use the contract in connection with
such plans should seek competent advice. The SEP-IRA will be issued with a rider
outlining the special terms of the contract.
CORPORATE AND SELF-EMPLOYED (H.R. 10 AND KEOGH) PENSION AND PROFIT SHARING PLANS
Sections 401(a) and 403(a) of the Code permit corporate employers to establish
various types of tax-favored retirement plans for employees. The Self-Employed
Individuals' Tax Retirement Act of 1962, as amended, commonly referred to as
"H.R. 10" or "Keogh," permits self-employed individuals also to establish such
tax-favored retirement plans for themselves and their employees. Such
retirement plans may permit the purchase of the contract in order to provide
benefits under the plans. Employers intending to use the contract in connection
with such plans should seek competent advice. The Company reserves the right to
request documentation to substantiate that a qualified plan exists and is being
properly administered. Integrity does not administer such plans.
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS
Section 457 of the Code permits employees of state and local governments and
tax-exempt organizations to defer a portion of their compensation without
paying current taxes. The employees must be participants in an eligible
deferred compensation plan. To the extent the contracts are used in
connection with an eligible plan, employees are considered general creditors
of the employer and the employer as Owner of the contract has the sole right
to the proceeds of the contract. However, Section 457(g), as added by the
Small Business and Jobs Protection Act (SBJPA) of 1996, provides that on and
after August 20, 1996, a plan maintained by an eligible governmental employer
must hold all assets and income of the plan in a trust, custodial account, or
annuity contract for the exclusive benefit of participants and their
beneficiaries. If the plan is in existence on August 20, 1996, the employer
need not establish a trust, custodial account, or annuity contract until
January 1, 1999. Loans to employees may be permitted under such plans;
however, a Section 457 plan is not required to allow loans. Contributions to
a contract in connection with an eligible government plan are subject to
limitations. Those who intend to use the contracts in connection with such
plans should seek competent advice. The Company reserves the right to request
documentation to substantiate that a qualified plan exists and is being
properly administered. Integrity does not administer such plans.
DISTRIBUTIONS UNDER TAX-FAVORED RETIREMENT PROGRAMS
Distributions from tax-favored plans are subject to certain restrictions. Prior
to the enactment of the 1996 SBJPA, distributions of minimum amounts specified
by the Code must have commenced by April 1 of the calendar year following the
calendar year in which the participant reaches age 70-1/2. The SBJPA provides
participants in qualified plans, with the exception of five-percent owners and
IRA holders, to begin receiving distributions by April 1 of the calendar year
following the later of either (i) the calendar year in which the employee
reaches age 70-1/2, or (ii) the calendar year in which the employee retires.
Additional distribution rules apply after the participant's death. Failure to
make mandatory distributions may result in the imposition of a 50% penalty tax
on any difference between the required distribution amount and the amount
distributed. Distributions to a participant from all plans (other than 457
plans) in a calendar year that exceed a specific limit under the Code are
generally subject to a 15% penalty tax (in addition to any ordinary income tax)
on the excess portion of the distributions. However, the SBJPA of 1996 has
suspended the excise tax on excess distributions. The provision relating to the
excise tax on excess distributions is effective with respect to distributions
received in 1997, 1998 and 1999.
Distributions from a tax-favored plan (not including an IRA subject to Code
Section 408) to an employee, surviving spouse, or former spouse who is an
alternate payee under a qualified domestic relations order, in the form of a
lump sum settlement or periodic annuity payments for a fixed period of fewer
than 10 years are subject to mandatory income tax withholding of 20% of the
taxable amount of the distribution, unless (1) the distributee directs the
transfer of such amounts in cash to another plan or an IRA; or (2) the payment
is a minimum distribution required under the Code. The taxable amount is the
amount of the distribution less the amount allocable to after-tax contributions.
All other types of taxable distributions are subject to withholding unless the
distributee elects not to have withholding apply.
We are not permitted to make distributions from a contract unless a request has
been made. It is therefore your responsibility to comply with the minimum
distribution rules. You should consult your tax adviser regarding these rules
and their proper application.
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The above description of the federal income tax consequences of the different
types of tax-favored retirement plans which may be funded by the contract is
only a brief summary and is not intended as tax advice. The rules governing the
provisions of plans are extremely complex and often difficult to comprehend.
Anything less than full compliance with all applicable rules, all of which are
subject to change, may have adverse tax consequences. A prospective Owner
considering adoption of a plan and purchase of a contract in connection
therewith should first consult a qualified and competent tax adviser, with
regard to the suitability of the contract as an investment vehicle for the plan.
FEDERAL AND STATE INCOME TAX WITHHOLDING
Integrity will withhold and remit to the U.S. government a part of the taxable
portion of each distribution made under a contract unless the distributee
notifies Integrity at or before the time of the distribution of an election not
to have any amounts withheld. In certain circumstances, Integrity may be
required to withhold tax, as explained above. The withholding rates applicable
to the taxable portion of periodic annuity payments (other than eligible
rollover distributions) are the same as the withholding rates generally
applicable to payments of wages. In addition, the withholding rate applicable to
the taxable portion of non-periodic payments (including withdrawals prior to the
maturity date) is 10%. As discussed above, the withholding rate applicable to
eligible rollover distributions is 20%.
Certain states have indicated that pension and annuity withholding will apply to
payments made to residents. Generally, an election out of federal withholding
will also be considered an election out of state withholding. For more
information concerning a particular state, call our Administrative Office at the
toll-free number.
IMPACT OF TAXES TO INTEGRITY
The contracts provide that Integrity may charge the Separate Account for taxes.
Integrity can also set up reserves for taxes.
TRANSFERS AMONG INVESTMENT OPTIONS
There will not be any tax liability if you transfer any part of the Account
Value among the Investment Options of your contract.
PART 8 - ADDITIONAL INFORMATION
SYSTEMATIC WITHDRAWALS
We offer a program for systematic withdrawals that allows you to pre-authorize
periodic withdrawals from your contract prior to your Retirement Date. You may
choose to have withdrawals made monthly, quarterly, semi-annually or annually
and may specify the day of the month (other than the 29th, 30th or 31st) on
which the withdrawal is to be made. You may specify a dollar amount for each
withdrawal or an annual percentage to be withdrawn. The minimum systematic
withdrawal currently is $100. You may also specify an account for direct deposit
of your systematic withdrawals. To enroll under our systematic withdrawal
program, you must deliver the appropriate administrative form to our
Administrative Office. Withdrawals may begin not less than one business day
after our receipt of the form. You or we may terminate your participation in the
program upon one day's prior written notice, and we may terminate or amend the
systematic withdrawal program at any time. If on any withdrawal date you do not
have sufficient values to make all of the withdrawals you have specified, no
withdrawals will be made and your enrollment in the program will be ended.
Amounts withdrawn by you under the systematic withdrawal program may be within
the free withdrawal amount in which case neither a contingent withdrawal charge
nor a Market Value Adjustment will be made. See "Contingent Withdrawal Charge"
in Part 4. AMOUNTS WITHDRAWN UNDER THE SYSTEMATIC WITHDRAWAL PROGRAM IN EXCESS
OF THE FREE WITHDRAWAL AMOUNT WILL BE SUBJECT TO A CONTINGENT WITHDRAWAL CHARGE
AND A MARKET VALUE ADJUSTMENT IF APPLICABLE. WITHDRAWALS ALSO MAY BE SUBJECT TO
THE 10% FEDERAL TAX PENALTY FOR EARLY WITHDRAWALS UNDER THE CONTRACTS AND TO
INCOME TAXATION. See Part 7, "Tax Aspects of the Contracts."
DOLLAR COST AVERAGING
We offer a dollar cost averaging program under which allocations to the Janus
Money Market Option are automatically transferred on a monthly, quarterly,
semi-annual or annual basis to one or more other Variable Account Options.
You must specify a dollar amount to be transferred into each Variable Account
Option, and the current minimum transfer to each Option
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is $250. No transfer charge will apply to transfers under our dollar cost
averaging program, and such transfers will not count towards the twelve
transfers you may make in a contract year before we may impose a transfer
charge.
To enroll under our dollar cost averaging program, you must deliver the
appropriate administrative form to our Administrative Office. You or we may
terminate your participation in the program upon one day's prior written notice,
and we may terminate or amend the dollar cost averaging program at any time. If
you do not have sufficient funds in the Janus Money Market Option to transfer to
each Variable Account Option specified, no transfer will be made and your
enrollment in the program will be ended.
CUSTOMIZED ASSET REBALANCING
We offer a customized asset rebalancing program whereby you can select the
frequency for rebalancing. Frequencies available include rebalancing monthly,
quarterly, semi-annually or annually. The value in the Variable Account Options
will be automatically rebalanced by transfers among such Variable Account
Options, and you will receive a confirmation notice after each rebalancing.
Transfers will occur only to and from those Variable Account Options where you
have current contribution allocations. No transfer charge will apply to
transfers under our Customized Asset Rebalancing program, and such transfers
will not count towards the twelve transfers you may make in a contract year
before we may impose a transfer charge.
GROs are not eligible for the Customized Asset Rebalancing program.
To enroll under our Customized Asset Rebalancing program, you must deliver the
appropriate administrative form to our Administrative Office. You should be
aware that other allocation programs, such as dollar cost averaging, as well as
transfers and withdrawals that you make, may not work in concert with the
Customized Asset Rebalancing program. You should, therefore, monitor your use
of such other programs, transfers, and withdrawals while the Customized Asset
Rebalancing program is in effect. You or we may terminate your participation in
the program upon one day's prior written notice, and we may terminate or amend
the Customized Asset Rebalancing program at any time.
SYSTEMATIC CONTRIBUTIONS
We offer a program for systematic contributions that allows you to pre-authorize
monthly, quarterly, or semi-annual withdrawals from your checking account for
payment to us. To enroll under our program, you must deliver the appropriate
administrative form to our Administrative Office. You or we may terminate your
participation in the program upon 30 days' prior written notice. Your
participation may be terminated by us if your bank declines to make any payment.
The minimum amount for systematic contributions is $1,000 per month.
PERFORMANCE INFORMATION
Performance data for the Variable Account Options, including the yield and
effective yield of the Janus Money Market Option, the yield of the other
Options, and the total return of all of the Options may appear in advertisements
or sales literature. Performance data for any Option reflects only the
performance of a hypothetical investment in the Option during the particular
time period on which the calculations are based. Performance information should
be considered in light of the investment objectives and policies of the
Portfolio in which the Option invests and the market conditions during the given
time period, and it should not be considered as a representation of performance
to be achieved in the future.
TOTAL RETURNS are based on the overall dollar or percentage change in value of a
hypothetical investment in an Option. Total return quotations reflect changes in
Fund share price, the automatic reinvestment by the Option of all distributions
and the deduction of applicable contract charges and expenses, including any
contingent withdrawal charge that would apply if an Owner surrendered the
contract at the end of the period indicated. Total returns also may be shown
that do not take into account the contingent withdrawal charge or the annual
administrative charge applicable where the Account Value is less than $50,000 at
the end of a contract year.
A CUMULATIVE TOTAL RETURN reflects an Option's performance over a stated period
of time. An AVERAGE ANNUAL TOTAL RETURN reflects the hypothetical annually
compounded return that would have produced the same cumulative total return if
the Option's performance had been constant over the entire period. Because
average annual total returns tend to smooth out variations in an Option's
returns, you should recognize that they are not the same as actual year-by-year
results.
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Some Options may also advertise YIELD. These measures reflect the income
generated by an investment in the Option over a specified period of time. This
income is annualized and shown as a percentage. Yields do not take into account
capital gains or losses or the contingent withdrawal charge.
The Janus Money Market Option may advertise its CURRENT and EFFECTIVE YIELD.
Current yield reflects the income generated by an investment in the Option over
a specified 7-day period. Effective yield is calculated in a similar manner
except that income earned is assumed to be reinvested. The JPM Bond Option may
advertise a 30-day yield which reflects the income generated by an investment in
such Option over a specified 30-day period.
For a detailed description of the methods used to determine yield and total
return for the Variable Account Options, see the SAI.
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APPENDIX A
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
Contribution:.................................. $50,000.00
GRO Account duration:.......................... 6 Years
Guaranteed Interest Rate:...................... 5% Annual Effective Rate
The following examples illustrate how the Market Value Adjustment and the
contingent withdrawal charge may affect the values of a contract upon a
withdrawal. The 5% assumed Guaranteed Interest Rate is the same rate used in the
Example under "Table of Annual Fees and Expenses" in this Prospectus. In these
examples, the withdrawal occurs three years after the initial contribution. The
Market Value Adjustment operates in a similar manner for transfers. No
contingent withdrawal charge applies to transfers.
The GRO Value for this $50,000 contribution is $67,004.78 at the expiration of
the GRO Account. After three years, the GRO Value is $57,881.25. It is also
assumed, for the purposes of these examples, that no prior partial withdrawals
or transfers have occurred.
The Market Value Adjustment will be based on the rate we are then crediting (at
the time of the withdrawal) on new contributions to GRO Accounts of the same
duration as the time remaining in your GRO Account, rounded to the next higher
number of complete months. If we do not declare a rate for the exact time
remaining, we will interpolate between the Guaranteed Interest Rates for GRO
Accounts of durations closest to (next higher and next lower) the remaining
period described above. Three years after the initial contribution, there would
have been three years remaining in your GRO Account. These examples also show
the withdrawal charge which would be calculated separately.
EXAMPLE OF A DOWNWARD MARKET VALUE ADJUSTMENT:
A downward Market Value Adjustment results from a full or partial withdrawal
that occurs when interest rates have increased. Assume interest rates have
increased three years after the initial contribution and we are then crediting
6.5% for a three-year GRO Account. Upon a full withdrawal, the Market Value
Adjustment, applying the above formula would be:
-0.0483785 = [(1 + .05)(36/12) / (1 + .065 + .0025)(36/12)]- 1
The Market Value Adjustment is a reduction of $2,800.21 from the GRO Value:
-$2,800.21 = -0.0483785 X $57,881.25
The Market Adjusted Value would be:
$55,081.04 = $57,881.25 - $2,800.21
A withdrawal charge of 4% would be assessed against the $50,000 original
contribution:
$2,000.00 = $50,000.00 X .04
Thus, the amount payable on a full withdrawal would be:
$53,081.04 = $57,881.25 - $2,800.21 - $2,000.00
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If instead of a full withdrawal, $20,000 was requested, we would first determine
the free withdrawal amount:
Greater of:
a) $5,788.13 = $57,881.25 X .10
or
b) $2,756.25 = gain in prior contract year
Free Amount = $5,788.13
The non-free amount would be:
$14,211.87 = $20,000.00 - $5,788.13
The Market Value Adjustment, which is only applicable to the non-free amount,
would be:
- $687.55 = -.0483785 X $14,211.87
The withdrawal charge would be:
$620.81 = [($14,211.87 + $687.55)/(1 - .04)] - ($14,211.87 + 687.55)
Thus, the total amount needed to provide $20,000 after the Market Value
Adjustment and withdrawal charge would be:
$21,308.36 = $20,000.00 + $687.55 + $620.81
The ending Account Value would be:
$36,572.89 = $57,881.25 - $21,308.36
EXAMPLE OF AN UPWARD MARKET VALUE ADJUSTMENT:
An upward Market Value Adjustment results from a full or partial withdrawal that
occurs when interest rates have decreased. Assume interest rates have decreased
three years after the initial contribution and we are then crediting 4% for a
three-year GRO Account. Upon a full withdrawal, the Market Value Adjustment,
applying the formula set forth in the prospectus, would be:
0.0217384 = [(1 + .05)(36/12) / (1 + .04 + .0025)(36/12)]- 1
The Market Value Adjustment is an increase of $1,258.25 to the GRO Value:
$1,258.25 = 0.0217384 X $57,881.25
The Market Adjusted Value would be:
$59,139.50 = $57,881.25 + $1,258.25
A withdrawal charge of 4% would be assessed against the $50,000 original
contribution:
$2,000.00 = $50,000.00 X .04
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Thus, the amount payable on a full withdrawal would be:
$57,139.50 = $57,881.25 + $1,258.25 - $2,000.00
If instead of a full withdrawal, $20,000 was requested, the free withdrawal
amount and non-free amount would first be determined as above:
Free Amount = $5,788.13
Non-Free Amount = $14,211.87
The Market Value Adjustment would be:
$308.94 = .0217384 X $14,211.87
The withdrawal charge would be:
$572.29 = [($14,211.87 - $308.94)/(1 - .04)] - ($14,211.87 - $308.94)
Thus, the total amount needed to provide $20,000 after the Market Value
Adjustment and withdrawal charge would be:
$20,270.35 = $20,000.00 - $308.94 + $579.29
The ending Account Value would be:
$37,610.90 = $57,881.25 - $20,270.35
Actual Market Value Adjustments may have a greater or lesser impact than shown
in the examples, depending on the actual change in interest crediting rate and
the timing of the withdrawal or transfer in relation to the time remaining in
the GRO Account. Also, the Market Value Adjustment can never decrease the
Account Value below premium plus 3% interest, before any applicable charges.
Account values less than $50,000 will be subject to a $30 annual charge.
The above examples will be adjusted to comply with applicable state regulation
requirements for contracts issued in certain states.
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STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 1, 1997
FOR
PINNACLE(version II)
FLEXIBLE PREMIUM VARIABLE ANNUITY
ISSUED BY
INTEGRITY LIFE INSURANCE COMPANY
AND
FUNDED THROUGH ITS SEPARATE ACCOUNT II
TABLE OF CONTENTS
Page
Part 1 - Integrity and Custodian . . . . . . . . . . . . . . . . . . . . . . . 2
Part 2 - Distribution of the Contracts . . . . . . . . . . . . . . . . . . . . 3
Part 3 - Performance Information . . . . . . . . . . . . . . . . . . . . . . . 3
Part 4 - Determination of Annuity Unit Values. . . . . . . . . . . . . . . . .10
Part 5 - Death Benefit Information for Contracts Issued Prior to
January 1, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Part 6 - Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . .12
This Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the prospectus for the contracts, dated November 1,
1997. For definitions of special terms used in the SAI, please refer to the
prospectus.
A copy of the prospectus to which this SAI relates is available at no charge by
writing the Administrative Office at Integrity Life Insurance Company
("Integrity"), P.O. Box 740074, Louisville, Kentucky 40201-0074, or by calling
1-800-325-8583.
<PAGE>
PART 1 - INTEGRITY AND CUSTODIAN
Integrity is an Ohio stock life insurance company that sells life insurance and
annuities. Its principal executive offices are located at 515 West Market
Street, Louisville, Kentucky, 40202. Integrity, the depositor of Separate
Account II, is a wholly owned subsidiary of Integrity Holdings, Inc., a Delaware
corporation which is a holding company engaged in no active business. Integrity
owns 100% of the stock of National Integrity Life Insurance Company, a New York
stock life insurance corporation. All outstanding shares of Integrity Holdings,
Inc. are owned by ARM Financial Group, Inc. (ARM), a Delaware corporation which
is a financial services company focusing on the long-term savings and retirement
marketplace by providing retail and institutional products and services
throughout the United States. ARM owns 100% of the stock of (i) ARM Securities
Corporation (ARM SECURITIES), a Minnesota corporation, registered with the SEC
as a broker-dealer and a member of the National Association of Securities
Dealers, Inc., (ii) ARM Capital Advisors, Inc., a New York corporation
registered with the SEC as an investment adviser, (iii) SBM Certificate Company,
a Minnesota corporation registered with the SEC as an issuer of face-amount
certificates, and (iv) ARM Transfer Agency, Inc., a Delaware corporation
registered with the SEC as a transfer and dividend disbursing agency.
In June 1997, ARM Financial completed an initial public offering (the
"Offering") of 9.2 million shares of Class A common stock, par value of $.01 per
share (the "New Class A Common Stock"), of which 5.75 million shares were sold
by ARM Financial and 3.45 million shares were sold by the Morgan Stanley
Stockholders (as defined below). Concurrent with the closing of the Offering,
ARM Financial amended and restated its Certificate of Incorporation to
effectuate a recapitalization such that (i) the common equity of ARM Financial
consists of New Class A Common Stock and Class B Non-Voting Common Stock, par
value of $.01 per share (the "New Class B Common Stock" and, together with the
New Class A Common Stock, the "New Common Stock"), (ii) authorized shares of the
New Class A Common Stock and New Class B common Stock were increased to 150
million shares and 50 million shares, respectively, (iii) each outstanding share
of common stock of ARM Financial was converted into one share of New Class A
Common Stock, (iv) certain shares of the New Class A Common Stock owned by
private equity funds sponsored by Morgan Stanley, Dean Witter, Discover & Co.
(the successor to Morgan Stanley Group Inc. in its merger with Dean Witter,
Discover & Co.) (the "Morgan Stanley Stockholders") were converted into New
Class B Common Stock such that, after giving effect to such conversion, but not
giving effect to the Offering, the Morgan Stanley Stockholders owned, in the
aggregate, 49% of the outstanding New Class A Common Stock, and (v) each share
of New Common Stock was split into 706 shares of New Common Stock. Holders of
New Class B Common Stock have no right to vote on matters submitted to a vote of
stockholders, except in certain circumstances. Shares of the New Class B Common
Stock have no preemptive or other subscription rights and are convertible into
an equal number of shares of New Class A Common Stock (1) at the option of the
holder thereof to the extent that, following such conversion, the Morgan Stanley
Stockholders will not, in the aggregate, own more than 49% of the outstanding
shares of New Class A Common Stock, and (2) automatically upon the transfer of
such shares by any Morgan Stanley Stockholder to a person that is not a Morgan
Stanley Stockholder or an affiliate of a Morgan Stanley Stockholder. The Morgan
Stanley Stockholders owned approximately 91% of the outstanding shares of ARM
Financial's common stock prior to the Offering and approximately 53% following
the Offering.
No person has the direct or indirect power to control Morgan Stanley, Dean
Witter, Discover & Co., except insofar as he or she may have such power by
virtue of his or her capacity as a director or executive officer thereof.
Morgan Stanley, Dean Witter, Discover & Co., is publicly held; no individual
beneficially owns more than 5% of the common shares; however, approximately 13%
of such shares are subject to a stockholders' agreement or voting agreement
among certain current and former principals and employees of Morgan Stanley,
Dean Witter, Discover & Co., and its predecessor.
Beginning in 1994, ARM provided substantially all of the services required to be
performed on behalf of the Separate Account. Total fees paid to ARM by
Integrity for management services in 1995 and 1996, including services
applicable to the Registrant, were $7,462,365 and $13,823,048, respectively.
Integrity is the custodian for the shares of Portfolios owned by the Separate
Account. The Portfolios' shares are held in book-entry form.
Reports and marketing materials, from time to time, may include information
concerning the rating of Integrity, as determined by A.M. Best Company,
Moody's Investor Service, Standard & Poor's Corporation, Duff & Phelps
Corporation, or other recognized rating services. Integrity is currently rated
"A" (Excellent) by A.M. Best Company, and has received
2
<PAGE>
claims paying ability ratings of "A" (Good) from Standard & Poor's Corporation,
"Baa1" from Moody's Investors Service, Inc., and "A+" (High) from Duff and
Phelps Credit Rating Company. However, Integrity does not guarantee the
investment performance of the portfolios, and these ratings do not reflect
protection against investment risk.
Under prior management, Integrity was subject to a consent order in the State of
Florida under which it was precluded from writing new business in Florida from
May, 1992 to November, 1994. The consent order was entered into on May 6, 1992
as a result of noncompliance with certain investment restrictions under Florida
law. Due to the substantial asset restructuring and capital infusions involved
with Integrity's acquisition by ARM in November, 1993, Integrity came to be
fully in compliance with the investment limitations of the State of Florida and
a request for full relief from the consent order was granted by the Florida
Department of Insurance on November 4, 1994.
On April 1, 1996, Integrity purchased for its own account approximately 478,900
shares of the Pinnacle Fixed Income Option, at net asset value, for an aggregate
purchase price of $5.1 million, for the purpose of "seeding" the Option.
Integrity intends to redeem its shares on a dollar-for-dollar basis to the
extent, and at the same time as, the Options have sales in respect to
policyholders. As of December 31, 1996, the shares of the Pinnacle Fixed Income
Option purchased by Integrity constituted 49.6% of the outstanding shares of the
Option.
PART 2 - DISTRIBUTION OF THE CONTRACTS
ARM Securities, a wholly owned subsidiary of ARM, is the principal underwriter
of the contracts. ARM Securities is registered with the SEC as a broker-dealer
and is a member in good standing of the National Association of Securities
Dealers, Inc. ARM Securities' address is 515 West Market Street, Louisville,
Kentucky 40202. The contracts are offered through ARM Securities on a
continuous basis.
We generally pay a maximum distribution allowance of 6% of initial
contributions. The amount of distribution allowances paid was $617,264,
$937,352, and $6,200,036 for the years ended December 31, 1996, 1995, and 1994,
respectively. No distribution allowances were retained by ARM Securities during
these years. Integrity may from time to time pay or allow additional
promotional incentives, in the form of cash or other compensation, to
broker-dealers that sell contracts. In some instances, such other incentives may
be offered only to certain broker-dealers that sell or are expected to sell
during specified time periods certain minimum amounts of the contracts.
PART 3 - PERFORMANCE INFORMATION
Each Variable Account Option may from time to time include the Average Annual
Total Return, the Cumulative Total Return, and Yield of its shares in
advertisements or in other information furnished to shareholders. The Janus
Money Market Option may also from time to time include the Yield and Effective
Yield of its shares in information furnished to shareholders. Performance
information is computed separately for each Option in accordance with the
formulas described below. At any time in the future, total return and yields
may be higher or lower than in the past and there can be no assurance that any
historical results will continue.
TOTAL RETURNS
Total returns reflect all aspects of an Option's return, including the automatic
reinvestment by the Option of all distributions and the deduction of all
applicable charges to the Option on an annual basis, including mortality risk
and expense charges, the annual administrative charge and other charges against
contract values. Quotations also will assume a termination (surrender) at the
end of the particular period and reflect the deductions of the contingent
withdrawal charge, if applicable. Total returns may be shown simultaneously that
do not take into account deduction of the contingent withdrawal charge, and/or
the annual administrative charge.
Nonstandardized "total return" will be calculated in a similar manner and for
the same time periods as the average annual total return and for three years
except total return will assume an initial investment of $60,000 and will not
reflect the deduction of any applicable contingent withdrawal charge, which, if
reflected, would decrease the level of performance shown. The contingent
withdrawal charge is not reflected because the contracts are designed for long
term investment. An
3
<PAGE>
assumed initial investment of $60,000 will be used because that figure more
closely approximates the size of a typical contract than does the $1,000 figure
used in calculating the standardized average annual total return quotations.
The amount of the hypothetical initial investment assumed affects performance
because the annual administrative charge is a fixed per contract charge.
AVERAGE ANNUAL TOTAL RETURNS are calculated by determining the growth or decline
in the value of a hypothetical historical investment in the Option over certain
periods, including 1, 5, and 10 years (up to the life of the Option), and then
calculating the annually compounded percentage rate that would have produced the
same result if the rate of growth or decline in value had been constant over the
period. Investors should realize that the Option's performance is not constant
over time, but changes from year to year, and that the average annual returns
represent the averages of historical figures as opposed to the actual historical
performance of an Option during any portion of the period illustrated. Average
annual returns are calculated pursuant to the following formula:
P(1+T)(n) = ERV, where P is a hypothetical initial payment of $1,000, T is the
average annual total return, n is the number of years, and ERV is the withdrawal
value at the end of the period.
CUMULATIVE TOTAL RETURNS are UNAVERAGED and reflect the simple percentage change
in the value of a hypothetical investment in the Option over a stated period of
time. In addition to the period since inception, cumulative total returns may be
calculated on a year-to-date basis at the end of each calendar month in the
current calendar year. The last day of the period for year-to-date returns is
the last day of the most recent calendar month at the time of publication.
YIELDS
Some Options may advertise yields. Yields quoted in advertising reflect the
change in value of a hypothetical investment in the Option over a stated period
of time, not taking into account capital gains or losses or the imposition of
any contingent withdrawal charge. Yields are annualized and stated as a
percentage.
CURRENT YIELD and EFFECTIVE YIELD are calculated for the Money Market Option.
Current Yield is based on the change in the value of a hypothetical investment
(exclusive of capital changes) over a particular 7-day period, less a
hypothetical charge reflecting deductions from contract values during the period
(the BASE PERIOD), and stated as a percentage of the investment at the start of
the base period (the BASE PERIOD RETURN). The base period return is then
annualized by multiplying by 365/7, with the resulting yield figure carried to
at least the nearest hundredth of one percent. Effective yield assumes that all
dividends received during an annual period have been reinvested. This
compounding effect causes effective yield to be higher than current yield.
Calculation of effective yield begins with the same base period return used in
the calculation of current yield, which is then annualized to reflect weekly
compounding pursuant to the following formula:
365/7
Effective Yield = {(Base Period Return) + 1) } - 1
4
<PAGE>
NON-STANDARD AVERAGE TOTAL RETURN - The table provides cumulative and average
annual total returns for each Option for the 1, 3, 5 and 10 Year Periods Ended
December 31, 1996, and from inception through December 31, 1996. The
calculation assumes the policy is still in force and therefore does not take
withdrawal charges into consideration. The performance information is based on
the historical investment experience of the Options and does not indicate or
represent future experience. This table is based upon average Account Value
over $60, 000 for which the annual charge is $0.
<TABLE>
<CAPTION>
RETURNS WITHOUT SURRENDER CHARGES
CUMULATIVE TOTAL RETURN
YEAR-TO- ------------------------------------
INCEPTION DATE LIFE OF
VARIABLE OPTIONS DATE (1) RETURN 3 YEAR 5 YEAR 10 YEAR FUND
- - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EAFE Equity Index 6/21/96 n/a n/a n/a
Equity 500 Index 12/31/92 n/a n/a
Small Cap Index 8/13/96 n/a n/a n/a
VIP Equity-Income 10/9/86
VIP II Contrafund 1/3/95 n/a n/a n/a
VIP III Growth & Income 12/31/96 n/a n/a n/a
VIP III Growth Opportunities 1/3/95 n/a n/a n/a
Harris Bretall Sullivan & Smith Equity Growth 12/7/92 n/a n/a
Zurich Kemper Value 12/21/92 n/a n/a
Zweig Asset Allocation 12/14/92 n/a n/a
Zweig Equity (Small Cap) 1/4/93 n/a n/a
Janus Balanced 9/13/93 n/a n/a
Janus Capital Appreciation (2) 5/1/97 n/a n/a n/a
Janus Worldwide Growth 9/13/93 n/a n/a
JPM Bond 1/3/95 n/a n/a n/a
JPM International Equity 1/3/95 n/a n/a n/a
Morgan Stanley Asian Equity 12/31/91 n/a
Morgan Stanley Emerging Markets Debt 2/1/94 n/a n/a
Morgan Stanley High Yield 8/31/92 n/a n/a
Morgan Stanley U.S. Real Estate 1/31/95 n/a n/a n/a
<CAPTION>
AVERAGE ANNUAL RETURN
------------------------------------------------
LIFE OF
VARIABLE OPTIONS 1 YEAR 3 YEAR 5 YEAR 10 YEAR FUND
- - ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EAFE Equity Index n/a n/a n/a
Equity 500 Index n/a n/a
Small Cap Index n/a n/a n/a n/a
VIP Equity-Income
VIP II Contrafund n/a n/a n/a
VIP III Growth & Income n/a n/a n/a n/a
VIP III Growth Opportunities n/a n/a n/a
Harris Bretall Sullivan & Smith Equity Growth n/a n/a
Zurich Kemper Value n/a n/a
Zweig Asset Allocation n/a n/a
Zweig Equity (Small Cap) n/a n/a
Janus Balanced n/a n/a
Janus Capital Appreciation (2) n/a n/a n/a n/a n/a
Janus Worldwide Growth n/a n/a
JPM Bond n/a n/a n/a
JPM International Equity n/a n/a n/a
Morgan Stanley Asian Equity n/a
Morgan Stanley Emerging Markets Debt n/a n/a
Morgan Stanley High Yield n/a n/a
Morgan Stanley U.S. Real Estate n/a n/a n/a
</TABLE>
5
<PAGE>
STANDARD AVERAGE TOTAL RETURN - The table provides cumulative and average annual
total returns for each Option for the 1, 3, 5 and 10 Year Periods Ended December
31, 1996, and from inception through December 31, 1996. The calculation
includes any withdrawal charges that would apply if an owner terminated the
policy at the end of the period, but excludes deductions for applicable premium
tax charges. The performance information is based on the historical investment
experience of the Options and does not indicate or represent future experience.
This table is based upon average Account Value over $60, 000 for whcih the
annual charge is $0.
<TABLE>
<CAPTION>
SEC STANDARDIZED
RETURNS WITH SURRENDER CHARGES CUMULATIVE TOTAL RETURN AVERAGE ANNUAL RETURN
-------------------------- -------------------------------------
INCEPTION LIFE OF LIFE OF
VARIABLE OPTIONS DATE (1) 5 YEAR 10 YEAR FUND 1 YEAR 5 YEAR 10 YEAR FUND
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EAFE Equity Index 6/21/96 n/a n/a n/a n/a
Equity 500 Index 12/31/92 n/a n/a n/a n/a
Small Cap Index 8/13/96 n/a n/a n/a n/a n/a
VIP Equity-Income 10/9/86
VIP II Contrafund 1/3/95 n/a n/a n/a n/a
VIP III Growth & Income 12/31/96 n/a n/a n/a n/a n/a
VIP III Growth Opportunities 1/3/95 n/a n/a n/a n/a
Harris Bretall Sullivan & Smith Equity Growth 12/7/92 n/a n/a n/a n/a
Zurich Kemper Value 12/21/92 n/a n/a n/a n/a
Zweig Asset Allocation 12/14/92 n/a n/a n/a n/a
Zweig Equity (Small Cap) 1/4/93 n/a n/a n/a n/a
Janus Balanced 9/13/93 n/a n/a n/a n/a
Janus Capital Appreciation (2) 5/1/97 n/a n/a n/a n/a n/a n/a
Janus Worldwide Growth 9/13/93 n/a n/a n/a n/a
JPM Bond 1/3/95 n/a n/a n/a n/a
JPM International Equity 1/3/95 n/a n/a n/a n/a
Morgan Stanley Asian Equity 12/31/91 n/a n/a
Morgan Stanley Emerging Markets Debt 2/1/94 n/a n/a n/a n/a
Morgan Stanley High Yield 8/31/92 n/a n/a n/a n/a
Morgan Stanley U.S. Real Estate 1/31/95 n/a n/a n/a n/a
-----------------------------------------------------------------------------
</TABLE>
n/a Not applicable.
(1) Represents the inception date of the underlying funds. Performance data
for periods prior to the actual inception of the variable account options
is hypothetical and based on the performance of the underlying funds. This
performance data has been adjusted to include all insurance company
contract charges and management fees of the underlying funds.
(2) Partial-year returns are calculated from the inception date through the
period ending 7/31/97.
6
<PAGE>
PERFORMANCE COMPARISONS
Performance information for an Option may be compared, in reports and
advertising, to: (1) Standard & Poor's Stock Index (S&P 500), Dow Jones
Industrial Averages, (DJIA), Donoghue Money Market Institutional Averages, or
other unmanaged indices generally regarded as representative of the securities
markets; (2) other variable annuity separate accounts or other investment
products tracked by Lipper Analytical Services, Inc. or the Variable Annuity
Research and Data Service, which are widely used independent research firms that
rank mutual funds and other investment companies by overall performance,
investment objectives, and assets; and (3) the Consumer Price Index (measure of
inflation) to assess the real rate of return from an investment in a contract.
Unmanaged indices may assume the reinvestment of dividends but generally do not
reflect deductions for annuity charges, investment management costs, brokerage
costs and other transaction costs that are normally paid when directly investing
in securities.
Each Option may from time to time also include the ranking of its performance
figures relative to such figures for groups of mutual funds categorized by
Lipper Analytical Services (LIPPER) as having the same or similar investment
objectives or by similar services that monitor the performance of mutual funds.
Each Option may also from time to time compare its performance to average mutual
fund performance figures compiled by Lipper in LIPPER PERFORMANCE ANALYSIS.
Advertisements or information furnished to present shareholders or prospective
investors may also include evaluations of an Option published by nationally
recognized ranking services and by financial publications that are nationally
recognized such as BARRON'S, BUSINESS WEEK, CDA TECHNOLOGIES, INC., CHANGING
TIMES, CONSUMER'S DIGEST, DOW JONES INDUSTRIAL AVERAGE, FINANCIAL PLANNING,
FINANCIAL TIMES, FINANCIAL WORLD, FORBES, FORTUNE, GLOBAL INVESTOR, HULBERT'S
FINANCIAL DIGEST, INSTITUTIONAL INVESTOR, INVESTORS DAILY, MONEY, MORNINGSTAR
MUTUAL FUNDS, THE NEW YORK TIMES, PERSONAL INVESTOR, STANGER'S INVESTMENT
ADVISER, VALUE LINE, THE WALL STREET JOURNAL, WIESENBERGER INVESTMENT COMPANY
SERVICE AND USA TODAY.
The performance figures described above may also be used to compare the
performance of an Option's shares against certain widely recognized standards or
indices for stock and bond market performance. The following are the indices
against which the Options may compare performance:
The Standard & Poor's Composite Index of 500 Stocks (the S&P 500) is a market
value-weighted and unmanaged index showing the changes in the aggregate market
value of 500 stocks relative to the base period 1941-43. The S&P 500 Index is
composed almost entirely of common stocks of companies listed on the NYSE,
although the common stocks of a few companies listed on the American Stock
Exchange or traded OTC are included. The 500 companies represented include 400
industrial, 60 transportation and 50 financial services concerns. The S&P 500
Index represents about 80% of the market value of all issues traded on the NYSE.
The Dow Jones Composite Average (or its component averages) is an unmanaged
index composed of 30 blue-chip industrial corporation stocks (Dow Jones
Industrial Average), 15 utilities company stocks and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
The New York Stock Exchange composite or component indices are unmanaged indices
of all industrial, utilities, transportation and finance company stocks listed
on the New York Stock Exchange.
The Wilshire 5000 Equity Index (or its component indices) represents the return
of the market value of all common equity securities for which daily pricing is
available. Comparisons of performance assume reinvestment of dividends.
The Morgan Stanley Capital International EAFE Index is an arithmetic, market
value-weighted average of the performance of over 900 securities on the stock
exchanges of countries in Europe, Australia and the Far East.
The Morgan Stanley Capital International World Index - An arithmetic, market
value-weighted average of the performance of over 1,470 securities listed on the
stock exchanges of countries in Europe, Australia, the Far East, Canada and the
United States.
7
<PAGE>
The Goldman Sachs 100 Convertible Bond Index currently includes 67 bonds and 33
preferred stocks. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
The Lehman Brothers Government Bond Index (the LEHMAN GOVERNMENT INDEX) is a
measure of the market value of all public obligations of the U.S. Treasury; all
publicly issued debt of all agencies of the U.S. Government and all
quasi-federal corporations; and all corporate debt guaranteed by the U.S.
Government. Mortgage-backed securities, flower bonds and foreign targeted
issues are not included in the Lehman Government Index.
The Lehman Brothers Government/Corporate Bond Index (the LEHMAN
GOVERNMENT/CORPORATE INDEX) is a measure of the market value of approximately
5,300 bonds with a face value currently in excess of $1 million, which have at
least one year to maturity and are rated "Baa" or higher (INVESTMENT GRADE) by a
nationally recognized statistical rating agency.
The Lehman Brothers Government/Corporate Intermediate Bond Index (the LEHMAN
GOVERNMENT/CORPORATE INTERMEDIATE INDEX) is composed of all bonds covered by the
Lehman Brothers Government/Corporate Bond Index with maturities between one and
9.99 years. Total return comprises price appreciation/depreciation and income
as a percentage of the original investment. Indexes are rebalanced monthly by
market capitalization.
The Lehman Brothers Intermediate Treasury Bond Index includes bonds with
maturities between one and ten years with a face value currently in excess of $1
million, that are rated investment grade or higher by a nationally recognized
statistical rating agency.
The Shearson Lehman Long-Term Treasury Bond Index is composed of all bonds
covered by the Shearson Lehman Hutton Treasury Bond Index with maturities of 10
years or greater.
The National Association of Securities Dealers Automated Quotation System
(NASDAQ) Composite Index covers 4,500 stocks traded over the counter. It
represents many small company stocks but is heavily influenced by about 100 of
the largest NASDAQ stocks. It is a value-weighted index calculated on price
change only and does not include income.
The NASDAQ Industrial Index is composed of more than 3,000 industrial issues.
It is a value-weighted index calculated on price change only and does not
include income.
The Value Line (Geometric) Index is an unweighted index of the approximately
1,700 stocks followed by the VALUE LINE INVESTMENT SURVEY.
The Salomon Brothers GNMA Index includes pools of mortgages originated by
private lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.
The Salomon Brothers' World Market Index is a measure of the return of an
equally weighted basket of short-term (three month U.S. Government securities
and bank deposits) investments in eight major currencies: the U.S. dollars, UK
pounds sterling, Canadian dollars, Japanese yen, Swiss francs, French francs,
German Deutsche mark and Netherlands guilder.
The Salomon Brothers Broad Investment-Grade Bond Index contains approximately
3,800 Treasury and agency, corporate and mortgage bonds with a rating of BBB or
higher, a stated maturity of at least one year, and a par value outstanding of
$25 million or more. The index is weighted according to the market value of all
bond issues included in the index.
The Salomon Brothers High Grade Corporate Bond Index consists of publicly
issued, non-convertible corporate bonds rated AA or AAA. It is a
value-weighted, total return index, including approximately 800 issues with
maturities of 12 years or grater.
The Salomon Brothers World Bond Index measures the total return performance of
high-quality securities in major sectors of the international bond market. The
index covers approximately 600 bonds from 10 currencies: Australian dollars,
Canadian dollars, European Currency Units, French francs, Japanese yen,
Netherlands guilder, Swiss francs, UK pounds sterling, U.S. dollars, and German
deutsche marks.
The J.P. Morgan Global Government Bond Index is a total return, market
capitalization weighted index, rebalanced monthly consisting of the following
countries: Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan,
Netherlands, Spain, Sweden, United Kingdom and United States.
8
<PAGE>
The 50/50 Index assumes a static mix of 50% of the S&P 500 Index and 50% of the
Lehman Government Corporate Index.
Other Composite Indices: 70% S&P 500 Index and 30% NASDAQ Industrial Index; 35%
S&P 500 Index and 65% Salomon Brothers High Grade Bond Index; and 65% S&P Index
and 35% Salomon Brothers High Grade Bond Index.
The SEI Median Balanced Fund Universe measures a group of funds with an average
annual equity commitment and an average annual bond - plus - private - placement
commitment greater than 5% each year. SEI must have at least two years of data
for a fund to be considered for the population.
The Russell 2000/Small Stock Index comprises the smallest 2000 stocks in the
Russell 3000 Index, and represents approximately 11% of the total U.S. equity
market capitalization. The Russell 3000 Index comprises the 3,000 largest U.S.
companies by market capitalization. The smallest company has a market value of
roughly $20 million.
The Russell 2500 Index is comprised of the bottom 500 stocks in the Russell 1000
Index which represents the universe of stocks from which most active money
managers typically select; and all the stocks in the Russell 2000 Index. The
largest security in the index has a market capitalization of approximately 1.3
billion.
The Consumer Price Index (or Cost of Living Index), published by the United
States Bureau of Labor Statistics is a statistical measure of change, over time,
in the price of goods and services in major expenditure groups.
STOCKS, BONDS, BILLS AND INFLATION, published by Hobson Associates, presents an
historical measure of yield, price and total return for common and small company
stocks, long-term government bonds, Treasury bills and inflation.
Savings and Loan Historical Interest Rates as published in the United States
Savings & Loan League Fact Book.
Historical data supplied by the research departments of First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch, Pierce,
Fenner & Smith, Shearson Lehman Hutton and Bloomberg L.P.
The MSCI Combined Far East Free ex Japan Index is a market-capitalization
weighted index comprising stocks in Hong Kong, Indonesia, Korea, Malaysia,
Philippines, Singapore and Thailand. Korea is included in the MSCI Combined
Far East Free ex Japan Index at 20% of its market capitalization.
The First Boston High Yield Index generally includes over 180 issues with an
average maturity range of seven to ten years with a minimum capitalization of
$100 million. All issues are individually trader-priced monthly.
In reports or other communications to shareholders, the Funds may also describe
general economic and market conditions affecting the Options and may compare the
performance of the Options with (1) that of mutual funds included in the
rankings prepared by Lipper or similar investment services that monitor the
performance of insurance company separate accounts or mutual funds, (2)
IBC/Donoghue's Money Fund Report, (3) other appropriate indices of investment
securities and averages for peer universe of funds which are described in this
Statement of Additional Information, or (4) data developed by National Integrity
or any of the Sub-Advisers derived from such indices or averages.
For those underlying Options which have not been held as Sub-Accounts within the
Separate Account for one of the quoted periods, the standardized average annual
total return and nonstandardized total return quotations will show the
investment performance such underlying Options would have achieved (reduced by
the applicable charges) had they been held as Sub-Accounts within the Separate
Account for the period quoted.
9
<PAGE>
INDIVIDUALIZED COMPUTER GENERATED ILLUSTRATIONS
Integrity may from time to time use computer-based software available through
Morningstar, CDA/Wiesenberger and/or other firms to provide registered
representatives and existing and/or potential owners of the contracts with
individualized hypothetical performance illustrations for some or all of the
Variable Account Options. Such illustrations may include, without limitation,
graphs, bar charts and other types of formats presenting the following
information: (i) the historical results of a hypothetical investment in a single
Option; (ii) the historical fluctuation of the value of a single Option (actual
and hypothetical); (iii) the historical results of a hypothetical investment in
more than one Option; (iv) the historical performance of two or more market
indices in relation to one another and/or one or more Options; (v) the
historical performance of two or more market indices in comparison to a single
Option or a group of Options; (vi) a market risk/reward scatter chart showing
the historical risk/reward relationship of one or more mutual funds or Options
to one or more indices and a broad category of similar anonymous variable
annuity subaccounts; and (vii) Option data sheets showing various information
about one or more Options (such as information concerning total return for
various periods, fees and expenses, standard deviation, alpha and beta,
investment objective, inception date and net assets). We reserve the right to
republish figures independently provided by Morningstar or any similar agency or
service.
PART 4 - DETERMINATION OF ANNUITY UNIT VALUES
The annuity unit value was initially fixed at $1.00 for contracts with assumed
base rates of net investment return of 5% or 3.5% a year. For each valuation
period thereafter, it is the annuity value for the preceding valuation period
multiplied by the adjusted net investment factor under the contracts. For each
valuation period, the adjusted net investment factor is equal to the net
investment factor reduced for each day in the valuation period by:
* .00013366 for a contract with an assumed base rate of net investment return
of 5% a year; or
* .00009425 for a contract with an assumed base rate of net investment return
of 3.5% a year.
Because of this adjustment, the annuity unit value rises and falls depending on
whether the actual rate of net investment return (after charges) is higher or
lower than the assumed base rate.
All certificates have a 5% assumed base rate, except in states where that rate
is not permitted. Annuity payments under contracts with an assumed base rate of
3.5% will at first be smaller than those under contracts with a 5% assumed base
rate. Payments under the 3.5% contracts, however, will rise more rapidly when
unit values are rising, and payments will fall more slowly when unit values are
falling, than those under 5% contracts.
The amounts of variable annuity payments are determined as follows:
Payments normally start on the Annuitant's retirement date. The first three
monthly payments are the same. Each of the first three monthly payments will be
based on the amount taken from the tables in the contract or on our current
rates, whichever is more favorable to the participant. Where the Company's
current annuity rates are used, contributions in the current and five prior
participation years will qualify for the Company's current individual annuity
rates applicable to funds derived from sources outside the Company. The balance
of the proceeds will qualify for the Company's current individual annuity rates
for payment of proceeds.
The first three monthly payments depend on the assumed base rate of net
investment return and the forms of annuity chosen (and any fixed period). If the
annuity involves a life contingency, the risk class and the age of the
annuitants will affect payments.
Payments after the first three months will vary according to the investment
performance of the Variable Account Option or Options selected. After that,
each payment will be calculated by multiplying the number of annuity units
credited by the average annuity unit value for the second calendar month before
the due date of the payment. The number of annuity units credited equals the
initial periodic payment divided by the annuity unit value for the valuation
period that includes the due date of the first annuity payment. The average
annuity unit value is the average of the annuity unit values for the valuation
periods ending in that month. Each business day together with any non-business
day or consecutive non-business day immediately preceding such business day
will constitute a valuation period.
ILLUSTRATION OF CHANGES IN ANNUITY UNIT VALUES. To show how we determine
variable annuity payments from month to month, assume that the contract value on
a retirement date is enough to fund an annuity with a monthly payment of $363
and that the annuity
10
<PAGE>
unit value for the valuation period that includes the due date of the first
annuity payment is $1.05. The number of annuity units credited under your
contract would be 345.71 (363 divided by 1.05 = 345.71).
If the fourth monthly payment is due in March, and the average annuity unit
value for January was $1.10, the annuity payment for March would be the number
of units (345.71) times the average annuity unit value ($1.10), or $380.28. If
the average annuity unit value was $1.00 in February, the annuity payment for
April would be 345.71 times $1.00, or $345.71.
For period certain life annuities and life income annuities, the participant may
not surrender or redeem once annuity payments commence. For period certain life
annuities only, if the payee (or the payee and the other annuitant under a joint
and survivor annuity) dies before the period selected ends, the remaining
payments will go to another named payee who may have the right to redeem the
annuity and secure the present value of future guaranteed payments in a lump
sum. The present value of future guaranteed payments for a period certain is
based on the number of payments left, the assumed base rate of net return, the
number of annuity units and the annuity unit value for the date the Company
receives a written request for lump sum payment of remaining values. Assets held
in the Account at least equal to all statutory reserves required for such
Separate Account.
PART 5 - DEATH BENEFIT INFORMATION FOR CONTRACTS ISSUED PRIOR TO JANUARY 1, 1996
Notwithstanding anything in the prospectus to the contrary, for contracts issued
during 1995, the amount of the death benefit is the greatest of:
- your Adjusted Account Value
- the highest Account Value at the beginning of any contract year, plus
- subsequent contributions and minus subsequent withdrawals
- your total contributions less the sum of withdrawals
Notwithstanding anything in the prospectus to the contrary, for contracts issued
prior to January 1, 1995, the amount of the death benefit is the greatest of:
- your Adjusted Account Value
- the Account Value at the beginning of the seventh contract year, plus
- subsequent contributions and minus subsequent withdrawals
- your total contributions less the sum of withdrawals
- for Annuitants less than 70 years old on the birthday nearest the date
on which their contract was issued, an enhanced minimum death benefit.
"Subsequent withdrawals" for purposes of calculation of a death benefit reflect
any market value adjustments applicable to such withdrawals.
The enhanced minimum death benefit is equal to the guaranteed death benefit,
except that the guaranteed death benefit may not exceed the maximum guaranteed
death benefit. The guaranteed death benefit on your Participation Date is your
initial contribution. On a monthly basis thereafter we recalculate that portion
of your guaranteed death benefit allocated to the Separate Account by adding
interest at an annual rate of 7% until the contract anniversary on which your
nearest birthday is your 70th, subject to the maximum, and subtracting the sum
of any withdrawals or transfers from the Separate Account during the month and a
pro rata amount of the interest accumulated relative to such withdrawn or
transferred amount. Therefore, your guaranteed death benefit at any time,
subject to the maximum, is equal to the sum of (1) your Guarantee Period Values,
and (2) your Separate Account contributions and the amount of interest
calculated on your Separate Account values for purposes of determining the
guaranteed death benefit less any withdrawals or transfers and less the interest
calculated on a pro rata basis on such withdrawn or transferred amount. Your
maximum guaranteed death benefit is determined by totalling your contributions
during your first five participation years, subtracting all withdrawals
inclusive of any market value adjustments made under the contract, multiplying
the result by two, and then adding to that amount your total contributions made
after the first five participation years.
PART 6 - FINANCIAL STATEMENTS
Ernst & Young LLP, Suite 2100, 400 West Market Street, Louisville, Kentucky
40202, is our independent auditor and serves as independent auditor of the
Separate Account. Ernst & Young LLP on an annual basis will audit certain
financial statements prepared by management and express an opinion on such
financial statements based on their audits.
11
<PAGE>
The financial statements of the Separate Account as of December 31, 1996, and
for the periods indicated in the financial statements and the statutory-basis
financial statements of Integrity as of and for the years ended December 31,
1996 and 1995 incorporated herein by reference to this SAI have been audited by
Ernst & Young LLP as set forth in their reports incorporated herein by reference
to this SAI.
The financial statements of Integrity should be distinguished from the financial
statements of the Separate Account and should be considered only as they relate
to the ability of Integrity to meet its obligations under the contract. They
should not be considered as relating to the investment performance of the assets
held in the Separate Account.
12
<PAGE>
CROSS REFERENCE SHEET - PINNACLE(VERSION III)
Showing Location in Part A (Prospectus) and Part B (Statement of Additional
Information) of Information required By Form N-4
PART A: INFORMATION REQUIRED IN PROSPECTUS - PINNACLE(VERSION III)
<TABLE>
<CAPTION>
Form N-4 Item No. Location in Prospectus
<S> <C>
1. Cover Page Cover Page
2. Definitions Part 1 - Summary
3. Synopsis Part 1 - Summary; Table of Annual Fees and
Expenses; Examples
4. Condensed Financial Information Part 1 - Financial Information
5. General Description of Registrant, Part 2 - Integrity and the Separate Account;
Annuity Contracts Part 3 - Your Investment Options
6. Deductions Part 4 - Deductions and Charges
7. General Description of Variable Part 5 - Terms of Your Variable
Annuity contracts Annuity Contract
8. Annuity Period Part 5 - Terms of Your Variable
Annuity Contract
9. Death Benefit Part 5 - Terms of Your Variable
Annuity Contract
10. Purchases and Contract Value Part 5 - Terms of Your Variable
Annuity Contract
11. Redemptions Part 5 - Terms of Your Variable
Annuity Contract
12. Taxes Part 7 - Tax Aspects of the Contracts
13. Legal Proceedings Not Applicable
14. Table of Contents of the Statement Table of Contents
of Additional Information
</TABLE>
<PAGE>
PART B: INFORMATION REQUIRED IN STATEMENT OF ADDITIONAL
INFORMATION - PINNACLE(VERSION III)
<TABLE>
<CAPTION>
Form N-4 Item No. Location in Statement of Additional
Information
<S> <C>
15. Cover Page Cover Page
16. Table of Contents Cover Page
17. General Information and History Part 1 - Integrity and Custodian
18. Services Part 1 - Integrity and Custodian
19. Purchase of Securities Being Offered Part 2 - Distribution of the Contracts
20. Underwriters Part 2 - Distribution of the Contracts
21. Calculation of Performance Data Part 3 - Performance Information
22. Annuity Payments Part 4 - Determination of Annuity Unit Values
23. Financial Statements Part 5 - Financial Statements
</TABLE>
<PAGE>
PROSPECTUS
PINNACLE(VERSION III)
FLEXIBLE PREMIUM VARIABLE ANNUITY*
Issued by INTEGRITY LIFE INSURANCE COMPANY
This prospectus describes a flexible premium variable annuity offered by
Integrity Life Insurance Company, an indirect wholly owned subsidiary of ARM
Financial Group, Inc. The individual contracts and group certificates
(CONTRACTS) offered by this prospectus provide several types of benefits, some
of which have tax-favored status under the Internal Revenue Code of 1986, as
amended. Contributions under the contracts may be allocated to the various
investment divisions of our Separate Account II (VARIABLE ACCOUNT OPTIONS, or
individually, OPTION) or to our Fixed Accounts, or both.
Contributions to the Variable Account Options are invested in shares of
corresponding portfolios of the 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 21 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
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
LEGENDS FUND
-------------
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Zweig Asset Allocation Portfolio
Zweig Equity (Small Cap) Portfolio
Zurich Kemper Value 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
<PAGE>
THERE CAN BE NO ASSURANCE THAT THE JANUS MONEY MARKET PORTFOLIO WILL ACHIEVE ITS
INVESTMENT OBJECTIVE OR BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00
PER SHARE.
We currently offer Guaranteed Rate Options (GROs) and a Systematic Transfer
Option (STO), together referred to as FIXED ACCOUNTS. Your allocation to a GRO
accumulates at a fixed interest rate we declare at the beginning of the duration
you select. A market value adjustment (MARKET VALUE ADJUSTMENT) will be made for
withdrawals, surrenders, transfers and certain other transactions before the
expiration of your GRO Account, but your value under a GRO Account may not be
decreased below an amount equal to your allocation plus interest compounded at
an annual effective rate of 3% (MINIMUM VALUE), less previous withdrawals and
any applicable contingent withdrawal charges. Your allocation to the STO
accumulates at a fixed interest rate that we declare each calendar quarter,
guaranteed never to be less than an effective annual yield of 3%. YOU MUST
TRANSFER ALL CONTRIBUTIONS YOU MAKE TO THE STO INTO OTHER INVESTMENT OPTIONS
WITHIN ONE YEAR OF CONTRIBUTION ON A MONTHLY OR QUARTERLY BASIS.
This prospectus contains information about the contracts that you should know
before investing. You should read this prospectus and any supplements, and
retain them for future reference. This prospectus is not valid unless provided
with the current prospectus for the Fund, which you should also read.
For further information and assistance, you should contact our Administrative
Office at Integrity Life Insurance Company, P.O. Box 740074, Louisville,
Kentucky 40201-0074. The express mail address is Integrity Life Insurance
Company, 515 West Market Street, Louisville, Kentucky 40202-3319. You may also
call the following toll-free number: 1-800-325-8583.
A registration statement relating to the contracts, which includes a Statement
of Additional Information (SAI) dated November 1, 1997, has been filed with the
Securities and Exchange Commission. The SAI is incorporated by reference into
this prospectus. A copy of the SAI is available free of charge by writing to or
calling our Administrative Office. A table of contents for the SAI follows the
table of contents for this prospectus.
* NOTE: CONTRACTS ISSUED IN THE STATE OF OREGON WILL BE SINGLE PREMIUM VARIABLE
ANNUITIES RATHER THAN FLEXIBLE PREMIUM VARIABLE ANNUITIES. ALL REFERENCES TO
FLEXIBLE CONTRIBUTIONS ARE SINGLE CONTRIBUTIONS FOR THIS STATE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is November 1, 1997.
<PAGE>
TABLE OF CONTENTS
PART 1 - SUMMARY PAGE
Your Variable Annuity Contract . . . . . . . . . . . . . . . . . . . . . . 1
Your Benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
How Your Contract is Taxed . . . . . . . . . . . . . . . . . . . . . . . . 1
Your Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Your Investment Options. . . . . . . . . . . . . . . . . . . . . . . . . . 1
Variable Account Options . . . . . . . . . . . . . . . . . . . . . . . . . 1
Account Value, Adjusted Account Value and Cash Value . . . . . . . . . . . 2
Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Charges and Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Withdrawals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Your Initial Right to Revoke . . . . . . . . . . . . . . . . . . . . . . . 3
Table of Annual Fees and Expenses. . . . . . . . . . . . . . . . . . . . . 4
Financial Information. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
PART 2 - INTEGRITY AND THE SEPARATE ACCOUNT
Integrity Life Insurance Company . . . . . . . . . . . . . . . . . . . . . 9
The Separate Account and the Variable Account Options. . . . . . . . . . . 9
Assets of Our Separate Account . . . . . . . . . . . . . . . . . . . . . . 9
Changes In How We Operate. . . . . . . . . . . . . . . . . . . . . . . . . 9
PART 3 - YOUR INVESTMENT OPTIONS
The Legends Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
The Legends Fund's Investment Manager and Sub-Advisers . . . . . . . .10
Investment Objectives of the Portfolios. . . . . . . . . . . . . . . .11
BT Insurance Funds Trust . . . . . . . . . . . . . . . . . . . . . . . . .12
Bankers Trust Funds' Investment Manager. . . . . . . . . . . . . . . .12
Investment Objectives of the Portfolios. . . . . . . . . . . . . . . .12
Fidelity Variable Insurance Products Funds . . . . . . . . . . . . . . . .14
Fidelity's VIP Funds' Investment Adviser . . . . . . . . . . . . . . .14
Investment Objectives of the Portfolios. . . . . . . . . . . . . . . .15
Janus Aspen Series . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
The Janus Trust Investment Adviser . . . . . . . . . . . . . . . . . .16
Investment Objectives of the Portfolios. . . . . . . . . . . . . . . .16
JPM Series Trust II. . . . . . . . . . . . . . . . . . . . . . . . . . . .17
The JPM Series Investment Adviser. . . . . . . . . . . . . . . . . . .17
Investment Objectives of the Portfolios. . . . . . . . . . . . . . . .17
Morgan Stanley Universal Funds, Inc. . . . . . . . . . . . . . . . . . . .18
The Morgan Stanley Universal Funds' Investment Adviser . . . . . . . .18
Investment Objectives of the Portfolios. . . . . . . . . . . . . . . .19
Fixed Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Guaranteed Rate Options. . . . . . . . . . . . . . . . . . . . . . . .20
Renewals of GRO Accounts. . . . . . . . . . . . . . . . . . . . . .20
Market Value Adjustments. . . . . . . . . . . . . . . . . . . . . .21
Systematic Transfer Option . . . . . . . . . . . . . . . . . . . . . .21
PART 4 - DEDUCTIONS AND CHARGES
Separate Account Charges . . . . . . . . . . . . . . . . . . . . . . . . .22
Annual Administrative Charge . . . . . . . . . . . . . . . . . . . . . . .22
Fund Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
State Premium Tax Deduction. . . . . . . . . . . . . . . . . . . . . . . .22
Contingent Withdrawal Charge . . . . . . . . . . . . . . . . . . . . . . .22
<PAGE>
PAGE
Transfer Charge. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
Hardship Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
Tax Reserve. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
PART 5 - TERMS OF YOUR VARIABLE ANNUITY
Contributions Under Your Contract. . . . . . . . . . . . . . . . . . . . .24
Your Account Value . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Your Purchase of Units in Our Separate Account . . . . . . . . . . . . . .24
How We Determine Unit Value. . . . . . . . . . . . . . . . . . . . . . . .25
Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Withdrawals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Assignments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Death Benefits and Similar Benefit Distributions . . . . . . . . . . . . .26
Annuity Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
Annuities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
Annuity Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
Timing of Payment. . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
How You Make Requests and Give Instructions. . . . . . . . . . . . . . . .28
PART 6 - VOTING RIGHTS
Fund Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
How We Determine Your Voting Shares. . . . . . . . . . . . . . . . . . . .29
How Fund Shares Are Voted. . . . . . . . . . . . . . . . . . . . . . . . .29
Separate Account Voting Rights . . . . . . . . . . . . . . . . . . . . . .29
PART 7 - TAX ASPECTS OF THE CONTRACTS
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
Your Contract is an Annuity. . . . . . . . . . . . . . . . . . . . . . . .30
Taxation of Annuities Generally. . . . . . . . . . . . . . . . . . . . . .30
Distribution-at-Death Rules. . . . . . . . . . . . . . . . . . . . . . . .31
Diversification Standards. . . . . . . . . . . . . . . . . . . . . . . . .31
Tax-Favored Retirement Programs. . . . . . . . . . . . . . . . . . . . . .32
Individual Retirement Annuities. . . . . . . . . . . . . . . . . . . .32
Tax Sheltered Annuities. . . . . . . . . . . . . . . . . . . . . . . .32
Simplified Employee Pensions . . . . . . . . . . . . . . . . . . . . .32
Corporate and Self-Employed (H.R. 10 and Keogh) Pension
and Profit Sharing Plans . . . . . . . . . . . . . . . . . . . . . .32
Deferred Compensation Plans of State and Local Governments and
Tax-Exempt Organizations . . . . . . . . . . . . . . . . . . . . . .33
Distributions Under Tax-Favored Retirement Programs. . . . . . . . . . . .33
Federal and State Income Tax Withholding . . . . . . . . . . . . . . . . .34
Impact of Taxes to Integrity . . . . . . . . . . . . . . . . . . . . . . .34
Transfers Among Investment Options . . . . . . . . . . . . . . . . . . . .34
PART 8 - ADDITIONAL INFORMATION
Systematic Withdrawals . . . . . . . . . . . . . . . . . . . . . . . . . .34
Dollar Cost Averaging. . . . . . . . . . . . . . . . . . . . . . . . . . .34
Systematic Transfer Program. . . . . . . . . . . . . . . . . . . . . . . .35
Customized Asset Rebalancing . . . . . . . . . . . . . . . . . . . . . . .35
<PAGE>
PAGE
Asset Allocation and Rebalancing Program . . . . . . . . . . . . . . . . .35
Systematic Contributions . . . . . . . . . . . . . . . . . . . . . . . . .36
Performance Information. . . . . . . . . . . . . . . . . . . . . . . . . .36
Appendix A - Illustration of a Market Value Adjustment . . . . . . . . .38
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED
TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS.
<PAGE>
SAI TABLE OF CONTENTS
Part 1 - Integrity and Custodian
Part 2 - Distribution of the Contracts
Part 3 - Performance Information
Part 4 - Determination of Annuity Unit Values
Part 5 - Financial Statements
If you would like to receive a copy of the Statement of Additional Information,
please complete the form below and send it to:
Administrative Office
Integrity Life Insurance Company
P.O. Box 740074
Louisville, KY 40201-0074
ATTN: Request for SAI of Separate Account II
Name:
----------------------------------------------------------------------
Address:
-------------------------------------------------------------------
City: State: Zip:
--------------------------------- ---------- -----------------
<PAGE>
PART 1 -- SUMMARY
YOUR VARIABLE ANNUITY CONTRACT
In this prospectus, WE, OUR and US mean Integrity Life Insurance Company
(INTEGRITY), an indirect wholly owned subsidiary of ARM Financial Group, Inc.
(ARM). We offer individual variable annuity contracts. In certain states, we
offer certificates under a group variable annuity contract instead of contracts.
When we use the words contract or certificate, we are referring to both the
individual contracts and the group certificates.
You can invest for retirement by purchasing a contract if you properly complete
a Customer Profile form (an application or enrollment form may be required in
some states) and make a minimum initial contribution. In this prospectus, YOU
and YOUR mean the Annuitant, the person upon whose life the Annuity Benefit and
the Death Benefit are based, usually the Owner of the contract. If the Annuitant
does not own the contract, all of the rights under the contract belong to the
Owner until annuity payments begin.
Your retirement or endowment date (RETIREMENT DATE) will be no later than your
98th birthday or earlier, if required by law, unless you notify us of a
different date.
YOUR BENEFITS
Your contract provides an Account Value, an annuity benefit, and a death
benefit. See "Your Account Value," "Death Benefits and Similar Benefit
Distributions" and "Annuity Benefits" in Part 5.
Your benefits may be received under a contract subject to the usual rules for
taxation of annuities, including the tax-deferral of earnings until withdrawal.
The contract also can provide your benefits under certain tax-favored retirement
programs, which are subject to special rules covering such matters as
eligibility and contribution amounts. See Part 7, "Tax Aspects of the
Contracts" for detailed information.
HOW YOUR CONTRACT IS TAXED
Under current law, any increases in the value of your contributions to your
contract are tax deferred and will not be included in your taxable income until
withdrawn. See Part 7, "Tax Aspects of the Contracts."
YOUR CONTRIBUTIONS
The minimum initial contribution in most states is currently $1,000. Minimum
initial contribution for residents of Pennsylvania and South Carolina is $3,000.
Subsequent contributions of at least $100 can be made. Special rules for lower
minimum initial and subsequent contributions apply for certain tax-favored
retirement plans. See "Contributions Under Your Contract" in Part 5.
YOUR INVESTMENT OPTIONS
You may allocate contributions to the Variable Account Options or to the Fixed
Accounts, or both. The Variable Account Options and the Fixed Accounts are
together referred to as the INVESTMENT OPTIONS. Contributions may be allocated
to up to nine Investment Options at any one time. See "Contributions Under Your
Contract" in Part 5. To select Investment Options most suitable for you, see
Part 3, "Your Investment Options."
VARIABLE ACCOUNT OPTIONS
The Variable Account Options (also referred to as DIVISIONS) invest in shares of
corresponding investment portfolios of the Funds, each a "series" type of mutual
fund. Each investment portfolio is referred to as a PORTFOLIO. The investment
objective of each Variable Account Option and its corresponding Portfolio is the
same. Your value in a Variable Account Option will vary depending on the
performance of the corresponding Portfolio. For a full description of a Fund,
see each Fund's prospectus and the Fund's Statement of Additional Information.
ACCOUNT VALUE, ADJUSTED ACCOUNT VALUE AND CASH VALUE
1
<PAGE>
The sum of your values under the Fixed Accounts plus your values in the Variable
Account Options is referred to as the ACCOUNT VALUE. Your ADJUSTED ACCOUNT VALUE
is your Account Value, as increased or decreased (but not below the Minimum
Value) by any Market Value Adjustments. Your CASH VALUE is equal to your
Adjusted Account Value, reduced by any applicable contingent withdrawal charge
and will be reduced by the pro rata portion of the annual administrative charge,
if applicable. See "Charges and Fees" below.
TRANSFERS
You may transfer all or portions of your Account Value among the Investment
Options, subject to the conditions described under "Transfers" in Part 5.
Transfers from any Investment Option must be for at least $250. Transfers may be
arranged through our telephone transfer service. See Part 5, "Transfers."
Transfers may also be made under our following special services: (i) Dollar
Cost Averaging, (ii) Customized Asset Rebalancing, or (iii) to transfer your STO
contributions. See Part 8, "Dollar Cost Averaging," "Customized Asset
Rebalancing," and "Systematic Transfer Program."
CHARGES AND FEES
If your Account Value is less than $50,000 as of the last day of any contract
year prior to your Retirement Date, an annual administrative expense charge of
$30 is deducted from your contract. See Part 4, "Deductions and Charges."
A charge at an effective annual rate of 1.35% of the Account Value of the assets
in each Variable Account Option is made daily. We make this charge to cover
mortality and expense risks (1.20%) and certain administrative expenses (.15%).
The charge will never be greater than an effective annual rate of 1.35% of the
Account Value of the assets in each Variable Account Option. See Part 4,
"Deductions and Charges."
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, the 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. The
expenses reflect a voluntary undertaking by Bankers Trust to waive or reimburse
expenses.
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 .65% 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. The highest annual rate
at which any of the Janus Portfolios paid advisory fees in 1996 was .79% of
average net assets. Please see Table of Annual Fees and Expenses 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.
A Fund's advisory fees cannot be increased without the consent of its
shareholders. See "Table of Annual Fees and Expenses" below and "The Funds'
Investment Managers and Sub-Advisers" in Part 3.
2
<PAGE>
If you frequently transfer funds from one Investment Option to another, certain
transfers may become subject to a charge. We will not, however, charge more than
$20 per transfer. See "Transfer Charge" in Part 4.
When you make withdrawals from your contract, a contingent withdrawal charge may
be deducted from your Account Value. This sales charge will be in addition to
the Market Value Adjustment applicable to early withdrawals from GRO Accounts.
Under certain circumstances, the contingent withdrawal charge and market value
adjustment may be waived. See "Withdrawals" below and "Guaranteed Rate Options"
in Part 3.
WITHDRAWALS
You may make an unlimited number of withdrawals from your contract as frequently
as you wish. Each withdrawal must be for at least $300. A sales charge of up to
8% of the contribution amount withdrawn, in excess of any free withdrawal amount
(defined below), will be deducted from your Account Value, unless one of the
exceptions applies. This charge defrays marketing expenses. See "Contingent
Withdrawal Charge" in Part 4. Most withdrawals made by you prior to age 59-1/2
are also subject to a 10% federal tax penalty. In addition, some tax-favored
retirement programs limit withdrawals. See Part 7, "Tax Aspects of the
Contracts." For partial withdrawals, the total amount deducted from your
Account Value will include the withdrawal amount requested, any applicable
Market Value Adjustment, and any applicable withdrawal charge, so that the net
amount you receive will be the amount requested. For residents of Pennsylvania
and South Carolina a $3,000 minimum account balance is required to remain in
your Contract after any withdrawals.
The FREE WITHDRAWAL AMOUNT is a non-cumulative amount which you may take as a
partial withdrawal each contract year without being subject to the contingent
withdrawal charge or any Market Value Adjustment. It is equal to 10% of the
Account Value, minus cumulative prior withdrawals in the current contract year.
However, as explained above, a tax penalty still applies if you are under age
59-1/2.
YOUR INITIAL RIGHT TO REVOKE
Within ten days after you receive your contract, you may cancel it by returning
it to our Administrative Office. The 10-day period may be extended if required
by state law. We will refund all your contributions with an adjustment for any
investment gain or loss on the contributions put into each Variable Account
Option from the date units were purchased until the date your contract is
received by us, including any charges deducted. If state law instead requires a
refund of your contributions without any adjustment, we will return that amount
to you. For allocations to any of the GROs, we will refund to you the amount of
your contributions.
3
<PAGE>
TABLE OF ANNUAL FEES AND EXPENSES
Contract Owner Transaction Expenses
- - -----------------------------------
Sales Load on Purchases. . . . . . . . . . . . . . . . . . . $0
Deferred Sales Load (1). . . . . . . . . . . . . . . 8% 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)(7) 0.31%(6)(7) 0.65%(6)(7)
Equity 500 Index. . . . . . . . . . . . . . . . . . . . . . . . 0.11%(6)(7) 0.19%(6)(7) 0.30%(6)(7)
Small Cap Index . . . . . . . . . . . . . . . . . . . . . . . . 0.22%(6)(7) 0.23%(6)(7) 0.45%(6)(7)
VIP Equity-Income . . . . . . . . . . . . . . . . . . . . . . . 0.51%(6) 0.07% 0.58%(6)
VIP II Contrafund . . . . . . . . . . . . . . . . . . . . . . . 0.61%(6) 0.13% 0.74%(8)
VIP III Growth & Income . . . . . . . . . . . . . . . . . . . . 0.50%(6) 0.20%(6) 0.70%(6)(8)
VIP III Growth Opportunities. . . . . . . . . . . . . . . . . . 0.61% 0.16% 0.77%(8)
Harris Bretall Sullivan & Smith Equity Growth . . . . . . . . . 0.65% 0.38% 1.03%(9)
Zurich Kemper Value . . . . . . . . . . . . . . . . . . . . . . 0.65% 0.40% 1.05%(9)
Zweig Asset Allocation. . . . . . . . . . . . . . . . . . . . . 0.90% 0.38% 1.28%(9)
Zweig Equity (Small Cap). . . . . . . . . . . . . . . . . . . . 1.05% 0.50% 1.55%(9)
Janus Capital Appreciation. . . . . . . . . . . . . . . . . . . 0.75%(10) 0.30%(10) 1.05%(10)
Janus Balanced. . . . . . . . . . . . . . . . . . . . . . . . . 0.79%(11) 0.15%(11) 0.94%(11)
Janus Worldwide Growth. . . . . . . . . . . . . . . . . . . . . 0.66%(11) 0.14%(11) 0.80%(11)
Janus Money Market. . . . . . . . . . . . . . . . . . . . . . . 0.00%(11) 0.50%(11) 0.50%(11)
JPM International Equity. . . . . . . . . . . . . . . . . . . . 0.60% 0.60% 1.20%(12)
JPM Bond. . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.30% 0.45% 0.75%(12)
Morgan Stanley Asian Equity . . . . . . . . . . . . . . . . . . 0.80%(13) 0.40%(13) 1.20%(13)
Morgan Stanley Emerging Markets Debt. . . . . . . . . . . . . . 0.80%(13) 0.50%(13) 1.30%(13)
Morgan Stanley High Yield . . . . . . . . . . . . . . . . . . . 0.50%(13) 0.30%(13) 0.80%(13)
Morgan Stanley U.S. Real Estate . . . . . . . . . . . . . . . . 0.80%(13) 0.30%(13) 1.10%(13)
</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, customized rebalancing, or
systematic transfers. See "Deductions and Charges - Transfer Charge" in Part 4.
4
<PAGE>
(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) 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 is for the year ended December 31, 1996. The fee for
certain portfolios may be reduced as assets increase. See Part 3 - Your
Investment Options for the applicable fee rates for particular portfolios.
(6) Estimated
(7) 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.
(8) A portion of the brokerage commissions that certain of Fidelity's VIP 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.
(9) The Manager of the Legends Fund has agreed to reimburse each of the Legends
Fund Portfolios for operating expenses (excluding management fees) above an
annual rate of .50% of average net assets for all Portfolios of the Legends
Fund. Without reimbursements, total annual expenses for the Fund's fiscal year
ended June 30, 1997 would have been 1.82% for the Zweig Equity (Small Cap)
Portfolio. The Manager has reserved the right to withdraw or modify its policy
of expense reimbursement for the Portfolios, but has no current intention to do
so during 1998. In the Legends Fund's prospectus, see "Management of the Fund."
(10) 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.
(11) 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 and Janus Worldwide Growth Portfolios
reduce the management fee to the level of the corresponding Janus retail fund.
Other waivers, if applicable, are first applied against the management fee and
then against other expenses. Without 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.
(12) 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.
5
<PAGE>
(13) 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.
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.
CUMULATIVE EXPENSES PER $1,000 INVESTMENT IF YOU SURRENDER YOUR CONTRACT AT THE
END OF THE APPLICABLE PERIOD:
<TABLE>
<CAPTION>
Portfolio 1 Year 3 Years 5 Years 10 Years
- - --------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
EAFE-Registered Trademark- Index. . . . . . . . . . . . . . . . $100.99 $124.75 $150.98 $238.35
Equity 500 Index. . . . . . . . . . . . . . . . . . . . . . . . $ 97.41 $113.87 $132.66 $200.80
Small Cap Index . . . . . . . . . . . . . . . . . . . . . . . . $ 98.94 $118.54 $140.54 $217.06
VIP Equity-Income . . . . . . . . . . . . . . . . . . . . . . . $100.28 $122.58 $147.34 $230.95
VIP II Contrafund . . . . . . . . . . . . . . . . . . . . . . . $101.92 $127.53 $155.65 $247.79
VIP III Growth & Income . . . . . . . . . . . . . . . . . . . . $101.51 $126.30 $153.57 $243.61
VIP III Growth Opportunities. . . . . . . . . . . . . . . . . . $102.22 $128.46 $157.20 $250.92
Harris Bretall Sullivan & Smith Equity Growth . . . . . . . . . $105.09 $137.08 $171.59 $279.66
Zurich Kemper Value . . . . . . . . . . . . . . . . . . . . . . $106.12 $140.15 $176.68 $289.73
Zweig Asset Allocation. . . . . . . . . . . . . . . . . . . . . $107.24 $143.52 $182.26 $300.69
Zweig Equity (Small Cap). . . . . . . . . . . . . . . . . . . . $110.22 $152.36 $196.85 $328.99
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>
6
<PAGE>
CUMULATIVE 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- 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
Harris Bretall Sullivan & Smith Equity Growth . . . . . . . . . $25.09 $77.08 $131.59 $279.66
Zurich Kemper Value . . . . . . . . . . . . . . . . . . . . . . $26.12 $80.15 $136.68 $289.73
Zweig Asset Allocation. . . . . . . . . . . . . . . . . . . . . $27.24 $83.52 $142.26 $300.69
Zweig Equity (Small Cap). . . . . . . . . . . . . . . . . . . . $30.22 $92.36 $156.85 $328.99
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 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.
7
<PAGE>
FINANCIAL INFORMATION
The table below shows the unit value for certain Variable Account Options at
inception, the number of units outstanding at December 31 of each year since
inception, and the unit value at the beginning and end of each period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994 1993 1992 INCEPTION*
---- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
ZURICH KEMPER VALUE DIVISION
Unit value at beginning of period . . . . . . . . $14.85 $10.34 $10.56 $10.07 - $10.00
Unit value at end of period . . . . . . . . . . . $18.24 $14.85 $10.34 $10.56 $10.07
Number of units outstanding at end of period . . 1,119,634 806,752 733,336 547,498 3,540
HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH DIVISION
Unit value at beginning of period . . . . . . . . $13.21 $10.17 $9.91 $10.05 - $10.00
Unit value at end of period . . . . . . . . . . . $14.85 $13.21 $10.17 $9.91 $10.05
Number of units outstanding at end of period . . 1,184,119 1,342,971 1,014,016 830,307 18,906
ZWEIG ASSET ALLOCATION DIVISION
Unit value at beginning of period . . . . . . . . $13.44 $11.23 $11.33 $9.99 - $10.00
Unit value at end of period . . . . . . . . . . . $15.23 $13.44 $11.23 $11.33 $9.99
Number of units outstanding at end of period . . 2,434,199 2,541,023 2,558,692 1,518,392 11,385
ZWEIG EQUITY (SMALL CAP) DIVISION
Unit value at beginning of period . . . . . . . . $12.58 $10.53 $10.74 - - $10.00
Unit value at end of period . . . . . . . . . . . $14.71 $12.58 $10.53 $10.74 -
Number of units outstanding at end of period . . 592,469 587,830 567,827 425,500 -
</TABLE>
- - --------------------------------------------------------------------------------
*Inception Dates for the Variable Account Options were December 14, 1992 for the
Zweig Asset Allocation, Zurich Kemper Value and Zweig Equity Options; and
December 8, 1992 for the Harris Bretall Sullivan & Smith Equity Growth Option.
The Inception Date for each of the following: EAFE-Registered Trademark- Equity
Index, Equity 500 Index, Small Cap Index, VIP Equity-Income, VIP II
Contrafund,VIP III Growth & Income,VIP III Growth Opportunities, Janus Capital
Appreciation, Janus Balanced, Janus Worldwide Growth, Janus Money Market, JPM
International Equity, JPM Bond, Morgan Stanley Asian Equity, Morgan Stanley
Emerging Markets Debt, Morgan Stanley High Yield, and Morgan Stanley U.S. Real
Estate 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.
8
<PAGE>
PART 2 - INTEGRITY AND THE SEPARATE ACCOUNT
INTEGRITY LIFE INSURANCE COMPANY
Integrity is a stock life insurance company organized under the laws of Ohio.
Its principal executive offices are located in Louisville, Kentucky. We are
authorized to sell life insurance and annuities in 45 states and the District of
Columbia. In addition to the contracts, we sell flexible premium annuity
contracts with an underlying investment medium other than the Funds, fixed
single premium annuity contracts, and flexible premium annuity contracts
offering both traditional fixed guaranteed interest rates along with fixed
equity indexed options. We are currently licensed to sell variable contracts in
45 states and the District of Columbia. In addition to issuing annuity products,
we have entered into agreements with other insurance companies to provide
administrative and investment support for products to be designed, underwritten
and sold by these companies.
Integrity is an indirect wholly owned subsidiary of ARM. ARM specializes in the
asset accumulation business, providing retail and institutional customers with
products and services designed to serve the growing long-term savings and
retirement markets. At June 30, 1997, ARM had $5.6 billion of assets under
management.
THE SEPARATE ACCOUNT AND THE VARIABLE ACCOUNT OPTIONS
The Separate Account is established and maintained under the insurance laws of
the State of Ohio. It is a unit investment trust registered with the Securities
and Exchange Commission (the SEC) under the Investment Company Act of 1940 (1940
ACT). A unit investment trust is a type of investment company. SEC registration
does not involve any supervision by the SEC of the management or investment
policies of the Separate Account. Each Variable Account Option invests in shares
of corresponding Portfolios of the Funds. We may establish additional Options,
some of which may not be available for your allocations. The Variable Account
Options currently available to you are listed on the cover page of this
prospectus.
ASSETS OF OUR SEPARATE ACCOUNT
Under Ohio law, we own the assets of our Separate Account and use them to
support the variable portion of your contract and other variable annuity
contracts. Annuitants under other variable annuity contracts will participate in
the Separate Account in proportion to the amounts relating to their contracts.
The Separate Account's assets supporting the variable portion of these variable
contracts may not be used to satisfy liabilities arising out of any other
business of ours. Under certain unlikely circumstances, one Variable Account
Option may be liable for claims relating to the operations of another Option.
Income, gains and losses, whether or not realized, from assets allocated to the
Separate Account are credited to or charged against the Separate Account without
regard to our other income, gains or losses. We may permit charges owed to us to
stay in the Separate Account, and thus may participate proportionately in the
Separate Account. Amounts in the Separate Account in excess of reserves and
other liabilities belong to us, and we may transfer them to our general account
(GENERAL ACCOUNT).
CHANGES IN HOW WE OPERATE
We may modify how we or our Separate Account operate, subject to your approval
when required by the 1940 Act or other applicable law or regulation. You will be
notified if any changes result in a material change in the underlying
investments of a Variable Account Option. We may:
- add Options to, or remove Options from, our Separate Account, combine two
or more Options within our Separate Account, or withdraw assets relating to
your contract from one Option and put them into another;
- register or end the registration of the Separate Account under the 1940
Act;
- operate our Separate Account under the direction of a committee or
discharge such a committee at any time (the committee may be composed of a
majority of persons who are "interested persons" of Integrity under the
1940 Act);
- restrict or eliminate any voting rights of Owners or others who have voting
rights that affect our Separate Account;
- cause one or more Options to invest in a mutual fund other than or in
addition to the Funds;
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- operate our Separate Account or one or more of the Options in any other
form the law allows, including a form that allows us to make direct
investments. We may make any legal investments we wish. In choosing these
investments, we will rely on our own or outside counsel for advice.
PART 3 - YOUR INVESTMENT OPTIONS
THE LEGENDS FUND
The Legends Fund, a Maryland corporation, is an open-end diversified management
investment company registered under the 1940 Act. Such registration does not
involve supervision by the SEC of the investments or investment policies of the
Legends Fund. The Legends Fund is a "series" type of investment company with
diversified portfolios. The Legends Fund does not impose a sales charge or
"load" for buying and selling its shares. The shares of the Portfolios of the
Legends Funds are bought and sold by the Separate Account at their respective
net asset values.
The Legends Fund is designed to serve as an investment vehicle for variable
annuity and variable life contracts of insurance companies. Shares of the
Portfolios of the Legends Fund currently are available to the separate accounts
of Integrity and National Integrity Life Insurance Company (NATIONAL INTEGRITY),
a wholly owned subsidiary of Integrity.
Shares of Portfolios of the Legends Fund are made available to the Separate
Account under a Participation Agreement (PARTICIPATION AGREEMENT). The
Participation Agreement is among the Legends Fund, ARM Securities Corporation
(ARM SECURITIES), a wholly owned subsidiary of ARM which is the principal
underwriter for Legends Fund shares, and Integrity. If state or federal law
precludes the sale of the Legends Fund's or any Portfolio's shares to the
Separate Account, or in certain other circumstances, sales of shares to the
Separate Account may be suspended and/or the Participation Agreement may be
terminated as to the Legends Fund or the affected Portfolio. Also, the
Participation Agreement may be terminated by any party thereto with one year's
written notice.
Notwithstanding termination of the Participation Agreement, the Legends Fund and
ARM Securities are obligated to continue to make the Legends Fund's shares
available for contracts outstanding on the date the Participation Agreement
terminates, unless the Participation Agreement was terminated due to an
irreconcilable conflict among contractowners of different separate accounts. If
for any reason the shares of any Portfolio are no longer available for purchase
by the Separate Account for outstanding contracts, the parties to the
Participation Agreement have agreed to cooperate to comply with the 1940 Act in
arranging for the substitution of another funding medium as soon as reasonably
practicable and without disruption of sales of shares to the Separate Account or
any Variable Account Option.
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 fourth quarter of 1997.
ARM Capital Advisors has entered into a sub-advisory agreement with a
professional manager for investment of the assets of each of the Portfolios.
The sub-adviser for each Portfolio is listed under "Investment Objectives of
the Portfolios" below. The Portfolios pay monthly investment management fees
to ARM Capital Advisors, and ARM Capital Advisors pays the sub-advisers for
their services to the Portfolios. ARM Capital Advisors retains a management
fee at an annual rate of up to .25% of Portfolio net assets (depending upon
Portfolio) as compensation for providing certain services to the Portfolios.
The management fees paid by each Portfolio to ARM Capital Advisors as a
percentage of net assets are set forth below:
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Legends Fund Portfolio Management Fee
---------------------- --------------
Harris Bretall Sullivan & Smith Equity Growth. . . . . . 0.65%
Zurich Kemper Value. . . . . . . . . . . . . . . . . . . 0.65%
Zweig Asset Allocation . . . . . . . . . . . . . . . . . 0.90%
Zweig Equity (Small Cap) . . . . . . . . . . . . . . . . 1.05%
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Set forth below is a summary of the
investment objectives of the Portfolios of the Fund. There can be no assurance
that these objectives will be achieved. YOU SHOULD READ THE FUND'S PROSPECTUS
CAREFULLY BEFORE INVESTING.
HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH PORTFOLIO
Harris Bretall Sullivan & Smith Equity Growth Portfolio seeks long-term capital
appreciation. It primarily invests in stocks of established companies with
proven records of superior and consistent growth. The Portfolio may invest all
or a portion of its assets in cash and cash equivalents if the sub-adviser
considers the equity markets to be overvalued. The Portfolio may invest in U.S.
government securities when this appears desirable in light of the Portfolio's
investment objective or when market conditions warrant. Harris Bretall Sullivan
& Smith, Inc. is the sub-adviser to the Portfolio.
ZURICH KEMPER VALUE PORTFOLIO
Zurich Kemper Value Portfolio seeks primarily long-term capital appreciation
with a secondary objective of current income. It invests principally in a
diversified portfolio of securities believed by the sub-adviser to be
undervalued. The sub-adviser's philosophy centers on identifying stocks of
large, well-known companies with solid financial strength and generous dividend
yields that have low price-earnings ratios and have been generally overlooked by
the market. Zurich Kemper Value Advisors, Inc. is the sub-adviser to the
Portfolio.
ZWEIG ASSET ALLOCATION PORTFOLIO
Zweig Asset Allocation Portfolio seeks long-term capital appreciation. It
invests primarily in Blue Chip Stocks, consistent with preservation of capital
and the reduction of portfolio exposure to market risk, as determined by the
sub-adviser to the Portfolio. Blue Chip Stocks are stocks which the sub-adviser
considers comparable to the stocks included in the S&P 500 at the time of
purchase, and that have a minimum of $400 million market capitalization, average
daily trading volume of 50,000 shares or $425 million in total assets, and which
are traded on the New York Stock Exchange (NYSE), American Stock Exchange
(AMEX), over-the-counter (OTC) or on foreign exchanges. Zweig/Glaser Advisers is
the sub-adviser to the Portfolio.
ZWEIG EQUITY (SMALL CAP) PORTFOLIO
Zweig Equity (Small Cap) Portfolio seeks long-term capital appreciation. It
invests primarily in Small Company Stocks, consistent with preservation of
capital and reduction of portfolio exposure to market risk, as determined by the
sub-adviser. Current income is not an objective. SMALL COMPANY STOCKS are the
2,500 stock positions immediately after the 500 largest stocks ranked in terms
of market capitalization and/or trading volume, and which are traded on the
NYSE, AMEX, OTC or on foreign exchanges. Zweig/Glaser Advisers is the
sub-adviser to the Portfolio.
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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 adviser 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.
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 waivers):
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 Fund 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
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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-Registered Trademark- 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.
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<PAGE>
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 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.
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Set forth in the table below is the individual fund fee rate for the portfolios
and their 1996 management fee rate, comprised of the individual and group rates,
as a percentage of average net assets:
1996
Portfolio Individual Rate Management Fee
-----------------------------------------------------------------
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
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.
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<PAGE>
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 $300 Million 0.75* 1.25%
Janus Balanced Next $200 Million 0.70 N/A
Janus Worldwide Growth Over $500 Million 0.65 N/A
- - -------------------------------------------------------------------------------
Janus Money Market All Asset Levels 0.25 0.50
- - -------------------------------------------------------------------------------
* Janus has agreed to reduce each of the Capital Appreciation, Balanced, and
Worldwide Growth Portfolios' advisory fees to the extent that such fee exceeds
the effective rate of the Janus retail fund corresponding to such Portfolio,
which are the Janus Olympus Fund, Janus Balanced Fund, and Janus Worldwide Fund,
respectively. 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. The Portfolio normally invests at least 25% of its assets in
fixed-income senior securities, which include debt securities and preferred
stocks.
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JANUS WORLDWIDE GROWTH PORTFOLIO
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. 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.
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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.
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 a 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. 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 August 31,
1997, MSAM and its investment advisory affiliates (exclusive of MAS, Van Kampen
American Capital, and Dean Witter Intercapital) managed assets of approximately
$80.9 billion, and MAS managed assets of approximately $57.6 billion.
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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
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.
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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").
FIXED ACCOUNTS
BECAUSE OF APPLICABLE EXEMPTIVE AND EXCLUSIONARY PROVISIONS, INTERESTS IN
CONTRACTS ATTRIBUTABLE TO GROS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933 ("1933 ACT"), NOR UNDER THE INVESTMENT COMPANY ACT OF 1940 ("1940 ACT").
THUS, NEITHER SUCH CONTRACTS NOR OUR GENERAL ACCOUNT, WHICH GUARANTEES THE
VALUES AND BENEFITS UNDER THOSE CONTRACTS, ARE GENERALLY SUBJECT TO REGULATION
UNDER THE PROVISIONS OF THE 1933 ACT OR THE 1940 ACT. ACCORDINGLY, WE HAVE BEEN
ADVISED THAT THE STAFF OF THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
REVIEWED THE DISCLOSURE IN THIS PROSPECTUS RELATING TO THE GROS OR THE GENERAL
ACCOUNT. DISCLOSURES REGARDING THE GROS OR THE GENERAL ACCOUNT MAY, HOWEVER, BE
SUBJECT TO CERTAIN GENERALLY APPLICABLE PROVISIONS OF THE FEDERAL SECURITIES
LAWS RELATING TO THE ACCURACY AND COMPLETENESS OF STATEMENTS MADE IN
PROSPECTUSES.
GUARANTEED RATE OPTIONS
We offer GROs with durations of three, five, seven and ten years. We may from
time to time change the durations available. Each allocation to a GRO locks in a
fixed effective annual interest rate declared by us (GUARANTEED INTEREST RATE)
for the duration you select (your GRO ACCOUNT). The duration of your GRO
Account is the GUARANTEE PERIOD. Each contribution or transfer to a GRO
establishes a new GRO Account at the then-current Guaranteed Interest Rate
declared by us. We will not declare an interest rate less than 3%. Each GRO
Account expires at the end of the duration you have selected. See "Renewals of
GRO Accounts" below. Values and benefits under your contract attributable to
GROs are guaranteed by the reserves in our GRO separate account as well as by
our General Account.
The value of each of your GRO Accounts is referred to as a GRO VALUE. The GRO
Value at the expiration of the GRO Account, assuming you have not transferred or
withdrawn any amounts, will be the amount allocated plus interest at the
Guaranteed Interest Rate. We credit interest daily at an effective annual rate
equal to the Guaranteed Interest Rate. We allocate interest at the end of each
contract year and at the time of any transfer, full or partial withdrawal,
payment of a death benefit or purchase of any annuity benefit.
We may declare a higher rate of interest in the first year for any Contribution
allocated to a GRO which will exceed the Guaranteed Interest Rate credited
during the remaining years of the Guarantee Period (ENHANCED RATE). This
Enhanced Rate will be guaranteed for the Guaranteed Period's first year and
declared at the time of purchase. We reserve the right to declare and credit
additional interest based on Contribution, Account Value, withdrawal dates,
economic conditions or on any other lawful, nondiscriminatory basis (ADDITIONAL
INTEREST). Any Enhanced Rate and Additional Interest credited to your GRO
Account will be separate from the Guaranteed Interest Rate and not used in the
Market Value Adjustment formula. THE ENHANCED RATE OR ADDITIONAL INTEREST MAY
NOT BE MADE APPLICABLE UNDER CONTRACTS ISSUED IN CERTAIN STATES.
Each group of GRO Accounts of the same duration is considered one GRO, (i.e. all
of your three-year GRO Accounts are one GRO while all of your five-year GRO
Accounts are another GRO).
You may obtain information about our current Guaranteed Interest Rates by
calling our Administrative Office.
ALLOCATIONS TO GROS MAY NOT BE MADE UNDER CONTRACTS ISSUED IN CERTAIN STATES.
THE TEN YEAR GRO IS NOT AVAILABLE IN OREGON.
RENEWALS OF GRO ACCOUNTS. When a GRO Account expires, a new GRO Account of the
same duration, at the then-current Guaranteed Interest Rate, will be established
unless you withdraw your GRO Value or transfer it to another Investment Option.
We will notify you in writing before the expiration of your GRO Accounts. You
must notify us prior to the expiration of your GRO Accounts of any changes you
desire to make. See "Transfers" in Part 5.
Any renewal of a GRO Account will be implemented on the expiration date of the
GRO Account. You will receive the current Guaranteed Interest Rate applicable on
the expiration date. If a GRO Account expires and it cannot be renewed
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for the same duration, it will be renewed for the next shortest available
duration, unless you instruct us otherwise within 30 days prior to expiration of
the GRO Account. You may not choose, and we will not renew, a GRO Account that
expires after your Retirement Date.
MARKET VALUE ADJUSTMENTS. A MARKET VALUE ADJUSTMENT is an adjustment, either up
or down, in your GRO Value prior to the expiration of your GRO Account. A Market
Value Adjustment will be made for each transfer, partial withdrawal in excess of
the free withdrawal amount, surrender, or purchase of an annuity benefit from a
GRO Account that occurs other than within 30 days prior to the expiration of the
GRO Account. There will be no Market Value Adjustment made for a death benefit.
The market adjusted value may be higher or lower than the GRO Value. In no
event, however, may the market adjusted value in each GRO Account be less than
the Minimum Value, an amount equal to your allocation to such GRO Account plus
3% interest, compounded annually, less previous withdrawals from such GRO
Account and less any applicable contingent withdrawal charges. The Minimum Value
for partial withdrawals or transfers will be calculated on a pro-rata basis.
The Market Value Adjustment applicable to a GRO Account prior to its expiration
reflects the relationship between the Guaranteed Interest Rate for such GRO
Account and the then-current Guaranteed Interest Rate applicable to a newly
elected GRO Account of a duration equal to the time remaining in your GRO
Account. The Market Value Adjustment will reduce the GRO Value (but not below
the Minimum Value) if the current Guaranteed Interest Rate is higher than the
Guaranteed Interest Rate being credited to amounts under your GRO Account.
Conversely, the Market Value Adjustment will increase the GRO Value if the
current Guaranteed Interest Rate is lower than the Guaranteed Interest Rate
being credited to amounts under your GRO Account.
The Market Value Adjustment (MVA) for a GRO Account is determined under the
following formula:
N/12 N/12
MVA = GRO Value x [(1 + A) / (1 + B + .0025) - 1], where
A is the Guaranteed Interest Rate being credited to the GRO Account subject
to the Market Value Adjustment,
B is the current Guaranteed Interest Rate, as of the effective date of the
application of the Market Value Adjustment, for current allocations to a
GRO Account, the length of which is equal to the number of whole months
remaining in your GRO Account. Subject to certain adjustments, if such
remaining period is not equal to an exact period for which we have declared
a new Guaranteed Interest Rate, B will be determined by interpolating
between the Guaranteed Interest Rates for GRO Accounts of durations closest
to (next higher and next lower) the remaining period described above.
N is the number of whole months remaining in your GRO Account.
For contracts issued in certain states, the formula above will be adjusted to
comply with applicable state requirements.
If the remaining term of your GRO Account is 30 days or less, the Market Value
Adjustment for your GRO Account shall be zero. If for any reason we are no
longer declaring current Guaranteed Interest Rates, then for purposes of
determining B we will use the yield to maturity of United States Treasury Notes
with the same remaining term as your GRO Account, interpolating when necessary,
in place of the current Guaranteed Interest Rate or Rates.
For illustrations of the application of the Market Value Adjustment formula, see
Appendix A.
SYSTEMATIC TRANSFER OPTION
We also offer a STO which guarantees an interest rate that we declare in advance
for each calendar quarter. This interest rate applies to all contributions
within the STO Account at the time the rate is declared. You MUST transfer all
STO contributions into other Investment Options within one year of your most
recent STO contribution. Transfers will be made automatically in equal quarterly
or monthly installments of not less than $1,000 each. No transfers into the STO
from other Investment Options are permitted. Withdrawals from the STO are
subject to normal contingent withdrawal charges. We guarantee that the STO's
effective annual yield will never be less than 3.0%. See "Systematic Transfer
Program" in Part 8 for details on this program. This option may not be
currently available in some states.
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PART 4 -- DEDUCTIONS AND CHARGES
SEPARATE ACCOUNT CHARGES
Integrity deducts from the unit value every calendar day an amount equal to an
effective annual rate of 1.35% of the Account Value in the Variable Account
Options. This daily expense rate cannot be increased without your consent.
Various portions of this total charge, as described below, pay for certain
services to the Separate Account and the contracts.
A daily charge equal to an effective annual rate of .15% of the value of each
Variable Account Option is deducted for administrative expenses not covered by
the annual administrative charge described below. The daily administrative
charge, like the annual administrative charge, is designed to reimburse
Integrity for expenses actually incurred, without profit.
A daily charge equal to an effective annual rate of 1.20% of the value of each
Variable Account Option is deducted for Integrity's assuming the expense risk
(.85%) and the mortality risk (.35%) under the contract. The expense risk is the
risk that our actual expenses of administering the contracts will exceed the
annual administrative expense charge. In this context, mortality risk refers to
the cost of insuring the risk Integrity takes that annuitants, as a class of
persons, will live longer than estimated and therefore require Integrity to pay
out more annuity benefits than anticipated. The relative proportion of the
mortality and expense risk charges may be modified, but the total effective
annual risk charge of 1.20% of the value of the Variable Account Options may not
be increased on your Contract.
Integrity may realize a gain from these daily charges to the extent they are not
needed to meet the actual expenses incurred.
ANNUAL ADMINISTRATIVE CHARGE
If your Account Value is less than $50,000 on the last day of any contract year
prior to the your Retirement Date, Integrity charges an annual administrative
charge of $30. This charge is deducted from your Account Value in each
Investment Option on a pro-rata basis. The portion of the charge applicable to
the Variable Account Options will reduce the number of units credited to you.
The portion of the charge applicable to the Fixed Accounts is withdrawn in
dollars. The annual administrative charge will be pro-rated based on the number
of days that have elapsed in the contract year in the event of the Annuitant's
retirement, death, or termination of a contract during a contract year.
FUND CHARGES
Our Separate Account purchases shares of the Funds at net asset value. That
price reflects investment management fees and other direct expenses that have
already been deducted from the assets of the Funds. The amount charged for
investment management may not be increased without the prior approval of a
Fund's shareholders. See Part 3 - Your Investment Options.
STATE PREMIUM TAX DEDUCTION
Integrity will not deduct state premium taxes from your contributions before
applying the contributions to the Investment Options, unless required to pay
such taxes under applicable state law. If the Annuitant elects an annuity
benefit, Integrity will deduct any applicable state premium taxes from the
amount otherwise available for an annuity benefit. State premium taxes, if
applicable, currently range up to 4%.
CONTINGENT WITHDRAWAL CHARGE
No sales charges are applied when you make a contribution to the contract.
Contributions withdrawn will be subject to a withdrawal charge of up to 8%. As
shown below, the percentage charge varies, depending upon the "age" of the
contributions included in the withdrawal--that is, the contract year in which
each contribution was made. The maximum percentage of 8% would apply if the
entire amount of the withdrawal consisted of contributions made during your
current contract year. No withdrawal charge applies when you withdraw
contributions made earlier than your sixth prior contract year. For purposes of
calculating the withdrawal charge, (1) the oldest contributions will be treated
as the first withdrawn
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and more recent contributions next, and (2) partial withdrawals up to the free
withdrawal amount will not be considered a withdrawal of any contributions. For
partial withdrawals, the total amount deducted from your Account Value will
include the withdrawal amount requested, any applicable Market Value Adjustment,
and any applicable withdrawal charge, so that the net amount you receive will be
the amount requested.
During any contract year, no charge will be applied to your partial withdrawals
that do not exceed the free withdrawal amount. On any Business Day, the free
withdrawal amount is 10% of your Account Value less withdrawals during the
current contract year. If any partial withdrawal exceeds the free withdrawal
amount, we will deduct the applicable contingent withdrawal charge with respect
to such excess amount. The contingent withdrawal charge is a sales charge to
defray our costs of selling and promoting the contracts. We do not expect that
revenues from contingent withdrawal charges will cover all of such costs. Any
shortfall will be made up from our General Account assets, including any profits
from other charges under the contracts.
Contract Year in Which Charge as a % of the
Withdrawn Contribution Was Made Contribution Withdrawn
- - ------------------------------- ----------------------
Current. . . . . . . . . . . . . . . . . . . 8%
First Prior. . . . . . . . . . . . . . . . . 7
Second Prior . . . . . . . . . . . . . . . . 6
Third Prior. . . . . . . . . . . . . . . . . 5
Fourth Prior . . . . . . . . . . . . . . . . 4
Fifth Prior. . . . . . . . . . . . . . . . . 3
Sixth Prior. . . . . . . . . . . . . . . . . 2
Seventh Prior and Earlier. . . . . . . . . . 0
No contingent withdrawal charge will be applied to any amount withdrawn if the
Annuitant uses the withdrawal either to purchase from Integrity an immediate
annuity benefit with life contingencies or an immediate annuity without life
contingencies which provides for level payments over five or more years, with a
restricted prepayment option. Similarly, no charge will be applied if the
Annuitant dies and the withdrawal is made by the Annuitant's beneficiary. See
"Death Benefits and Similar Benefit Distributions" in Part 5.
Unless specifically instructed otherwise, Integrity will make withdrawals
(including any applicable charges) from the Investment Options in the same ratio
the Annuitant's Account Value in each Investment Option bears to the Annuitant's
total Account Value. The minimum withdrawal permitted is $300. For residents of
Pennsylvania, South Carolina and Washington State a $3,000 minimum account
balance is required to remain in your Contract after any withdrawals.
TRANSFER CHARGE
No charge is made for your first twelve transfers among the Variable Account
Options or the GROs during a contract year. We are, however, permitted to
charge up to $20 for each additional transfer during that contract year. (No
transfer charge will apply to transfers under (i) Dollar Cost Averaging, (ii)
Customized Asset Rebalancing, or (iii) systematic transfers from the STO, nor
will such transfers count towards the twelve transfers you may make in a
contract year before we may impose a transfer charge.) See "Transfers" in Part
5. Transfers from a GRO may be subject to a Market Value Adjustment. See
"Guaranteed Rate Options" in Part 3.
HARDSHIP WAIVER
Withdrawal Charges may also be waived on full or partial withdrawal requests of
$1,000 or more under a Hardship circumstance. The Market Value Adjustment may
also be waived on any amounts withdrawn from the GRO Accounts. Such Hardship
circumstances include the Owner's (1) confinement to a nursing home, hospital
and long term care facility, (2) diagnosis of terminal illness with any medical
condition which would result in death or total disability, and (3) unemployment.
We reserve the right to obtain reasonable notice and documentation including,
but not limited to, a physician's certification and Determination Letter from a
State Department of Labor. Some of the hardship circumstances listed above may
not be applicable in some states, and, in other states, may not be available at
all.
TAX RESERVE
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We have the right to make a charge in the future for taxes or for reserves set
aside for taxes, which will reduce the investment experience of the Variable
Account Options.
PART 5 -- TERMS OF YOUR VARIABLE ANNUITY
CONTRIBUTIONS UNDER YOUR CONTRACT
You can make contributions of at least $100 at any time up to the Annuitant's
Retirement Date. Your first contribution, however, cannot be less than $1,000.
Minimum initial contribution for residents of Pennsylvania and South Carolina
is $3,000 after any withdrawals. We will accept contributions of at least $50
for salary allotment programs. We have special rules for minimum contribution
amounts for tax-favored retirement programs. See "Special Rules for Tax-Favored
Retirement Programs" in Part 7.
We may limit the total contributions under one contract to $1,000,000 if you are
under age 76 or to $250,000 if you are over age 76. Once you reach eight years
before your Retirement Date, we may refuse to accept any contribution made for
you. Contributions may also be limited by various laws or prohibited by
Integrity for all Annuitants under the contract. If your contributions are made
under a tax-favored retirement program, we will not measure them against the
maximum limits set by law.
Contributions are applied to the various Investment Options selected by you and
are used to pay annuity and death benefits.
Each contribution is credited as of the date we have RECEIVED (as defined below)
at our Administrative Office both the contribution and instructions for
allocation among the Investment Options. At any time you may have amounts in not
more than nine Investment Options. For purposes of calculating the nine
Investment Options, each of your GRO Accounts counts as one Investment Option.
Wire transfers of federal funds are deemed received on the day of transmittal if
credited to our account by 3 p.m. Eastern Time, otherwise they are deemed
received on the next Business Day. Contributions by check or mail are deemed
received not later than the second Business Day after they are delivered to our
Administrative Office. A BUSINESS DAY is any day other than a weekend or a
national bank holiday.
You can change your choice of Investment Options at any time by writing to the
Administrative Office. The request should indicate your contract number and the
specific change, and you should sign the request. When it is received by the
Administrative Office, the change will be effective for any contribution which
accompanies it and for all future contributions.
YOUR ACCOUNT VALUE
Your Account Value reflects various charges. See Part 4, "Deductions and
Charges." Annual deductions are made as of the last day of each contract year.
Withdrawal charges and Market Value Adjustments, if applicable, are made as of
the effective date of the transaction. Charges against our Separate Account are
reflected daily. Any amount allocated to a Variable Account Option will go up or
down in value depending on the investment experience of that Option. For
contributions allocated to the Variable Account Options, there are no guaranteed
values. The value of your contributions allocated to the Fixed Accounts is
guaranteed, subject to any applicable Market Value Adjustments. See "Guaranteed
Rate Options" in Part 3.
YOUR PURCHASE OF UNITS IN OUR SEPARATE ACCOUNT
Allocations to the Variable Account Options are used to purchase units. On any
given day, the value you have in a Variable Account Option is the unit value
multiplied by the number of units credited to you in that Option. The units of
each Variable Account Option have different unit values.
The number of units purchased or redeemed (sold) in any Variable Account Option
is calculated by dividing the dollar amount of the transaction by the Option's
unit value, calculated after the close of business that day. The number of units
for a Variable Account Option at any time is the number of units purchased less
the number of units redeemed. The value of units fluctuates with the investment
performance of the corresponding Portfolios of the Funds which in turn reflects
the investment income and realized and unrealized capital gains and losses of
the Portfolios, as well as the Funds' expenses. The unit values also change
because of deductions and charges we make to our Separate Account. The number
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of units credited to you, however, will not vary because of changes in unit
values. Units of a Variable Account Option are purchased when you allocate new
contributions or transfer prior contributions to that Option. Units are redeemed
when you make withdrawals or transfer amounts from a Variable Account Option. We
also redeem units to pay the death benefit when the Annuitant dies and to pay
the annual administrative charge.
HOW WE DETERMINE UNIT VALUE
We determine unit values for each Variable Account Option on the Valuation Date.
The Valuation Date for purposes of determining unit values is 4 p.m. Eastern
Time on each day the New York Stock Exchange is open for business.
The unit value of each Variable Account Option for any day on which we determine
unit values is equal to the unit value for the last day on which a unit value
was determined multiplied by the net investment factor for that Option on the
current day. We determine a NET INVESTMENT FACTOR for each Option as follows:
- First, we take the value of the shares belonging to the Option in the
corresponding Portfolio at the close of business that day (before giving
effect to any transactions for that day, such as contributions or
withdrawals). For this purpose, we use the share value reported to us by
the Funds.
- Next, we add any dividends or capital gains distributions by the Fund on
that day.
- Then, we charge or credit for any taxes or amounts set aside as a reserve
for taxes.
- Then, we divide this amount by the value of the amounts in the Option at
the close of business on the last day on which a unit value was determined
(after giving effect to any transactions on that day).
- Finally, we subtract a daily asset charge for each calendar day since the
last day on which a unit value was determined (for example, a Monday
calculation will include charges for Saturday and Sunday). The daily charge
is .00003721, which is an effective annual rate of 1.35%. This charge is
for the mortality risk, administrative expenses and expense risk assumed by
us under the contract.
Generally, this means that we adjust unit values to reflect what happens to the
Funds, and also for the mortality and expense risk charge and any charge for
administrative expenses or taxes.
TRANSFERS
You may transfer your Account Value among the Variable Account Options and the
GROs, subject to Integrity's then current transfer restrictions. You may not
make a transfer into the STO. Transfers to a GRO must be to a newly elected GRO
(i.e. to a GRO that you have not elected before) at the then-current Guaranteed
Interest Rate, unless Integrity otherwise consents. Transfers from a GRO other
than within 30 days prior to the expiration date of a GRO Account are subject to
a Market Value Adjustment. See "Guaranteed Rate Options" in Part 3. For amounts
in GROs, transfers will be made according to the order in which monies were
originally allocated to any GRO.
The amount transferred must be at least $250 or, if less, the entire amount in
the Investment Option. After twelve transfers have been made by you during a
contract year, a charge of up to $20 may apply to each additional transfer
during that contract year, except that no charge will be made for transfers
under our dollar cost averaging or customized asset rebalancing or systematic
transfer programs, described in Part 8. Once annuity payments begin, transfers
are no longer permitted.
Written transfer requests must be sent directly to the Administrative Office.
Each Annuitant's request for a transfer must specify the contract number, the
amounts to be transferred and the Investment Options to and from which the
amounts are to be transferred. Transfers may also be arranged through our
telephone transfer service provided you have established a Personal
Identification Number (PIN CODE). We will honor telephone transfer instructions
from any person who provides correct identifying information, and we are not
responsible in the event of a fraudulent telephone transfer which is believed to
be genuine in accordance with these procedures. Accordingly, you bear the risk
of loss if unauthorized persons make transfers on your behalf.
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A transfer request will be effective as of the Business Day it is received by
our Administrative Office. A transfer request does not change the allocation of
current or future contributions among the Investment Options. Telephone
transfers may be requested from 8:30 a.m. - 5:00 p.m., Eastern Time, on any day
we are open for business. You will receive the Variable Account Options' unit
values as of the close of business on the day you call. Accordingly, transfer
requests received after 4:00 p.m. Eastern Time will be processed using unit
values as of the close of business on the next Business Day after the day you
call. All transfers will be confirmed in writing.
WITHDRAWALS
You may make an unlimited number of withdrawals from your contract as frequently
as you wish. Each withdrawal must be for at least $300. For residents of
Pennsylvania and South Carolina a $3,000 minimum account balance is required to
remain in your Contract after any withdrawals. A withdrawal charge of up to 8%
of the contribution amount withdrawn, as adjusted for any applicable Market
Value Adjustment and the withdrawal charge itself will be deducted from your
Account Value, unless one of the exceptions applies. See "Guaranteed Rate
Options" in Part 3 and "Contingent Withdrawal Charge" in Part 4. Most
withdrawals made by you prior to age 59-1/2 are also subject to a 10% federal
tax penalty. In addition, some tax-favored retirement programs limit
withdrawals. See Part 7, "Tax Aspects of the Contracts" for further information
regarding various tax consequences associated with the contracts.
ASSIGNMENTS
You may not assign the contract as collateral or security for a loan, but an
Owner whose contract is not related to a tax-favored program may otherwise
assign the contract before the Annuitant's Retirement Date. An assignment of the
contract as a gift may, however, have adverse tax consequences. See Part 7, "Tax
Aspects of the Contracts." Integrity will not be bound by an assignment unless
it is in writing, and we have received it at the Administrative Office.
DEATH BENEFITS AND SIMILAR BENEFIT DISTRIBUTIONS
A death benefit is available to a beneficiary if the Annuitant dies prior to the
Retirement Date.
If the Annuitant is under the age of 80 at the time of death, the amount of the
death benefit is the greatest of:
- your Account Value
- the highest Account Value at the beginning of any contract year, plus
subsequent contributions and minus subsequent withdrawals
- your total contributions less the sum of withdrawals
"Subsequent withdrawals" for purposes of calculation of a death benefit reflect
any market value adjustments applicable to such withdrawals.
If the Annuitant is 80 or older at the time of death, the amount of the death
benefit will be your Account Value.
The death benefit amount is determined as of the date proof of death and
instructions for payment of proceeds are received by the Administrative Office.
Death benefits (and benefit distributions required because of a separate Owner's
death) can be paid in a lump sum or as an annuity. If no benefit option is
selected for the beneficiary at the Annuitant's death, the beneficiary can
select an option.
The beneficiary of the death benefit under a contract is selected by the Owner.
An Owner may change beneficiaries by submitting the appropriate form to the
Administrative Office. If no Annuitant's beneficiary survives the Annuitant,
then the death benefit is generally paid to the Annuitant's estate. No death
benefit will be paid after the Annuitant's death if there is a contingent
Annuitant. In that case, the contingent Annuitant becomes the new Annuitant
under the contract.
Generally, the Owner also may select his or her own beneficiary. If the Owner
dies before the Annuitant's Retirement Date, an Owner's beneficiary will become
the Owner of the contract and may be required to receive benefit distributions.
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ANNUITY BENEFITS
All annuity benefits under your contract are calculated as of the Retirement
Date selected by you. The Retirement Date can be changed by written notice to
the Administrative Office any time prior to the Retirement Date. The Retirement
Date may be no later than your 98th birthday or earlier, if required by law. The
terms of the contracts applicable to the various retirement programs, along with
the federal tax laws, establish certain minimum and maximum retirement ages.
Annuity benefits may take the form of a lump sum payment or an annuity. A lump
sum payment will provide the Annuitant with the Cash Value under the contract,
shortly after the Retirement Date. The amount applied for the purchase of an
annuity benefit will be the Adjusted Account Value, except that the Cash Value
will be the amount applied if the annuity benefit does not have a life
contingency and either the term is less than five years or the annuity can be
commuted to a lump sum payment without a withdrawal charge applying.
ANNUITIES
Alternate forms of annuity benefits can provide for fixed or variable payments
which may be made monthly, quarterly, semi-annually or annually. Variable
payments will be funded through one or more Separate Account Divisions. For any
annuity, the minimum amount applied to the annuity must be $2,000 and the
minimum initial payment must be at least $20.
If you have not already selected a form of annuity, we will send you, within six
months prior to your Retirement Date, an appropriate notice form on which you
may indicate the type of annuity you desire or confirm to us that the normal
form of annuity, as defined below, is to be provided. However, if we do not
receive a completed form from you on or before your Retirement Date, we will
deem the Retirement Date to have been extended until we receive your written
instructions at our Administrative Office. During such extension, the values
under your contract in the various Investment Options will remain invested in
such options and amounts remaining in Variable Account Options will continue to
be subject to the investment risks associated with those Options. However, your
Retirement Date cannot be extended beyond your 98th birthday or earlier, if
required by law. You will receive a lump sum benefit if you do not make an
election by such date.
We currently offer the following types of annuities:
A PERIOD CERTAIN ANNUITY provides for fixed or variable payments, or both, to
the Annuitant or the Annuitant's beneficiary (the PAYEE) for a fixed period. The
amount is determined by the period selected. The Annuitant, or if the payee dies
before the end of the period selected, the payee's beneficiary, may elect to
receive the total present value of future payments in cash.
A PERIOD CERTAIN LIFE ANNUITY provides for fixed or variable payments, or both,
for at least the period selected and thereafter for the life of the payee or the
payee and another annuitant under a joint and survivor annuity. You may not
change or redeem the annuity once payments have begun. If the payee (or the
payee and the other annuitant under a joint and survivor annuity) dies before
the period selected ends, the remaining payments will go to another named payee
who may have the right to redeem the annuity and secure the present value of
future guaranteed payments in a lump sum. The NORMAL FORM OF ANNUITY is a fixed
life income annuity with 10 years of payments guaranteed, funded through our
General Account.
A LIFE INCOME ANNUITY provides fixed payments for the life of the payee or the
payee and another annuitant under a joint and survivor annuity. Once a life
income annuity is selected, the form of annuity cannot be changed or redeemed
for a lump sum payment by the Annuitant or any payee.
ANNUITY PAYMENTS
Fixed annuity payments will not change and are based upon annuity rates provided
in your contract. The size of payments will depend on the form of annuity that
was chosen and, in the case of a life income annuity, on the payee's age (or
payee and a joint annuitant in the case of a joint and survivor annuity) and sex
(except under most tax-favored retirement programs). If Integrity's current
annuity rates then in effect would yield a larger payment, those current rates
will apply instead of the tables.
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Variable annuity payments are funded only in the Separate Account Divisions
through the purchase of annuity units. The Variable Account Option or Options
selected cannot be changed after annuity payments begin. The SAI provides
further information concerning the determination of annuity payments. The
number of units purchased is equal to the amount of the first annuity payment
divided by the new annuity unit value for the valuation period which includes
the due date of the first annuity payment. The amount of the first annuity
payment is determined in the same manner for a variable annuity as it is for a
fixed annuity. The number of annuity units stays the same for the annuity
payment period but the new annuity unit value changes to reflect the investment
income and the realized and unrealized capital gains and losses of the Variable
Account Option or Options selected, after charges made against it. Annuity unit
values assume a base rate of net investment return of 5%, except in states which
require a lower rate in which case 3.5% will be used. The annuity unit value
will rise or fall depending on whether the actual rate of net investment return
is higher or lower than the assumed base rate. In the SAI, see "Determination of
Annuity Unit Values."
If the age or sex of an annuitant has been misstated, any benefits will be those
which would have been purchased at the correct age and sex. Any overpayments or
underpayments made by us will be charged or credited with interest at the rate
of 6% per year. If we have made overpayments because of incorrect information
about age or sex, we will deduct the overpayment from the next payment or
payments due. We add underpayments to the next payment.
TIMING OF PAYMENT
We normally make payments from the Variable Account Options, or apply your
Adjusted Account Value to the purchase of an annuity within seven days after
receipt of the required form at our Administrative Office. Our action can be
deferred, however, for any period during which (1) the New York Stock Exchange
has been closed or trading on it is restricted; (2) sales of securities or
determination of the fair value of Separate Account assets is not reasonably
practicable because of an emergency; or (3) the SEC, by order, permits Integrity
to defer action in order to protect persons with interests in the Separate
Account. Integrity can defer payment of your Fixed Accounts for up to six
months, and interest will be paid on any such payment delayed for 30 days or
more.
HOW YOU MAKE REQUESTS AND GIVE INSTRUCTIONS
When you communicate in writing with our Administrative Office, use the address
on the first page of this prospectus. Your request or instruction cannot be
honored unless it is in proper and complete form. Whenever possible, use one of
our printed forms, which may be obtained from our Administrative Office.
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PART 6 - VOTING RIGHTS
FUND VOTING RIGHTS
Integrity is the legal owner of the shares of the Funds held by the Separate
Account and, as such, has the right to vote on certain matters. Among other
things, we may vote to elect a Fund's Board of Directors, to ratify the
selection of independent auditors for a Fund, and on any other matters described
in a Fund's current prospectus or requiring a vote by shareholders under the
1940 Act.
Whenever a shareholder vote is taken, we give you the opportunity to tell us how
to vote the number of shares purchased as a result of contributions to your
contract. We will send you Fund proxy materials and a form for giving us voting
instructions.
If we do not receive instructions in time from all Owners, we will vote shares
in a Portfolio for which no instructions have been received in the same
proportion as we vote shares for which we have received instructions. Under
eligible deferred compensation plans and certain Qualified Plans, your voting
instructions must be communicated to us indirectly, through your employer, but
we are not responsible for any failure by your employer to solicit your
instructions or to communicate your instructions to us. We will vote any Fund
shares that we are entitled to vote directly, because of amounts we have
accumulated in our Separate Account, in the same proportions that other Owners
vote. If the federal securities laws or regulations or interpretations of them
change so that we are permitted to vote shares of a Fund in our own right or to
restrict Owner voting, we may do so.
HOW WE DETERMINE YOUR VOTING SHARES
You may participate in voting only on matters concerning the Portfolios in which
your contributions have been invested. We determine the number of Fund shares in
each Variable Account Option that are attributable to your contract by dividing
the amount of your Account Value allocated to that Option by the net asset value
of one share of the corresponding Portfolio as of the record date set by a
Fund's Board for a Fund's shareholders' meeting. The record date for this
purpose must be no more than 60 days before the meeting of a Fund. We count
fractional shares. After annuity payments have commenced, voting rights are
calculated in a similar manner based on the actuarially determined value of your
interest in each Variable Account Option.
HOW FUND SHARES ARE VOTED
All Fund shares are entitled to one vote; fractional shares have fractional
votes. Voting is on a Portfolio-by-Portfolio basis, except for certain matters
(for example, election of Directors) which require collective approval. On
matters on which the interests of the individual Portfolios differ, the approval
of the shareholders in one Portfolio is not needed in order to make a decision
in another Portfolio. To the extent shares of a Fund are sold to separate
accounts of other insurance companies, the shares voted by such companies in
accordance with instructions received from their contract holders will dilute
the effect of voting instructions received by Integrity from its Owners.
SEPARATE ACCOUNT VOTING RIGHTS
Under the 1940 Act, certain actions (such as some of those described under
"Changes in How We Operate" in Part 2) may require Owner approval. In that case,
you will be entitled to a number of votes based on the value you have in the
Variable Account Options, as described above under "How We Determine Your Voting
Shares." We will cast votes attributable to amounts we have in the Variable
Account Options in the same proportions as votes cast by Owners.
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PART 7 - TAX ASPECTS OF THE CONTRACTS
INTRODUCTION
The effect of federal income taxes on the amounts held under a contract, on
annuity payments, and on the economic benefits to the Owner, Annuitant, and the
beneficiary or other payee may depend on Integrity's tax status, on the type of
retirement plan, if any, for which the contract is purchased, and upon the tax
and employment status of the individuals concerned.
The following discussion of the federal income tax treatment of the contract is
not exhaustive, does not purport to cover all situations and is not intended to
be tax advice. It is based upon understanding of the present federal income tax
laws as currently interpreted by the Internal Revenue Service (IRS). No
representation is made regarding the likelihood of continuation of the present
federal income tax laws or of the current interpretations by the IRS or the
courts. Future legislation may affect annuity contracts adversely. Moreover, no
attempt has been made to consider any applicable state or other laws. Because of
the inherent complexity of such laws and the fact that tax results will vary
according to the particular circumstances of the individual involved and, if
applicable, the qualified plan, any person contemplating the purchase of a
contract, contemplating selection of annuity payments under the contract, or
receiving annuity payments under a contract should consult a qualified tax
adviser. INTEGRITY DOES NOT MAKE ANY GUARANTEE REGARDING THE TAX STATUS,
FEDERAL, STATE, OR LOCAL, OF ANY CONTRACT OR ANY TRANSACTION INVOLVING THE
CONTRACTS.
YOUR CONTRACT IS AN ANNUITY
Under the federal tax law, any individual can purchase an annuity with after-tax
dollars and exclude any annuity earnings in taxable income until an actual
distribution is taken from the annuity. Alternatively, the individual (or
employer) may purchase the annuity to fund a tax-favored retirement program
(contributions are with pre-tax dollars), such as an IRA or qualified plan.
This prospectus covers the basic tax rules that apply to an annuity purchased
directly with after-tax dollars, (NONQUALIFIED ANNUITY), and some of the special
tax rules which apply to an annuity purchased to fund a tax-favored retirement
program, (QUALIFIED ANNUITY). A qualified annuity may restrict your rights and
benefits in order to qualify for its special treatment under the federal tax
law.
TAXATION OF ANNUITIES GENERALLY
Section 72 of the Internal Revenue Code of 1986, as amended (the CODE), governs
the taxation of annuities. In general, an Owner is not taxed on increases in
value under a contract until some form of withdrawal or distribution is made
under the contract. However, under certain circumstances, the increase in value
may be subject to current federal income tax. For example, corporations,
partnerships, trusts and other non-natural persons cannot defer the taxation of
current income credited to the contract unless an exception applies. In
addition, if an Owner transfers an annuity as a gift to someone other than a
spouse (or divorced spouse), any increase in its value will be taxed at the time
of transfer. The assignment or pledge of any portion of the value of a contract
will be treated as a distribution of that portion of the value of the contract.
Section 72 provides that the proceeds of a full or partial withdrawal from a
contract prior to the date on which annuity payments begin are treated first as
taxable income to the extent that the Account Value exceeds the "investment" or
"basis" in the contract and then as non-taxable recovery of the investment or
basis in the contract. Generally, the investment or basis in the contract
equals the contributions made by or on your behalf, less any amounts previously
withdrawn which were not treated as taxable income. Special rules may apply if
the contract includes contributions made prior to August 14, 1982 which were
rolled over to the contract in a tax-free exchange.
Once annuity payments begin, the Annuitant recovers a portion of the investment
tax-free from each payment. The non-taxable portion of each payment is based on
the ratio of the Annuitant's investment to his or her expected return under the
contract (exclusion Ratio). The remainder of each payment will be ordinary
income.
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After you have recovered your total investment, future payments are fully
included in income. If the Annuitant dies prior to recovering the total
investment, a deduction for the remaining basis will generally be allowed on the
Annuitant's final federal income tax return.
Withholding of federal income taxes on all distributions may be required unless
the recipient who is eligible elects not to have any amounts withheld and
properly notifies Integrity of that election.
The taxable portion of a distribution is treated as ordinary income and is taxed
at ordinary income tax rates. In addition, a tax penalty of 10% applies to the
taxable portion of a distribution unless the distribution is: (1) on or after
the date on which the taxpayer attains age 59-1/2; (2) as a result of the death
of the Owner; (3) attributable to the taxpayer becoming disabled within the
meaning of Code Section 72(m)(7); (4) from certain qualified plans (note,
however, other penalties may apply); (5) under a qualified funding asset (as
defined in Section 130(d) of the Code); (6) purchased by an employer on
termination of certain types of qualified plans and held by the employer until
the employee separates from service; or (7) under an immediate annuity as
defined in Code Section 72(u)(4).
All annuity contracts issued by Integrity or its affiliates to one Annuitant
during any calendar year are treated as a single contract in measuring the
taxable income that results from surrenders and withdrawals under any one of the
contracts.
DISTRIBUTION-AT-DEATH RULES
Under section 72(s) of the Code, in order to be treated as an annuity, a
contract must provide the following distribution rules: (a) if any Owner dies
on or after the Retirement Date and before the entire interest in the contract
has been distributed, then the remaining portion of such interest must be
distributed at least as quickly as the method in effect on the date of the
Owner's death; and (b) if any Owner dies before the Retirement Date, the entire
interest in the contract must be distributed within five years after the date of
the Owner's death. To the extent such interest is payable to a beneficiary,
however, such interest may be annuitized over the life of that beneficiary or
over a period not extending beyond the life expectancy of that beneficiary, so
long as distributions commence within one year after the Owner's death. If the
beneficiary is the spouse of the Owner, the contract (along with the deferred
tax status) may be continued in the name of the spouse as the Owner.
If the Owner is not an individual, the "primary annuitant," as defined in the
Code, is considered the Owner. The primary annuitant is the individual who is of
primary importance in affecting the timing of the amount of payout under a
contract. In addition, when the Owner is not an individual, a change in the
primary annuitant is treated as the death of the Owner. Finally, in the case of
joint owners, the distribution-at-death rules will be applied at the death of
the first Owner.
DIVERSIFICATION STANDARDS
Each Portfolio of the Funds will be required to adhere to regulations adopted by
the Treasury Department pursuant to Section 817(h) of the Code prescribing asset
diversification requirements for investment companies whose shares are sold to
insurance company separate accounts funding variable contracts. The investment
manager for the Fund monitors the investments in order to comply with the
regulations to assure that the contracts continue to be treated as annuities for
federal income tax purposes.
The IRS has stated in published rulings that a variable contract owner will be
considered the owner of separate account assets if the contract owner possesses
incidents of ownership in those assets, such as the ability to exercise
investment control over the assets. In those circumstances, income and gains
from the separate account assets would be includable in the variable contract
owner's gross income. The Treasury Department also announced, in connection
with the issuance of regulations concerning diversification, that those
regulations "do not provide guidance concerning the circumstances in which
investor control of the investments of a segregated asset account may cause the
investor (I.E., the Owner), rather than the insurance company, to be treated as
the owner of the assets in the account." This announcement also stated that
guidance would be issued by way of regulations or rulings on the "extent to
which policyholders may direct their investments to particular subaccounts
without being treated as owners of the underlying assets." As of the date of
this prospectus, no such guidance has been issued.
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TAX-FAVORED RETIREMENT PROGRAMS
The contract is designed for use in connection with certain types of retirement
plans which receive favorable treatment under the Code. Numerous special tax
rules apply to the participants in such qualified plans and to the contracts
used in connection with such qualified plans. These tax rules vary according to
the type of plan and the terms and conditions of the plan itself. Owners,
Annuitants, and beneficiaries are cautioned that the rights of any person to any
benefits under qualified plans may be subject to the terms and conditions of the
plans themselves, regardless of the terms and conditions of the contract. In
addition, loans from qualified contracts, where allowed, are subject to a
variety of limitations, including restrictions as to the amount that may be
borrowed, the duration of the loan, and the manner in which the loans must be
repaid. (Owners should always consult their tax advisors and retirement plan
fiduciaries prior to exercising their loan privileges.) Also, special rules
apply to the time at which distributions must commence and the form in which the
distributions must be paid. THEREFORE, NO ATTEMPT IS MADE TO PROVIDE MORE THAN
GENERAL INFORMATION ABOUT THE USE OF CONTRACTS WITH THE VARIOUS TYPES OF
QUALIFIED PLANS.
Integrity reserves the right to change its administrative rules, such as minimum
contribution amounts, as needed to comply with the Code as to tax-favored
retirement programs.
Following are brief descriptions of various types of qualified plans in
connection with which Integrity may issue a contract.
INDIVIDUAL RETIREMENT ANNUITIES
Code Section 408 permits eligible individuals to contribute to an individual
retirement program known as an IRA. An individual who receives compensation and
who has not reached age 70-1/2 by the end of the tax year may establish an IRA
and make contributions up to the deadline for filing his or her federal income
tax return for that year (without extensions). IRAs are subject to limitations
on the amount that may be contributed, the persons who may be eligible, and on
the time when distributions may commence. An individual may also rollover
amounts distributed from another IRA or another tax-favored retirement program
to an IRA contract. Your IRA contract will be issued with a rider outlining the
special terms of your contract which apply to IRAs.
TAX SHELTERED ANNUITIES
Section 403(b) of the Code permits the purchase of tax-sheltered annuities (TSA)
by public schools and certain charitable, educational and scientific
organizations described in Section 501(c)(3) of the Code. The contract is not
intended to accept other than employee contributions. Such contributions are not
includible in the gross income of the employee until the employee receives
distributions from the contract. The amount of contributions to the TSA is
limited to certain maximums imposed by Code sections 403(b), 415 and 402(g).
Furthermore, the Code sets forth additional restrictions governing such items as
transferability, distributions and withdrawals. Any employee should obtain
competent tax advice as to the tax treatment and suitability of such an
investment. Your contract will be issued with a rider outlining the special
terms which apply to a TSA.
SIMPLIFIED EMPLOYEE PENSIONS
Section 408(k) of the Code allows employers to establish simplified employee
pension plans (SEP-IRAS) for their employees, using the employees' IRAs for such
purposes, if certain criteria are met. Under these plans the employer may,
within specified limits, make deductible contributions on behalf of the
employees to IRAs. Employers intending to use the contract in connection with
such plans should seek competent advice. The SEP-IRA will be issued with a rider
outlining the special terms of the contract.
CORPORATE AND SELF-EMPLOYED (H.R. 10 AND KEOGH) PENSION AND PROFIT SHARING PLANS
Sections 401(a) and 403(a) of the Code permit corporate employers to establish
various types of tax-favored retirement plans for employees. The Self-Employed
Individuals' Tax Retirement Act of 1962, as amended, commonly referred to as
"H.R. 10" or "Keogh," permits self-employed individuals also to establish such
tax-favored retirement plans for themselves and their employees. Such
retirement plans may permit the purchase of the contract in order to provide
benefits under the plans. Employers intending to use the contract in connection
with such plans should seek competent
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advice. The Company reserves the right to request documentation to substantiate
that a qualified plan exists and is being properly administered. Integrity does
not administer such plans.
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS
Section 457 of the Code permits employees of state and local governments and
tax-exempt organizations to defer a portion of their compensation without paying
current taxes. The employees must be participants in an eligible deferred
compensation plan. To the extent the contracts are used in connection with an
eligible plan, employees are considered general creditors of the employer and
the employer as Owner of the contract has the sole right to the proceeds of the
contract. However, Section 457(g), as added by the Small Business and Jobs
Protection Act (SBJPA) of 1996, provides that on and after August 20, 1996, a
plan maintained by an eligible governmental employer must hold all assets and
income of the plan in a trust, custodial account, or annuity contract for the
exclusive benefit of participants and their beneficiaries. If the plan is in
existence on August 20, 1996, the employer need not establish a trust, custodial
account, or annuity contract until January 1, 1999. Loans to employees may be
permitted under such plans; however, a Section 457 plan is not required to allow
loans. Contributions to a contract in connection with an eligible government
plan are subject to limitations. Those who intend to use the contracts in
connection with such plans should seek competent advice. The Company reserves
the right to request documentation to substantiate that a qualified plan exists
and is being properly administered. Integrity does not administer such plans.
DISTRIBUTIONS UNDER TAX-FAVORED RETIREMENT PROGRAMS
Distributions from tax-favored plans are subject to certain restrictions. Prior
to the enactment of the 1996 SBJPA, distributions of minimum amounts specified
by the Code must have commenced by April 1 of the calendar year following the
calendar year in which the participant reaches age 70-1/2. The SBJPA provides
participants in qualified plans, with the exception of five-percent owners and
IRA holders, to begin receiving distributions by April 1 of the calendar year
following the later of either (i) the calendar year in which the employee
reaches age 70-1/2, or (ii) the calendar year in which the employee retires.
Additional distribution rules apply after the participant's death. Failure to
make mandatory distributions may result in the imposition of a 50% penalty tax
on any difference between the required distribution amount and the amount
distributed. Distributions to a participant from all plans (other than 457
plans) in a calendar year that exceed a specific limit under the Code are
generally subject to a 15% penalty tax (in addition to any ordinary income tax)
on the excess portion of the distributions. However, the SBJPA of 1996 has
suspended the excise tax on excess distributions. The provision relating to the
excise tax on excess distributions is effective with respect to distributions
received in 1997, 1998 and 1999.
Distributions from a tax-favored plan (not including an IRA subject to Code
Section 408) to an employee, surviving spouse, or former spouse who is an
alternate payee under a qualified domestic relations order, in the form of a
lump sum settlement or periodic annuity payments for a fixed period of fewer
than 10 years are subject to mandatory income tax withholding of 20% of the
taxable amount of the distribution, unless (1) the distributee directs the
transfer of such amounts in cash to another plan or an IRA; or (2) the payment
is a minimum distribution required under the Code. The taxable amount is the
amount of the distribution less the amount allocable to after-tax contributions.
All other types of taxable distributions are subject to withholding unless the
distributee elects not to have withholding apply.
We are not permitted to make distributions from a contract unless a request has
been made. It is therefore your responsibility to comply with the minimum
distribution rules. You should consult your tax adviser regarding these rules
and their proper application.
The above description of the federal income tax consequences of the different
types of tax-favored retirement plans which may be funded by the contract is
only a brief summary and is not intended as tax advice. The rules governing the
provisions of plans are extremely complex and often difficult to comprehend.
Anything less than full compliance with all applicable rules, all of which are
subject to change, may have adverse tax consequences. A prospective Owner
considering adoption of a plan and purchase of a contract in connection
therewith should first consult a qualified and competent tax adviser, with
regard to the suitability of the contract as an investment vehicle for the plan.
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FEDERAL AND STATE INCOME TAX WITHHOLDING
Integrity will withhold and remit to the U.S. government a part of the taxable
portion of each distribution made under a contract unless the distributee
notifies Integrity at or before the time of the distribution of an election not
to have any amounts withheld. In certain circumstances, Integrity may be
required to withhold tax, as explained above. The withholding rates applicable
to the taxable portion of periodic annuity payments (other than eligible
rollover distributions) are the same as the withholding rates generally
applicable to payments of wages. In addition, the withholding rate applicable to
the taxable portion of non-periodic payments (including withdrawals prior to the
maturity date) is 10%. As discussed above, the withholding rate applicable to
eligible rollover distributions is 20%.
Certain states have indicated that pension and annuity withholding will apply to
payments made to residents. Generally, an election out of federal withholding
will also be considered an election out of state withholding. For more
information concerning a particular state, call our Administrative Office at the
toll-free number.
IMPACT OF TAXES TO INTEGRITY
The contracts provide that Integrity may charge the Separate Account for taxes.
Integrity can also set up reserves for taxes.
TRANSFERS AMONG INVESTMENT OPTIONS
There will not be any tax liability if you transfer any part of the Account
Value among the Investment Options of your contract.
PART 8 - ADDITIONAL INFORMATION
SYSTEMATIC WITHDRAWALS
We offer a program for systematic withdrawals that allows you to pre-authorize
periodic withdrawals from your contract prior to your Retirement Date. You may
choose to have withdrawals made monthly, quarterly, semi-annually or annually
and may specify the day of the month (other than the 29th, 30th or 31st) on
which the withdrawal is to be made. You may specify a dollar amount for each
withdrawal or an annual percentage to be withdrawn. The minimum systematic
withdrawal currently is $100. For residents of Pennsylvania, South Carolina and
Washington State a $3,000 minimum account balance is required to remain in your
Contract after any withdrawals. You may also specify an account for direct
deposit of your systematic withdrawals. To enroll under our systematic
withdrawal program, you must deliver the appropriate administrative form to our
Administrative Office. Withdrawals may begin not less than one business day
after our receipt of the form. You or we may terminate your participation in the
program upon one day's prior written notice, and we may terminate or amend the
systematic withdrawal program at any time. If on any withdrawal date you do not
have sufficient values to make all of the withdrawals you have specified, no
withdrawals will be made and your enrollment in the program will be ended.
Amounts withdrawn by you under the systematic withdrawal program may be within
the free withdrawal amount in which case neither a contingent withdrawal charge
nor a Market Value Adjustment will be made. See "Contingent Withdrawal Charge"
in Part 4. AMOUNTS WITHDRAWN UNDER THE SYSTEMATIC WITHDRAWAL PROGRAM IN EXCESS
OF THE FREE WITHDRAWAL AMOUNT WILL BE SUBJECT TO A CONTINGENT WITHDRAWAL CHARGE
AND A MARKET VALUE ADJUSTMENT IF APPLICABLE. WITHDRAWALS ALSO MAY BE SUBJECT TO
THE 10% FEDERAL TAX PENALTY FOR EARLY WITHDRAWALS UNDER THE CONTRACTS AND TO
INCOME TAXATION. SEE PART 7, "TAX ASPECTS OF THE CONTRACTS."
DOLLAR COST AVERAGING
We offer a dollar cost averaging program under which allocations to the Janus
Money Market Option are automatically transferred on a monthly, quarterly,
semi-annual or annual basis to one or more other Variable Account Options. You
must specify a dollar amount to be transferred into each Variable Account
Option, and the current minimum transfer to each Option is $250. No transfer
charge will apply to transfers under our dollar cost averaging program, and such
transfers will not count towards the twelve transfers you may make in a contract
year before we may impose a transfer charge.
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To enroll under our dollar cost averaging program, you must deliver the
appropriate administrative form to our Administrative Office. You or we may
terminate your participation in the program upon one day's prior written notice,
and we may terminate or amend the dollar cost averaging program at any time. If
you do not have sufficient funds in the Janus Money Market Option to transfer to
each Variable Account Option specified, no transfer will be made and your
enrollment in the program will be ended.
SYSTEMATIC TRANSFER PROGRAM
We also offer a systematic transfer program under which contributions to the STO
are automatically transferred on a monthly or quarterly basis, as selected by
you, to one or more other Investment Options. Your STO contributions will be
transferred in equal installments of not less than $1,000 over a one year
period. If you do not have sufficient funds in the STO to transfer to each
Option specified, a final transfer will be made on a pro rata basis and your
enrollment in the program will be ended. Any funds remaining in the STO at the
end of the one year period during which transfers are required to be made will
be transferred at the end of such period on a pro rata basis to the Options
previously elected by you for this program. No transfer charge will apply to
transfers under our systematic transfer program, and such transfers will not
count towards the twelve transfers you may make in a contract year before we may
impose a transfer charge.
To enroll under our systematic transfer program, you must deliver the
appropriate administrative form to our Administrative Office. We reserve the
right to terminate the systematic transfer program in whole or in part, or to
place restrictions on contributions to the program. This program may not be
currently available in some states.
CUSTOMIZED ASSET REBALANCING
We offer a customized asset rebalancing program whereby you can select the
frequency for rebalancing. Frequencies available include rebalancing monthly,
quarterly, semi-annually or annually. The value in the Variable Account Options
will be automatically rebalanced by transfers among such Variable Account
Options, and you will receive a confirmation notice after each rebalancing.
Transfers will occur only to and from those Variable Account Options where you
have current contribution allocations. No transfer charge will apply to
transfers under our customized asset rebalancing program, and such transfers
will not count towards the twelve transfers you may make in a contract year
before we may impose a transfer charge.
Fixed Accounts are not eligible for the customized asset rebalancing program.
To enroll under our customized asset rebalancing program, you must deliver the
appropriate administrative form to our Administrative Office. You should be
aware that other allocation programs, such as dollar cost averaging, as well as
transfers and withdrawals that you make, may not work in concert with the
customized asset rebalancing program. You should, therefore, monitor your use
of such other programs, transfers, and withdrawals while the customized asset
rebalancing program is in effect. You or we may terminate your participation in
the program upon one day's prior written notice, and we may terminate or amend
the customized asset rebalancing program at any time.
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 among the Options currently
established for each Model. You and your financial representative also have the
option to design a program that is tailored to your specific retirement needs.
When selecting this program, contributions will be allocated and your variable
portfolios will be rebalanced at least annually as recommended by the Asset
Allocation & Rebalancing Program. The program applies to all contributions made
to your annuity contract. You will receive a confirmation notice after each
rebalancing. No transfer charge will apply to transfers 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.
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<PAGE>
In each investor profile, a portion of all contributions is allocated to a
five-year Guaranteed Rate Option (GRO). The amount allocated to the GRO will
not be reallocated or rebalanced while participating in a specific investor
profile. You may cancel or change the investment profile you have selected at
any time. However, the GRO funds may be subject to a market value adjustment
(MVA) that may increase or decrease your account value.
To enroll under the Asset Allocation and Rebalancing Program, complete the
Dollar Cost Averaging/Asset Allocation and Rebalancing form (Catalog #1814)
found in the back of this prospectus. You should be aware that other allocation
programs, such as dollar cost averaging, as well as additions, transfers and
withdrawals that you make, may not work in concert with the Customized Asset
Rebalancing program. If, after selecting one of the five Models, you initiate a
transaction that results in a reallocation outside one of the Models, your
participation in the Model program is automatically terminated. You should,
therefore, monitor your use of such other programs, transfers, and withdrawals
while the Customized Asset Rebalancing program is in effect. This program is
not available in concert with the Customized 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.
SYSTEMATIC CONTRIBUTIONS
We offer a program for systematic contributions that allows you to pre-authorize
monthly, quarterly, or semi-annual withdrawals from your checking account for
payment to us. To enroll under our program, you must deliver the appropriate
administrative form to our Administrative Office. You or we may terminate your
participation in the program upon 30 days' prior written notice. Your
participation may be terminated by us if your bank declines to make any payment.
The minimum amount for systematic contributions is $1,000 per month.
PERFORMANCE INFORMATION
Performance data for the Variable Account Options, including the yield and
effective yield of the Janus Money Market Option, the yield of the other
Options, and the total return of all of the Options may appear in advertisements
or sales literature. Performance data for any Option reflects only the
performance of a hypothetical investment in the Option during the particular
time period on which the calculations are based. Performance information should
be considered in light of the investment objectives and policies of the
Portfolio in which the Option invests and the market conditions during the given
time period, and it should not be considered as a representation of performance
to be achieved in the future.
TOTAL RETURNS are based on the overall dollar or percentage change in value of a
hypothetical investment in an Option. Total return quotations reflect changes in
Fund share price, the automatic reinvestment by the Option of all distributions
and the deduction of applicable contract charges and expenses, including any
contingent withdrawal charge that would apply if an Owner surrendered the
contract at the end of the period indicated. Total returns also may be shown
that do not take into account the contingent withdrawal charge or the annual
administrative charge applicable where the Account Value is less than $50,000 at
the end of a contract year.
A CUMULATIVE TOTAL RETURN reflects an Option's performance over a stated period
of time. An AVERAGE ANNUAL TOTAL RETURN reflects the hypothetical annually
compounded return that would have produced the same cumulative total return if
the Option's performance had been constant over the entire period. Because
average annual total returns tend to smooth out variations in an Option's
returns, you should recognize that they are not the same as actual year-by-year
results.
Some Options may also advertise YIELD. These measures reflect the income
generated by an investment in the Option over a specified period of time. This
income is annualized and shown as a percentage. Yields do not take into account
capital gains or losses or the contingent withdrawal charge.
The Janus Money Market Option may advertise its CURRENT and EFFECTIVE YIELD.
Current yield reflects the income generated by an investment in the Option over
a specified 7-day period. Effective yield is calculated in a similar manner
except that income earned is assumed to be reinvested. The JPM Bond Option may
advertise a 30-day yield which reflects the income generated by an investment in
such Option over a specified 30-day period.
For a detailed description of the methods used to determine yield and total
return for the Variable Account Options, see the SAI.
36
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37
<PAGE>
APPENDIX A
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
Contribution: $50,000.00
GRO Account duration: 7 Years
Guaranteed Interest Rate: 5% Annual Effective Rate
The following examples illustrate how the Market Value Adjustment and the
contingent withdrawal charge may affect the values of a contract upon a
withdrawal. The 5% assumed Guaranteed Interest Rate is the same rate used in the
Example under "Table of Annual Fees and Expenses" in this Prospectus. In these
examples, the withdrawal occurs three years after the initial contribution. The
Market Value Adjustment operates in a similar manner for transfers. No
contingent withdrawal charge applies to transfers.
The GRO Value for this $50,000 contribution is $70,355.02 at the expiration of
the GRO Account. After three years, the GRO Value is $57,881.25. It is also
assumed, for the purposes of these examples, that no prior partial withdrawals
or transfers have occurred.
The Market Value Adjustment will be based on the rate we are then crediting (at
the time of the withdrawal) on new contributions to GRO Accounts of the same
duration as the time remaining in your GRO Account, rounded to the next higher
number of complete months. If we do not declare a rate for the exact time
remaining, we will interpolate between the Guaranteed Interest Rates for GRO
Accounts of durations closest to (next higher and next lower) the remaining
period described above. Three years after the initial contribution, there would
have been four years remaining in your GRO Account. These examples also show the
withdrawal charge which would be calculated separately.
EXAMPLE OF A DOWNWARD MARKET VALUE ADJUSTMENT:
A downward Market Value Adjustment results from a full or partial withdrawal
that occurs when interest rates have increased. Assume interest rates have
increased three years after the initial contribution and we are then crediting
6.25% for a four-year GRO Account. Upon a full withdrawal, the Market Value
Adjustment, applying the above formula would be:
48/12 48/12
-0.0551589 = [(1 + .05) / (1 + .0625 + .0025) ] - 1
The Market Value Adjustment is a reduction of $3,192.67 from the GRO Value:
-$3,192.67 = -0.0551589 X $57,881.25
The Market Adjusted Value would be:
$54,688.58 = $57,881.25 - $3,192.67
A withdrawal charge of 5% would be assessed against the $50,000 original
contribution:
$2,500.00 = $50,000.00 X .05
Thus, the amount payable on a full withdrawal would be:
$52,188.58 = $57,881.25 - $3,192.67 - $2,500.00
38
<PAGE>
If instead of a full withdrawal, $20,000 was requested, we would first determine
the free withdrawal amount:
$5,788.13 = $57,881.25 X .10
Free Amount = $5,788.13
The non-free amount would be:
$14,211.87 = $20,000.00 - $5,788.13
The Market Value Adjustment, which is only applicable to the non-free amount,
would be
- $783.91 = -0.0551589 X $14,211.87
The withdrawal charge would be:
$789.25 = [($14,211.87+ $783.91)/(1 - .05)] - ($14,211.87+ 783.91)
Thus, the total amount needed to provide $20,000 after the Market Value
Adjustment and withdrawal charge would be:
$21,573.16 = $20,000.00 + $783.91 + $789.25
The ending Account Value would be:
$36,308.09 = $57,881.25 - $21,573.16
EXAMPLE OF AN UPWARD MARKET VALUE ADJUSTMENT:
An upward Market Value Adjustment results from a full or partial withdrawal that
occurs when interest rates have decreased. Assume interest rates have decreased
three years after the initial contribution and we are then crediting 4% for a
four-year GRO Account. Upon a full withdrawal, the Market Value Adjustment,
applying the formula set forth in the prospectus, would be:
48/12 48/12
.0290890 = [(1 + .05) / (1 + .04 + .0025) ] - 1
The Market Value Adjustment is an increase of $1,683.71 to the GRO Value:
$1,683.71 = .0290890 X $57,881.25
The Market Adjusted Value would be:
$59,564.96 = $57,881.25 + $1,683.71
A withdrawal charge of 5% would be assessed against the $50,000 original
contribution:
$2,500.00 = $50,000.00 X .05
Thus, the amount payable on a full withdrawal would be:
$57,064.96 = $57,881.25 + $1,683.71 - $2,500.00
39
<PAGE>
If instead of a full withdrawal, $20,000 was requested, the free withdrawal
amount and non-free amount would first be determined as above:
Free Amount = $ 5,788.13
Non-Free Amount = $14,211.87
The Market Value Adjustment would be:
$413.41 = .0290890 X $14,211.87
The withdrawal charge would be:
$726.23 = [($14,211.87 - $413.41)/(1 - .05)] - ($14,211.87 - $413.41)
Thus, the total amount needed to provide $20,000 after the Market Value
Adjustment and withdrawal charge would be:
$20,312.82 = $20,000.00 - $413.41 + $726.23
The ending Account Value would be:
$37,568.43 = $57,881.25 - $20,312.82
Actual Market Value Adjustments may have a greater or lesser impact than shown
in the examples, depending on the actual change in interest crediting rate and
the timing of the withdrawal or transfer in relation to the time remaining in
the GRO Account. Also, the Market Value Adjustment can never decrease the
Account Value below premium plus 3% interest, before any applicable charges.
Account values less than $50,000 will be subject to a $30 annual charge.
The above examples will be adjusted to comply with applicable state regulation
requirements for contracts issued in certain states.
40
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 1, 1997
FOR
PINNACLE(VERSION III)
FLEXIBLE PREMIUM VARIABLE ANNUITY
ISSUED BY
INTEGRITY LIFE INSURANCE COMPANY
AND
FUNDED THROUGH ITS SEPARATE ACCOUNT II
TABLE OF CONTENTS
Page
Part 1 - Integrity and Custodian . . . . . . . . . . . . . . . . . . . . . .2
Part 2 - Distribution of the Contracts . . . . . . . . . . . . . . . . . . .3
Part 3 - Performance Information . . . . . . . . . . . . . . . . . . . . . .3
Part 4 - Determination of Annuity Unit Values. . . . . . . . . . . . . . . 10
Part 5 - Financial Statements. . . . . . . . . . . . . . . . . . . . . . . 11
This Statement of Additional Information (SAI) is not a prospectus. It should
be read in conjunction with the prospectus for the contracts, dated November 1,
1997. For definitions of special terms used in the SAI, please refer to the
prospectus.
A copy of the prospectus to which this SAI relates is available at no charge by
writing the Administrative Office at Integrity Life Insurance Company
("Integrity"), P.O. Box 740074, Louisville, Kentucky 40201-0074, or by calling
1-800-325-8583.
<PAGE>
PART 1 - INTEGRITY AND CUSTODIAN
Integrity is an Ohio stock life insurance company that sells life insurance and
annuities. Its principal executive offices are located at 515 West Market
Street, Louisville, Kentucky, 40202. Integrity, the depositor of Separate
Account II, is a wholly owned subsidiary of Integrity Holdings, Inc., a Delaware
corporation which is a holding company engaged in no active business. Integrity
owns 100% of the stock of National Integrity Life Insurance Company, a New York
stock life insurance corporation. All outstanding shares of Integrity Holdings,
Inc. are owned by ARM Financial Group, Inc. (ARM), a Delaware corporation which
is a financial services company focusing on the long-term savings and retirement
marketplace by providing retail and institutional products and services
throughout the United States. ARM owns 100% of the stock of (i) ARM Securities
Corporation (ARM SECURITIES), a Minnesota corporation, registered with the SEC
as a broker-dealer and a member of the National Association of Securities
Dealers, Inc., (ii) ARM Capital Advisors, Inc., a New York corporation
registered with the SEC as an investment adviser, (iii) SBM Certificate Company,
a Minnesota corporation registered with the SEC as an issuer of face-amount
certificates, and (iv) ARM Transfer Agency, Inc., a Delaware corporation
registered with the SEC as a transfer and dividend disbursing agency.
In June 1997, ARM Financial completed an initial public offering (the
"Offering") of 9.2 million shares of Class A common stock, par value of $.01 per
share (the "New Class A Common Stock"), of which 5.75 million shares were sold
by ARM Financial and 3.45 million shares were sold by the Morgan Stanley
Stockholders (as defined below). Concurrent with the closing of the Offering,
ARM Financial amended and restated its Certificate of Incorporation to
effectuate a recapitalization such that (i) the common equity of ARM Financial
consists of New Class A Common Stock and Class B Non-Voting Common Stock, par
value of $.01 per share (the "New Class B Common Stock" and, together with the
New Class A Common Stock, the "New Common Stock"), (ii) authorized shares of the
New Class A Common Stock and New Class B common Stock were increased to 150
million shares and 50 million shares, respectively, (iii) each outstanding share
of common stock of ARM Financial was converted into one share of New Class A
Common Stock, (iv) certain shares of the New Class A Common Stock owned by
private equity funds sponsored by Morgan Stanley, Dean Witter, Discover & Co.
(the successor to Morgan Stanley Group Inc. in its merger with Dean Witter,
Discover & Co.) (the "Morgan Stanley Stockholders") were converted into New
Class B Common Stock such that, after giving effect to such conversion, but not
giving effect to the Offering, the Morgan Stanley Stockholders owned, in the
aggregate, 49% of the outstanding New Class A Common Stock, and (v) each share
of New Common Stock was split into 706 shares of New Common Stock. Holders of
New Class B Common Stock have no right to vote on matters submitted to a vote of
stockholders, except in certain circumstances. Shares of the New Class B Common
Stock have no preemptive or other subscription rights and are convertible into
an equal number of shares of New Class A Common Stock (1) at the option of the
holder thereof to the extent that, following such conversion, the Morgan Stanley
Stockholders will not, in the aggregate, own more than 49% of the outstanding
shares of New Class A Common Stock, and (2) automatically upon the transfer of
such shares by any Morgan Stanley Stockholder to a person that is not a Morgan
Stanley Stockholder or an affiliate of a Morgan Stanley Stockholder. The Morgan
Stanley Stockholders owned approximately 91% of the outstanding shares of ARM
Financial's common stock prior to the Offering and approximately 53% following
the Offering.
No person has the direct or indirect power to control Morgan Stanley, Dean
Witter, Discover & Co., except insofar as he or she may have such power by
virtue of his or her capacity as a director or executive officer thereof.
Morgan Stanley, Dean Witter, Discover & Co., is publicly held; no individual
beneficially owns more than 5% of the common shares; however, approximately 13%
of such shares are subject to a stockholders' agreement or voting agreement
among certain current and former principals and employees of Morgan Stanley,
Dean Witter, Discover & Co., and its predecessor.
Beginning in 1994, ARM provided substantially all of the services required to be
performed on behalf of the Separate Account. Total fees paid to ARM by
Integrity for management services in 1995 and 1996, including services
applicable to the Registrant, were $7,462,365 and $13,823,048, respectively.
Integrity is the custodian for the shares of Portfolios owned by the Separate
Account. The Portfolios' shares are held in book-entry form.
Reports and marketing materials, from time to time, may include information
concerning the rating of Integrity, as determined by A.M. Best Company,
Moody's Investor Service, Standard & Poor's Corporation, Duff & Phelps
Corporation, or other recognized rating services. Integrity is currently rated
"A" (Excellent) by A.M. Best Company, and has received
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<PAGE>
claims paying ability ratings of "A" (Good) from Standard & Poor's Corporation,
"Baa1" from Moody's Investors Service, Inc., and "A+" (High) from Duff and
Phelps Credit Rating Company. However, Integrity does not guarantee the
investment performance of the portfolios, and these ratings do not reflect
protection against investment risk.
Under prior management, Integrity was subject to a consent order in the State of
Florida under which it was precluded from writing new business in Florida from
May, 1992 to November, 1994. The consent order was entered into on May 6, 1992
as a result of noncompliance with certain investment restrictions under Florida
law. Due to the substantial asset restructuring and capital infusions involved
with Integrity's acquisition by ARM in November, 1993, Integrity came to be
fully in compliance with the investment limitations of the State of Florida and
a request for full relief from the consent order was granted by the Florida
Department of Insurance on November 4, 1994.
On April 1, 1996, Integrity purchased for its own account approximately 478,900
shares of the Pinnacle Fixed Income Option, at net asset value, for an aggregate
purchase price of $5.1 million, for the purpose of "seeding" the Option.
Integrity intends to redeem its shares on a dollar-for-dollar basis to the
extent, and at the same time as, the Options have sales in respect to
policyholders. As of December 31, 1996, the shares of the Pinnacle Fixed Income
Option purchased by Integrity constituted 49.6% of the outstanding shares of the
Option.
PART 2 - DISTRIBUTION OF THE CONTRACTS
ARM Securities, a wholly owned subsidiary of ARM, is the principal underwriter
of the contracts. ARM Securities is registered with the SEC as a broker-dealer
and is a member in good standing of the National Association of Securities
Dealers, Inc. ARM Securities' address is 515 West Market Street, Louisville,
Kentucky 40202. The contracts are offered through ARM Securities on a
continuous basis.
We generally pay a maximum distribution allowance of 7.5% of initial
contributions, plus .50% trail commission paid on Account Value after the eighth
Contract Year. The amount of distribution allowances paid was $617,264,
$937,352, and $6,200,036 and for the years ended December 31, 1996, 1995, and
1994, respectively. No distribution allowances were retained by ARM Securities
during these years. Integrity may from time to time pay or allow additional
promotional incentives, in the form of cash or other compensation, to
broker-dealers that sell contracts. In some instances, such other incentives may
be offered only to certain broker-dealers that sell or are expected to sell
during specified time periods certain minimum amounts of the contracts.
PART 3 - PERFORMANCE INFORMATION
Each Variable Account Option may from time to time include the Average Annual
Total Return, the Cumulative Total Return, and Yield of its shares in
advertisements or in other information furnished to shareholders. The Janus
Money Market Option may also from time to time include the Yield and Effective
Yield of its shares in information furnished to shareholders. Performance
information is computed separately for each Option in accordance with the
formulas described below. At any time in the future, total return and yields
may be higher or lower than in the past and there can be no assurance that any
historical results will continue.
TOTAL RETURNS
Total returns reflect all aspects of an Option's return, including the automatic
reinvestment by the Option of all distributions and the deduction of all
applicable charges to the Option on an annual basis, including mortality risk
and expense charges, the annual administrative charge and other charges against
contract values. Quotations also will assume a termination (surrender) at the
end of the particular period and reflect the deductions of the contingent
withdrawal charge, if applicable. Total returns may be shown simultaneously that
do not take into account deduction of the contingent withdrawal charge, and/or
the annual administrative charge.
Nonstandardized "total return" will be calculated in a similar manner and for
the same time periods as the average annual total return and for three years
except total return will assume an initial investment of $60,000 and will not
reflect the deduction of any applicable contingent withdrawal charge, which, if
reflected, would decrease the level of performance
3
<PAGE>
shown. The contingent withdrawal charge is not reflected because the contracts
are designed for long term investment. An assumed initial investment of $60,000
will be used because that figure more closely approximates the size of a typical
contract than does the $1,000 figure used in calculating the standardized
average annual total return quotations. The amount of the hypothetical initial
investment assumed affects performance because the annual administrative charge
is a fixed per contract charge.
AVERAGE ANNUAL TOTAL RETURNS are calculated by determining the growth or
decline in the value of a hypothetical historical investment in the Option
over certain periods, including 1, 5, and 10 years (up to the life of the
Option), and then calculating the annually compounded percentage rate that
would have produced the same result if the rate of growth or decline in value
had been constant over the period. Investors should realize that the
Option's performance is not constant over time, but changes from year to
year, and that the average annual returns represent the averages of
historical figures as opposed to the actual historical performance of an
Option during any portion of the period illustrated. Average annual returns
are calculated pursuant to the following formula: P(1+T)(n) = ERV, where P
is a hypothetical initial payment of $1,000, T is the average annual total
return, n is the number of years, and ERV is the withdrawal value at the end
of the period.
CUMULATIVE TOTAL RETURNS are UNAVERAGED and reflect the simple percentage change
in the value of a hypothetical investment in the Option over a stated period of
time. In addition to the period since inception, cumulative total returns may be
calculated on a year-to-date basis at the end of each calendar month in the
current calendar year. The last day of the period for year-to-date returns is
the last day of the most recent calendar month at the time of publication.
YIELDS
Some Options may advertise yields. Yields quoted in advertising reflect the
change in value of a hypothetical investment in the Option over a stated period
of time, not taking into account capital gains or losses or the imposition of
any contingent withdrawal charge. Yields are annualized and stated as a
percentage.
CURRENT YIELD and EFFECTIVE YIELD are calculated for the Money Market Option.
Current Yield is based on the change in the value of a hypothetical investment
(exclusive of capital changes) over a particular 7-day period, less a
hypothetical charge reflecting deductions from contract values during the period
(the BASE PERIOD), and stated as a percentage of the investment at the start of
the base period (the BASE PERIOD RETURN). The base period return is then
annualized by multiplying by 365/7, with the resulting yield figure carried to
at least the nearest hundredth of one percent. Effective yield assumes that all
dividends received during an annual period have been reinvested. This
compounding effect causes effective yield to be higher than current yield.
Calculation of effective yield begins with the same base period return used in
the calculation of current yield, which is then annualized to reflect weekly
compounding pursuant to the following formula:
365/7
Effective Yield = {(Base Period Return) + 1) } - 1
4
<PAGE>
NON-STANDARD AVERAGE TOTAL RETURN - The table provides cumulative and average
annual total returns for each Option for the 1, 3, 5 and 10 Year Periods Ended
December 31, 1996, and from inception through December 31, 1996. The
calculation assumes the policy is still in force and therefore does not take
withdrawal charges into consideration. The performance information is based on
the historical investment experience of the Options and does not indicate or
represent future experience. This table is based upon average Account Value
over $60, 000 for which the annual charge is $0.
<TABLE>
<CAPTION>
RETURNS WITHOUT SURRENDER CHARGES
CUMULATIVE TOTAL RETURN AVERAGE ANNUAL RETURN
YEAR-TO- ------------------------------- ------------------------
INCEPTION DATE LIFE OF LIFE OF
VARIABLE OPTIONS DATE (1) RETURN 3 YEAR 5 YEAR 10 YEAR FUND 1 YEAR 3 YEAR 5 YEAR 10 YEAR FUND
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EAFE Equity Index 6/21/96 n/a n/a n/a n/a n/a n/a
Equity 500 Index 12/31/92 n/a n/a n/a n/a
Small Cap Index 8/13/96 n/a n/a n/a n/a n/a n/a n/a
VIP Equity-Income 10/9/86
VIP II Contrafund 1/3/95 n/a n/a n/a n/a n/a n/a
VIP III Growth & Income 12/31/96 n/a n/a n/a n/a n/a n/a n/a
VIP III Growth Opportunities 1/3/95 n/a n/a n/a n/a n/a n/a
Harris Bretall Sullivan & Smith
Equity Growth 12/7/92 n/a n/a n/a n/a
Zurich Kemper Value 12/21/92 n/a n/a n/a n/a
Zweig Asset Allocation 12/14/92 n/a n/a n/a n/a
Zweig Equity (Small Cap) 1/4/93 n/a n/a n/a n/a
Janus Balanced 9/13/93 n/a n/a n/a n/a
Janus Capital Appreciation (2) 5/1/97 n/a n/a n/a n/a n/a n/a n/a n/a
Janus Worldwide Growth 9/13/93 n/a n/a n/a n/a
JPM Bond 1/3/95 n/a n/a n/a n/a n/a n/a
JPM International Equity 1/3/95 n/a n/a n/a n/a n/a n/a
Morgan Stanley Asian Equity 12/31/91 n/a n/a
Morgan Stanley Emerging
Markets Debt 2/1/94 n/a n/a n/a n/a
Morgan Stanley High Yield 8/31/92 n/a n/a n/a n/a
Morgan Stanley U.S. Real Estate 1/31/95 n/a n/a n/a n/a n/a n/a
</TABLE>
5
<PAGE>
STANDARD AVERAGE TOTAL RETURN - The table provides cumulative and average annual
total returns for each Option for the 1, 3, 5 and 10 Year Periods Ended December
31, 1996, and from inception through December 31, 1996. The calculation
includes any withdrawal charges that would apply if an owner terminated the
policy at the end of the period, but excludes deductions for applicable premium
tax charges. The performance information is based on the historical investment
experience of the Options and does not indicate or represent future experience.
This table is based upon average Account Value over $60,000 for which the
annual charge is $0.
<TABLE>
<CAPTION>
SEC STANDARDIZED
RETURNS WITH SURRENDER CHARGE CUMULATIVE TOTAL RETURN AVERAGE ANNUAL RETURN
----------------------------- ---------------------------------
INCEPTION LIFE OF LIFE OF
VARIABLE OPTIONS DATE (1) 5 YEAR 10 YEAR FUND 1 YEAR 5 YEAR 10 YEAR FUND
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EAFE Equity Index 6/21/96 n/a n/a n/a n/a
Equity 500 Index 12/31/92 n/a n/a n/a n/a
Small Cap Index 8/13/96 n/a n/a n/a n/a n/a
VIP Equity-Income 10/9/86
VIP II Contrafund 1/3/95 n/a n/a n/a n/a
VIP III Growth & Income 12/31/96 n/a n/a n/a n/a n/a
VIP III Growth Opportunities 1/3/95 n/a n/a n/a n/a
Harris Bretall Sullivan & Smith Equity Growth 12/7/92 n/a n/a n/a n/a
Zurich Kemper Value 12/21/92 n/a n/a n/a n/a
Zweig Asset Allocation 12/14/92 n/a n/a n/a n/a
Zweig Equity (Small Cap) 1/4/93 n/a n/a n/a n/a
Janus Balanced 9/13/93 n/a n/a n/a n/a
Janus Capital Appreciation (2) 5/1/97 n/a n/a n/a n/a n/a n/a
Janus Worldwide Growth 9/13/93 n/a n/a n/a n/a
JPM Bond 1/3/95 n/a n/a n/a n/a
JPM International Equity 1/3/95 n/a n/a n/a n/a
Morgan Stanley Asian Equity 12/31/91 n/a n/a
Morgan Stanley Emerging Markets Debt 2/1/94 n/a n/a n/a n/a
Morgan Stanley High Yield 8/31/92 n/a n/a n/a n/a
Morgan Stanley U.S. Real Estate 1/31/95 n/a n/a n/a n/a
</TABLE>
n/a Not applicable.
(1) Represents the inception date of the underlying funds. Performance
data for periods prior to the actual inception of the variable account
options is hypothetical and based on the performance of the underlying
funds. This performance data has been adjusted to include all insurance
company contract charges and management fees of the underlying funds.
(2) Partial-year returns are calculated from the inception date through the
period ending 7/31/97.
6
<PAGE>
PERFORMANCE COMPARISONS
Performance information for an Option may be compared, in reports and
advertising, to: (1) Standard & Poor's Stock Index (S&P 500), Dow Jones
Industrial Averages, (DJIA), Donoghue Money Market Institutional Averages, or
other unmanaged indices generally regarded as representative of the securities
markets; (2) other variable annuity separate accounts or other investment
products tracked by Lipper Analytical Services, Inc. or the Variable Annuity
Research and Data Service, which are widely used independent research firms that
rank mutual funds and other investment companies by overall performance,
investment objectives, and assets; and (3) the Consumer Price Index (measure of
inflation) to assess the real rate of return from an investment in a contract.
Unmanaged indices may assume the reinvestment of dividends but generally do not
reflect deductions for annuity charges, investment management costs, brokerage
costs and other transaction costs that are normally paid when directly investing
in securities.
Each Option may from time to time also include the ranking of its performance
figures relative to such figures for groups of mutual funds categorized by
Lipper Analytical Services (LIPPER) as having the same or similar investment
objectives or by similar services that monitor the performance of mutual funds.
Each Option may also from time to time compare its performance to average mutual
fund performance figures compiled by Lipper in LIPPER PERFORMANCE ANALYSIS.
Advertisements or information furnished to present shareholders or prospective
investors may also include evaluations of an Option published by nationally
recognized ranking services and by financial publications that are nationally
recognized such as BARRON'S, BUSINESS WEEK, CDA TECHNOLOGIES, INC., CHANGING
TIMES, CONSUMER'S DIGEST, DOW JONES INDUSTRIAL AVERAGE, FINANCIAL PLANNING,
FINANCIAL TIMES, FINANCIAL WORLD, FORBES, FORTUNE, GLOBAL INVESTOR, HULBERT'S
FINANCIAL DIGEST, INSTITUTIONAL INVESTOR, INVESTORS DAILY, MONEY, MORNINGSTAR
MUTUAL FUNDS, THE NEW YORK TIMES, PERSONAL INVESTOR, STANGER'S INVESTMENT
ADVISER, VALUE LINE, THE WALL STREET JOURNAL, WIESENBERGER INVESTMENT COMPANY
SERVICE AND USA TODAY.
The performance figures described above may also be used to compare the
performance of an Option's shares against certain widely recognized standards or
indices for stock and bond market performance. The following are the indices
against which the Options may compare performance:
The Standard & Poor's Composite Index of 500 Stocks (the S&P 500) is a market
value-weighted and unmanaged index showing the changes in the aggregate market
value of 500 stocks relative to the base period 1941-43. The S&P 500 Index is
composed almost entirely of common stocks of companies listed on the NYSE,
although the common stocks of a few companies listed on the American Stock
Exchange or traded OTC are included. The 500 companies represented include 400
industrial, 60 transportation and 50 financial services concerns. The S&P 500
Index represents about 80% of the market value of all issues traded on the NYSE.
The Dow Jones Composite Average (or its component averages) is an unmanaged
index composed of 30 blue-chip industrial corporation stocks (Dow Jones
Industrial Average), 15 utilities company stocks and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
The New York Stock Exchange composite or component indices are unmanaged indices
of all industrial, utilities, transportation and finance company stocks listed
on the New York Stock Exchange.
The Wilshire 5000 Equity Index (or its component indices) represents the return
of the market value of all common equity securities for which daily pricing is
available. Comparisons of performance assume reinvestment of dividends.
The Morgan Stanley Capital International EAFE Index is an arithmetic, market
value-weighted average of the performance of over 900 securities on the stock
exchanges of countries in Europe, Australia and the Far East.
The Morgan Stanley Capital International World Index - An arithmetic, market
value-weighted average of the performance of over 1,470 securities listed on the
stock exchanges of countries in Europe, Australia, the Far East, Canada and the
United States.
7
<PAGE>
The Goldman Sachs 100 Convertible Bond Index currently includes 67 bonds and 33
preferred stocks. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
The Lehman Brothers Government Bond Index (the LEHMAN GOVERNMENT INDEX) is a
measure of the market value of all public obligations of the U.S. Treasury; all
publicly issued debt of all agencies of the U.S. Government and all
quasi-federal corporations; and all corporate debt guaranteed by the U.S.
Government. Mortgage-backed securities, flower bonds and foreign targeted
issues are not included in the Lehman Government Index.
The Lehman Brothers Government/Corporate Bond Index (the LEHMAN
GOVERNMENT/CORPORATE INDEX) is a measure of the market value of approximately
5,300 bonds with a face value currently in excess of $1 million, which have at
least one year to maturity and are rated "Baa" or higher (INVESTMENT GRADE) by a
nationally recognized statistical rating agency.
The Lehman Brothers Government/Corporate Intermediate Bond Index (the LEHMAN
GOVERNMENT/CORPORATE INTERMEDIATE INDEX) is composed of all bonds covered by the
Lehman Brothers Government/Corporate Bond Index with maturities between one and
9.99 years. Total return comprises price appreciation/depreciation and income
as a percentage of the original investment. Indexes are rebalanced monthly by
market capitalization.
The Lehman Brothers Intermediate Treasury Bond Index includes bonds with
maturities between one and ten years with a face value currently in excess of $1
million, that are rated investment grade or higher by a nationally recognized
statistical rating agency.
The Shearson Lehman Long-Term Treasury Bond Index is composed of all bonds
covered by the Shearson Lehman Hutton Treasury Bond Index with maturities of 10
years or greater.
The National Association of Securities Dealers Automated Quotation System
(NASDAQ) Composite Index covers 4,500 stocks traded over the counter. It
represents many small company stocks but is heavily influenced by about 100 of
the largest NASDAQ stocks. It is a value-weighted index calculated on price
change only and does not include income.
The NASDAQ Industrial Index is composed of more than 3,000 industrial issues.
It is a value-weighted index calculated on price change only and does not
include income.
The Value Line (Geometric) Index is an unweighted index of the approximately
1,700 stocks followed by the VALUE LINE INVESTMENT SURVEY.
The Salomon Brothers GNMA Index includes pools of mortgages originated by
private lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.
The Salomon Brothers' World Market Index is a measure of the return of an
equally weighted basket of short-term (three month U.S. Government securities
and bank deposits) investments in eight major currencies: the U.S. dollars, UK
pounds sterling, Canadian dollars, Japanese yen, Swiss francs, French francs,
German Deutsche mark and Netherlands guilder.
The Salomon Brothers Broad Investment-Grade Bond Index contains approximately
3,800 Treasury and agency, corporate and mortgage bonds with a rating of BBB or
higher, a stated maturity of at least one year, and a par value outstanding of
$25 million or more. The index is weighted according to the market value of all
bond issues included in the index.
The Salomon Brothers High Grade Corporate Bond Index consists of publicly
issued, non-convertible corporate bonds rated AA or AAA. It is a
value-weighted, total return index, including approximately 800 issues with
maturities of 12 years or grater.
The Salomon Brothers World Bond Index measures the total return performance of
high-quality securities in major sectors of the international bond market. The
index covers approximately 600 bonds from 10 currencies: Australian dollars,
Canadian dollars, European Currency Units, French francs, Japanese yen,
Netherlands guilder, Swiss francs, UK pounds sterling, U.S. dollars, and German
deutsche marks.
The J.P. Morgan Global Government Bond Index is a total return, market
capitalization weighted index, rebalanced monthly consisting of the following
countries: Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan,
Netherlands, Spain, Sweden, United Kingdom and United States.
8
<PAGE>
The 50/50 Index assumes a static mix of 50% of the S&P 500 Index and 50% of the
Lehman Government Corporate Index.
Other Composite Indices: 70% S&P 500 Index and 30% NASDAQ Industrial Index; 35%
S&P 500 Index and 65% Salomon Brothers High Grade Bond Index; and 65% S&P Index
and 35% Salomon Brothers High Grade Bond Index.
The SEI Median Balanced Fund Universe measures a group of funds with an average
annual equity commitment and an average annual bond - plus - private - placement
commitment greater than 5% each year. SEI must have at least two years of data
for a fund to be considered for the population.
The Russell 2000/Small Stock Index comprises the smallest 2000 stocks in the
Russell 3000 Index, and represents approximately 11% of the total U.S. equity
market capitalization. The Russell 3000 Index comprises the 3,000 largest U.S.
companies by market capitalization. The smallest company has a market value of
roughly $20 million.
The Russell 2500 Index is comprised of the bottom 500 stocks in the Russell 1000
Index which represents the universe of stocks from which most active money
managers typically select; and all the stocks in the Russell 2000 Index. The
largest security in the index has a market capitalization of approximately 1.3
billion.
The Consumer Price Index (or Cost of Living Index), published by the United
States Bureau of Labor Statistics is a statistical measure of change, over time,
in the price of goods and services in major expenditure groups.
STOCKS, BONDS, BILLS AND INFLATION, published by Hobson Associates, presents an
historical measure of yield, price and total return for common and small company
stocks, long-term government bonds, Treasury bills and inflation.
Savings and Loan Historical Interest Rates as published in the United States
Savings & Loan League Fact Book.
Historical data supplied by the research departments of First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch, Pierce,
Fenner & Smith, Shearson Lehman Hutton and Bloomberg L.P.
The MSCI Combined Far East Free ex Japan Index is a market-capitalization
weighted index comprising stocks in Hong Kong, Indonesia, Korea, Malaysia,
Philippines, Singapore and Thailand. Korea is included in the MSCI Combined
Far East Free ex Japan Index at 20% of its market capitalization.
The First Boston High Yield Index generally includes over 180 issues with an
average maturity range of seven to ten years with a minimum capitalization of
$100 million. All issues are individually trader-priced monthly.
In reports or other communications to shareholders, the Funds may also describe
general economic and market conditions affecting the Options and may compare the
performance of the Options with (1) that of mutual funds included in the
rankings prepared by Lipper or similar investment services that monitor the
performance of insurance company separate accounts or mutual funds, (2)
IBC/Donoghue's Money Fund Report, (3) other appropriate indices of investment
securities and averages for peer universe of funds which are described in this
Statement of Additional Information, or (4) data developed by National Integrity
or any of the Sub-Advisers derived from such indices or averages.
For those underlying Options which have not been held as Sub-Accounts within the
Separate Account for one of the quoted periods, the standardized average annual
total return and nonstandardized total return quotations will show the
investment performance such underlying Options would have achieved (reduced by
the applicable charges) had they been held as Sub-Accounts within the Separate
Account for the period quoted.
9
<PAGE>
INDIVIDUALIZED COMPUTER GENERATED ILLUSTRATIONS
Integrity may from time to time use computer-based software available through
Morningstar, CDA/Wiesenberger and/or other firms to provide registered
representatives and existing and/or potential owners of the contracts with
individualized hypothetical performance illustrations for some or all of the
Variable Account Options. Such illustrations may include, without limitation,
graphs, bar charts and other types of formats presenting the following
information: (i) the historical results of a hypothetical investment in a single
Option; (ii) the historical fluctuation of the value of a single Option (actual
and hypothetical); (iii) the historical results of a hypothetical investment in
more than one Option; (iv) the historical performance of two or more market
indices in relation to one another and/or one or more Options; (v) the
historical performance of two or more market indices in comparison to a single
Option or a group of Options; (vi) a market risk/reward scatter chart showing
the historical risk/reward relationship of one or more mutual funds or Options
to one or more indices and a broad category of similar anonymous variable
annuity subaccounts; and (vii) Option data sheets showing various information
about one or more Options (such as information concerning total return for
various periods, fees and expenses, standard deviation, alpha and beta,
investment objective, inception date and net assets). We reserve the right to
republish figures independently provided by Morningstar or any similar agency or
service.
PART 4 - DETERMINATION OF ANNUITY UNIT VALUES
The annuity unit value was initially fixed at $1.00 for contracts with assumed
base rates of net investment return of 5% or 3.5% a year. For each valuation
period thereafter, it is the annuity value for the preceding valuation period
multiplied by the adjusted net investment factor under the contracts. For each
valuation period, the adjusted net investment factor is equal to the net
investment factor reduced for each day in the valuation period by:
* .00013366 for a contract with an assumed base rate of net investment return
of 5% a year; or
* .00009425 for a contract with an assumed base rate of net investment return
of 3.5% a year.
Because of this adjustment, the annuity unit value rises and falls depending on
whether the actual rate of net investment return (after charges) is higher or
lower than the assumed base rate.
All certificates have a 5% assumed base rate, except in states where that rate
is not permitted. Annuity payments under contracts with an assumed base rate of
3.5% will at first be smaller than those under contracts with a 5% assumed base
rate. Payments under the 3.5% contracts, however, will rise more rapidly when
unit values are rising, and payments will fall more slowly when unit values are
falling, than those under 5% contracts.
The amounts of variable annuity payments are determined as follows:
Payments normally start on the Annuitant's retirement date. The first three
monthly payments are the same. Each of the first three monthly payments will be
based on the amount taken from the tables in the contract or on our current
rates, whichever is more favorable to the participant. Where the Company's
current annuity rates are used, contributions in the current and five prior
participation years will qualify for the Company's current individual annuity
rates applicable to funds derived from sources outside the Company. The balance
of the proceeds will qualify for the Company's current individual annuity rates
for payment of proceeds.
The first three monthly payments depend on the assumed base rate of net
investment return and the forms of annuity chosen (and any fixed period). If the
annuity involves a life contingency, the risk class and the age of the
annuitants will affect payments.
Payments after the first three months will vary according to the investment
performance of the Variable Account Option or Options selected. After that,
each payment will be calculated by multiplying the number of annuity units
credited by the average annuity unit value for the second calendar month before
the due date of the payment. The number of annuity units credited equals the
initial periodic payment divided by the annuity unit value for the valuation
period that includes the due date of the first annuity payment. The average
annuity unit value is the average of the annuity unit values for the valuation
periods ending in that month. Each business day together with any non-business
day or consecutive non-business day immediately preceding such business day
will constitute a valuation period.
ILLUSTRATION OF CHANGES IN ANNUITY UNIT VALUES. To show how we determine
variable annuity payments from month to month, assume that the contract value on
a retirement date is enough to fund an annuity with a monthly payment of $363
and that the annuity
10
<PAGE>
unit value for the valuation period that includes the due date of the first
annuity payment is $1.05. The number of annuity units credited under your
contract would be 345.71 (363 divided by 1.05 = 345.71).
If the fourth monthly payment is due in March, and the average annuity unit
value for January was $1.10, the annuity payment for March would be the number
of units (345.71) times the average annuity unit value ($1.10), or $380.28. If
the average annuity unit value was $1.00 in February, the annuity payment for
April would be 345.71 times $1.00, or $345.71.
For period certain life annuities and life income annuities, the participant may
not surrender or redeem once annuity payments commence. For period certain life
annuities only, if the payee (or the payee and the other annuitant under a joint
and survivor annuity) dies before the period selected ends, the remaining
payments will go to another named payee who may have the right to redeem the
annuity and secure the present value of future guaranteed payments in a lump
sum. The present value of future guaranteed payments for a period certain is
based on the number of payments left, the assumed base rate of net return, the
number of annuity units and the annuity unit value for the date the Company
receives a written request for lump sum payment of remaining values. Assets held
in the Account at least equal to all statutory reserves required for such
Separate Account.
PART 5 - FINANCIAL STATEMENTS
Ernst & Young LLP, Suite 2100, 400 West Market Street, Louisville, Kentucky
40202, is our independent auditor and serves as independent auditor of the
Separate Account. Ernst & Young LLP on an annual basis will audit certain
financial statements prepared by management and express an opinion on such
financial statements based on their audits.
The financial statements of the Separate Account as of December 31, 1996, and
for the periods indicated in the financial statements and the statutory-basis
financial statements of Integrity as of and for the years ended December 31,
1996 and 1995 incorporated herein by reference to this SAI have been audited by
Ernst & Young LLP as set forth in their reports incorporated herein by reference
to this SAI.
The financial statements of Integrity should be distinguished from the financial
statements of the Separate Account and should be considered only as they relate
to the ability of Integrity to meet its obligations under the contract. They
should not be considered as relating to the investment performance of the assets
held in the Separate Account.
11
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS INCLUDED IN PART A:
Part 1 - Financial Information
FINANCIAL STATEMENTS INCLUDED IN PART B:
SEPARATE ACCOUNT II:
Report of Independent Auditors*
Statement of Assets and Liabilities as of December 31, 1996*
Statement of Operations for the Year Ended December 31, 1996*
Statements of Changes in Net Assets for the Years Ended December 31, 1996
and 1995*
Notes to Financial Statements*
* Incorporated by reference to Registrant's registration statement on Form
N-4 filed May 1, 1997.
INTEGRITY LIFE INSURANCE COMPANY:
Report of Independent Auditors*
Balance Sheets (Statutory Basis) as of December 31, 1996 and 1995*
Statements of Operations (Statutory Basis) for the Years Ended
December 31, 1996 and 1995*
Statements of Changes in Capital and Surplus (Statutory Basis) for the
Years Ended
December 31, 1996 and 1995*
Statements of Cash Flows (Statutory Basis) for the Years Ended
December 31, 1996 and 1995*
Notes to Financial Statements*
* Incorporated by reference to Registrant's registration statement on Form
N-4 filed May 1, 1997.
(b) EXHIBITS:
The following exhibits are filed herewith:
1. Resolutions of the Board of Directors of Integrity Life Insurance
Company (INTEGRITY) and Certification of the Chief Executive
Officer authorizing the establishment of Separate Account II, the
Registrant. Incorporated by reference from Registrant's Form N-4
registration statement filed on August 24, 1992.
2. Not applicable.
3.(a) Form of Selling/General Agent Agreement between Integrity and
Painewebber Incorporated, incorporated by reference to
Registrant's Pre-Effective Amendment No. 1 registration statement
on Form N-4 filed on November 9, 1992.
3.(b) Form of Variable Contract Principal Underwriter Agreement with
ARM Securities Corporation. Incorporated by reference from
Registrant's Form N-4 registration statement (File No. 33-51268)
on May 1, 1996.
<PAGE>
4.(a) Form of trust agreement. Incorporated by reference from
Registrant's Form N-4 registration statement filed on August 24,
1992.
4.(b) Form of group variable annuity contract. Incorporated by
reference from pre-effective amendment no. 1 to Registrant's Form
N-4 registration statement filed on November 9, 1992.
4.(c) Form of variable annuity certificate. Incorporated by reference
from Registrant's N-4 registration statement filed on August 24,
1992.
4.(d) Form of individual variable annuity contract. Incorporated by
reference from pre-effective amendment no. 1 to Registrant's Form
N-4 registration statement (File No. 33-51270), filed on November
9, 1992.
4.(e) Forms of riders to certificate for qualified plans. Incorporated
by reference from pre-effective amendment no. 1 to Registrant's
Form N-4 registration statement filed on November 9, 1992.
4.(f) Form of rider for use in certain states eliminating the Guarantee
Period Options. Incorporated by reference from Form N-4
registration statement (File No. 33-56654).
4.(g) Alternate form of variable annuity contract for use in certain
states. Incorporated by reference from Registrant's Form N-4
registration statement (File No. 33-51268) on May 1, 1996.
5. Form of application. Incorporated by reference to post-effective
amendment no. 1 to Form S-1 registration statement (File No.
33-51270).
6.(a) Certificate of Incorporation of Integrity. Incorporated by
reference to post-effective amendment no. 4 to Registrant's Form
N-4 registration statement (File No. 51268), filed on April 28,
1995.
6.(b) By-Laws of Integrity. Incorporated by reference to post-effective
amendment no. 4 to Registrant's Form N-4 registration statement
(File No. 33-51268), filed on April 28, 1995.
7.(a) Reinsurance Agreement between Integrity and Connecticut General
Life Insurance Company (CIGNA). Incorporated by reference to
post-effective amendment no. 4 to Registrant's Form N-4
registration statement (File No. 33-51268), filed on April 28,
1995.
7.(b) Reinsurance Agreement between Integrity and Connecticut General
Life Insurance Company (CIGNA) effective January 1, 1995.
Incorporated by reference from Registrant's Form N-4 registration
statement (File No. 33-51268) on May 1, 1996.
8. Form of Participation Agreement among Integrity Series Fund,
Inc., Integrity Financial Services, Inc. and Integrity,
incorporated by reference to Registrant's registration statement
on Form N-4 filed August 24, 1992.
9. Opinion and Consent of Kevin L. Howard, incorporated by reference
to Registrant's registration statement on Form N-4 filed May 1,
1997.
10. Consents of Ernst & Young LLP (filed herewith).
11. Not applicable.
12. Not applicable.
13. Schedule for computation of performance quotations.
Incorporated by reference from Registrant's Form N-4
registration statement (File No. 33-51268) on May 1, 1996.
2
<PAGE>
14. Not applicable.
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
Set forth below is information regarding the directors and principal
officers of Integrity, the Depositor:
DIRECTORS:
Name and Principal Business Address Position and Offices with Depositor
- - ----------------------------------- -----------------------------------
Mark A. Adkins Director
Integrity Life Insurance Company
515 West Market Street
Louisville, KY 40202
John Franco Director, Co-Chairman of the Board and
Integrity Life Insurance Company Co-Chief Executive Officer
515 West Market Street
Louisville, KY 40202
William H. Guth Director and Product Development Officer
Integrity Life Insurance Company
515 West Market Street
Louisville, KY 40202
John R. Lindholm Director and President
Integrity Life Insurance Company
515 West Market Street
Louisville, KY 40202
Martin H. Ruby Director, Co-Chairman of the Board and
Integrity Life Insurance Company Co-Chief Executive Officer
515 West Market Street
Louisville, KY 40202
Gerald J. Rusnak Director
Integrity Life Insurance Company
200 East Wilson Bridge Road
Worthington, OH 43085
Jeffrey A. Trainer Director
Integrity Life Insurance Company
200 East Wilson Bridge Road
Worthington, OH 43085
3
<PAGE>
SELECTED OFFICERS: (The business address for each of the principal officers
listed below is 515 West Market Street, Louisville, Kentucky
40202.)
Name and Principal Business Address Position and Offices with Depositor
- - ----------------------------------- -----------------------------------
Dennis L. Carr Executive Vice President and Chief
Actuary
David E. Ferguson Executive Vice President and Chief
Technology Officer
Daniel R. Gattis Executive Vice President-Institutional
Business Group
John R. McGeeney Executive Vice President-Retail Business
Division
Robert H. Scott Executive Vice President, General
Counsel and Secretary
Edward L. Zeman Executive Vice President and Chief
Financial Officer
Patricia L. Winter Senior Vice President -
Mergers/Acquisitions and Investment
Assurance
Peter S. Resnik Treasurer
Barry G. Ward Controller
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH INTEGRITY OR
REGISTRANT
Integrity, the depositor of Separate Account II, is a wholly owned
subsidiary of Integrity Holdings, Inc., a Delaware corporation which is a
holding company engaged in no active business. Integrity owns 100% of stock of
National Integrity Life Insurance Company, a New York stock life insurance
corporation. All outstanding shares of Integrity Holdings, Inc. are owned by
ARM Financial Group, Inc., (ARM) a Delaware corporation which is a financial
services company focusing on the long-term savings and retirement marketplace by
providing retail and institutional products and services throughout the United
States. ARM owns 100% of the stock of (i) ARM Securities Corporation (ARM
SECURITIES), a Minnesota corporation, registered with the SEC as a broker-dealer
and a member of the National Association of Securities Dealers, Inc., (ii) ARM
Capital Advisors, Inc., a New York corporation registered with the SEC as an
investment adviser, (iii) SBM Certificate Company, a Minnesota corporation
registered with the SEC as an issuer of face-amount certificates, and (iv) ARM
Transfer Agency, Inc., a Delaware corporation registered with the SEC as a
transfer and dividend disbursing agency.
In June 1997, ARM completed an initial public offering (the
"Offering") of 9.2 million shares of Class A common stock, par value of $.01 per
share (the "New Class A Common Stock"), of which 5.75 million shares were sold
by ARM and 3.45 million shares were sold by the Morgan Stanley Stockholders (as
defined below). Concurrent with the closing of the Offering, ARM amended and
restated its Certificate of Incorporation to effectuate a recapitalization such
that (i) the common equity of ARM consists of New Class A Common Stock and Class
B Non-Voting Common Stock, par value of $.01 per share (the "New Class B Common
Stock" and, together with the New Class A Common Stock, the "New Common
Stock"), (ii) authorized shares of the New Class A Common Stock and New Class B
common Stock were increased to 150 million shares and 50 million shares,
respectively, (iii) each outstanding share of common stock of ARM was converted
into one share of New Class A Common Stock, (iv) certain shares of the New Class
A Common Stock owned by private equity funds sponsored by Morgan Stanley, Dean
Witter, Discover & Co. (the successor to Morgan Stanley Group Inc. in its merger
with Dean Witter, Discover & Co.) (the "Morgan Stanley Stockholders") were
converted into New Class B Common Stock such that, after giving effect to such
conversion, but not giving effect to the Offering, the Morgan Stanley
Stockholders owned, in the aggregate, 49% of the outstanding New Class A Common
Stock, and (v) each share of New Common Stock was split into 706 shares of New
Common Stock. Holders of New Class B Common Stock have no right to vote on
matters submitted to a vote of stockholders, except in certain circumstances.
Shares of the New Class B Common Stock have no preemptive or other subscription
rights and are convertible into an equal number of shares of New Class A Common
Stock (1) at the option of the holder thereof to the extent that, following such
conversion,
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the Morgan Stanley Stockholders will not, in the aggregate, own more than 49% of
the outstanding shares of New Class A Common Stock, and (2) automatically upon
the transfer of such shares by any Morgan Stanley Stockholder to a person that
is not a Morgan Stanley Stockholder or an affiliate of a Morgan Stanley
Stockholder. The Morgan Stanley Stockholders owned approximately 91% of the
outstanding shares of ARM's common stock prior to the Offering and approximately
53% following the Offering.
No person has the direct or indirect power to control Morgan Stanley,
Dean Witter, Discover & Co., except insofar as he or she may have such power by
virtue of his or her capacity as a director or executive officer thereof.
Morgan Stanley, Dean Witter, Discover & Co., is publicly held; no individual
beneficially owns more than 5% of the common shares; however, approximately 13%
of such shares are subject to a stockholders' agreement or voting agreement
among certain current and former principals and employees of Morgan Stanley,
Dean Witter, Discover & Co., and its predecessor.
The following list shows the subsidiaries of Morgan Stanley, Dean
Witter, Discover & Co. All subsidiaries are wholly owned by their immediate
parent company and are incorporated in Delaware, except where noted otherwise in
parentheses.
"MORGAN STANLEY" COMPANIES
Fourth Street Development Co. Incorporated
Fourth Street Ltd.
Jolter Investments Inc.
Morgan Rundle Inc.
MR Ventures Inc.
Morgan Stanley & Co. Incorporated
Morgan Stanley Flexible Agreements Inc.
MS Securities Services Inc.
Prime Dealer Services Corp.
Morgan Stanley ABS Capital I Inc.
Morgan Stanley ABS Capital II Inc.
Morgan Stanley Advisory Partnership Inc.
Morgan Stanley Asset Funding Inc.
Morgan Stanley Asset Management (CPO) Inc.
Morgan Stanley Asset Management Inc.
Morgan Stanley Asset Management Holdings Inc.
Miller Anderson & Sherrerd, LLP (Pennsylvania)
MAS Fund Distribution, Inc. (Pennsylvania)
Morgan Stanley Global Franchise Inc.
Morgan Stanley Baseball, Inc.
Morgan Stanley Capital Group Inc.
Morgan Stanley Capital I Inc.
Morgan Stanley Capital (Jersey) Limited (Jersey, Channel Is.)
Morgan Stanley Capital Partners III, Inc.
Morgan Stanley Capital Services Inc.
Morgan Stanley Commercial Mortgage Capital, Inc.
Morgan Stanley Commodities Management, Inc.
Morgan Stanley Derivative Products Inc.
Morgan Stanley Developing Country Debt II, Inc.
Morgan Stanley Emerging Markets Inc.
Morgan Stanley Equity (C.I.) Limited (Jersey, Channel Is.)
Morgan Stanley Equity Finance Limited (England)
Morgan Stanley Equity Investors Inc.
Morgan Stanley Finance (Jersey) Limited (Jersey)
Morgan Stanley Global Emerging Markets, Inc. (Jersey, Channel Is.)
Morgan Stanley Insurance Agency Inc.
Morgan Stanley International Incorporated
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Bank Morgan Stanley AG (Switzerland)
Morgan Stanley AOZT (Russia)
Morgan Stanley Asia (China) Limited (Hong Kong)
Morgan Stanley Asia Holdings I Inc.
Morgan Stanley Asia Holdings II Inc.
Morgan Stanley Asia Holdings III Inc.
Morgan Stanley Asia Holdings IV Inc.
Morgan Stanley Asia Holdings V Inc.
Morgan Stanley Asia Holdings VI Inc.
Morgan Stanley Asia Pacific (Holdings) Limited (Cayman Islands)
Morgan Stanley Asia Regional (Holdings) I LLC (Cayman Islands)
Morgan Stanley Asia Limited (Hong Kong)
Morgan Stanley Futures (Hong Kong) Limited (Hong Kong)
Morgan Stanley Hong Kong Securities Limited (Hong Kong)
Morgan Stanley Pacific Limited (Hong Kong)
Morgan Stanley Asia Regional (Holdings) Ii LLC (Cayman Islands)
Morgan Stanley Asia Regional (Holdings) III LLC (Cayman Islands)
Morgan Stanley Asia (Singapore) Pte (Rep. of Singapore)
Morgan Stanley Asset Management Singapore Company (Rep. of
Singapore)
Morgan Stanley Capital Group (Singapore) Pte (Rep. of
Singapore)
Morgan Stanley Futures (Singapore) Pte (Rep. of Singapore)
Morgan Stanley Asia Regional (Holdings) IV LLC (Cayman Islands)
Morgan Stanley Japan (Holdings) Ltd. (Cayman Islands)
Morgan Stanley Japan Limited (Hong Kong)
Morgan Stanley Asia Pacific (Holdings) I Limited (Cayman Islands)
Morgan Stanley Asia (Taiwan) Ltd. (Rep. of China)
Morgan Stanley Asset & Investment Trust Management Co., Limited (Japan)
Morgan Stanley Australia Limited (Australia)
Morgan Stanley Australia Securities Limited (Australia)
Morgan Stanley Bank Luxembourg S.A. (Luxembourg)
Morgan Stanley Canada Limited (Canada)
Morgan Stanley Capital SA (France)
Morgan Stanley Capital (Luxembourg) S.A. (Luxembourg)
Morgan Stanley Financial Services Beteiligungs GmbH (Germany)
Morgan Stanley Financial Services GmbH & Co. KG (Germany)
Morgan Stanley Group (Europe) PLC (England)
Morgan Stanley Asset Management Limited (England)
Morgan Stanley Capital Group Limited (England)
Morgan Stanley (Europe) Limited (England)
Morgan Stanley Finance plc (England)
Morgan Stanley Properties Limited (England)
Morgan Stanley Property Management (UK) Limited (England)
Morgan Stanley Services (UK) Limited (England)
Morgan Stanley UK Group (England)
Morgan Stanley & Co. International Limited (England)
Morgan Stanley Funding Limited Jersey, Channel Is.)
Morgan Stanley International Nominees Limited (England)
Morgan Stanley & Co. Limited (England)
Morgan Stanley Securities Limited (England)
Morstan Nominees Limited (England)
MS Leasing UK Limited (England)
Morgan Stanley Holding (Deutschland) GmbH (Germany)
Morgan Stanley Bank AG (Germany)
Morgan Stanley Hong Kong Nominees Limited (Hong Kong)
Morgan Stanley International Insurance Ltd (Bermuda)
Morgan Stanley Latin America Incorporated
Morgan Stanley Administadora de Carteriras Ltda. (Brazil)
Morgan Stanley do Brasil Ltda. (Brazil)
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MS Carbocol Advisors Incorporated
Morgan Stanley Latin American Derivatives Ltd. (Cayman Islands)
Morgan Stanley Mauritius Company Limited (Mauritius)
Morgan Stanley Asset Management India Private Limited
(India)
Morgan Stanley India Securities Private Limited (India)
Morgan Stanley India Private Limited (India)
Morgan Stanley Middle East Inc.
Morgan Stanley Offshore Investment Company Ltd. (Cayman Islands)
Morgan Stanley S.A. (France)
Morgan Stanley Services (Jersey) Limited (Jersey, Channel Is.)
Morgan Stanley SICAV Management S.A. (Luxembourg)
Morgan Stanley South Africa (Pty) Limited (South Africa)
Morgan Stanley SPVI (Cayman Islands) LLC (Cayman Islands)
Farlington Corporation (Ireland)
ITALSEC S.r.l. (Italy)
Morgan Stanley SPV II (Cayman Islands) LLC (Cayman Islands)
Morgan Stanley (Structured Products) Jersey Limited (Jersey, Channel
Is.)
Morgan Stanley (Thailand) Limited (Thailand)
Morgan Stanley Wertpapiere GmbH (Germany)
MS Italy (Holdings) Inc.
Banca Morgan Stanley SpA (Italy)
MS LDC, Ltd.
MSAM/Kokusai (Cayman Islands), Inc. (Cayman Islands)
MSL Incorporated
Morgan Stanley (Jersey) Limited (Jersey, Channel Is.)
Morgan Stanley LEF I, Inc.
Morgan Stanley Leveraged Capital Fund Inc.
Morgan Stanley Leveraged Equity Fund II, Inc.
Morgan Stanley Capital Partners Asia Limited (Hong Kong)
Morgan Stanley Leveraged Equity Holdings Inc.
Morgan Stanley Market Products Inc.
Morgan Stanley Mortgage Capital Inc. (New York)
Morgan Stanley Overseas Finance Ltd. (Cayman Islands)
Morgan Stanley Overseas Services (Jersey) Limited (Jersey, Channel Is.)
Morgan Stanley Real Estate Investment Management Inc.
Morgan Stanley Real Estate Fund, Inc.
MSREF I, L.L.C
MSREF I-CO, L.L.C
Morgan Stanley Real Estate Investment Management II, Inc.
MSREF II-CO, L.L.C
Morgan Stanley Realty Incorporated
Brooks Harvey & Co., Inc.
Morgan Stanley Realty of California Inc. (California)
Morgan Stanley Realty of Illinois Inc.
Brooks Harvey of Florida, Inc. (Florida)
Brooks Harvey & Co. of Hawaii, Inc.
Morgan Stanley Realty Japan Ltd. (Japan)
BH-MS Realty Inc.
BH-MS Leasing Inc
BH-Sartell Inc.
The Morgan Stanley Scholarship Fund Inc. (Not-For-Profit)
Morgan Stanley Senior Funding, Inc.
Morgan Stanley Services Inc.
Morgan Stanley Technical Services Inc.
Morgan Stanley Technical Services MB/VC Inc.
Morgan Stanley Trust Company (New York)
Morgan Stanley Venture Capital Inc.
Morgan Stanley Venture Capital II, Inc.
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Morgan Stanley Venture Capital III, Inc.
Morgan Stanley Ventures Inc.
Morstan Development Company, Inc.
Moranta, Inc. (Georgia)
Porstan Development Company, Inc.
MS 10020, Inc.
MS 10036, Inc.
MS Capital Cayman Ltd. (Cayman Islands)
MS Financing Inc.
1585 Broadway Corporation
Morgan Stanley 750 Building Corp.
MS Tokyo Properties Ltd. (Japan)
MS Holdings Incorporated
MS Real Estate Special Situations Inc.
MS Real Estate Special Situations GP Inc.
MS Technology Holdings, Inc.
MS Venture Capital (Japan) Inc.
MSAM Holdings II, Inc.
VK/AC Holding, Inc.
Van Kampen American Capital, Inc.
ACCESS Investor Services, Inc.
American Capital Contractual Services, Inc. (New York)
Van Kampen American Capital Advisors, Inc.
Van Kampen American Capital Asset Management, Inc.
Van Kampen American Capital Distributors, Inc.
Van Kampen American Capital Exchange Corp. (California)
Van Kampen American Capital Insurance Agency of
Illinois, Inc. (Illinois)
Van Kampen American Capital Insurance Agency of Texas,
Inc. (Texas)
Van Kampen American Capital Investment Advisory Corp.
Van Kampen American Capital Management, Inc.
Van Kampen American Capital Recordkeeping Services,
Inc.
Van Kampen American Capital Trust Company (Texas)
Van Kampen Merritt Equity Advisors Corp.
VKAC Cayman Limited (Cayman Islands)
VK/AC System, Inc.
MSBF Inc.
MSCP III Holdings, Inc.
MSIT Holdings, Inc.
MSPL Co. Inc.
MSREF II, Inc.
MSREF II, L.L.C.
MSREF Funding, Inc.
MSUH Holdings I, Inc.
MSUH Holdings II, Inc.
MS SP Urban Horizons, Inc.
MS Urban Horizons, Inc.
PG Holdings, Inc.
PG Investors, Inc.
PG Investors II, Inc.
Pierpont Power, Inc. (New York)
Romley Computer Leasing Inc.
Strategic Investments I, Inc.
THE MORGAN STANLEY LEVERAGED EQUITY FUND II, L.P.
(the general partner of which is Morgan Stanley Leveraged Equity Fund II, Inc.)
American Italian Pasta Company
Amerin Corportion
Amerin Guaranty Corporation
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ARM Financial Group, Inc.
CIMIC Holdings Limited
Consolidated Hydro, Inc.
Hamilton Services Limited
PageMart Wireless, Inc.
Jefferson Smurfit Corporation
Risk Management Solutions
Silgran Holding Inc.
Silgan Corporation
American Color Graphics
"DEAN WITTER, DISCOVER COMPANIES"
Dean Witter Alliance Capital Corporation
Dean Witter Asset Corporation
Dean Witter Capital Corporation
Dean Witter Advisers Inc.
Dean Witter Capital Advisers Inc.
DW Administrators Inc.
DW Window Coverings Holding, Inc.
Dean Witter Distributors Inc.
Dean Witter Equipment corporation
Dean Witter Aviation Capital Inc.
Dean Witter Futures and Currency Management Inc.
Dean Witter InterCapital Inc.
Dean Witter Services Company Inc.
Dean Witter Realty Inc.
Cook Street Credit Company (Colorado)
Cool Springs Inc. (Massachusetts)
Dean Witter Global Realty Inc.
Dean Witter Holding Corporation
Cameron Leasing Corporation
Civic Center Leasing Corporation
Lee Leasing Corporation
Lewiston Leasing Corporation
Sartell Leasing Corporation
Dean Witter Leasing Corporation
Dean Witter Realty Advisors Inc.
Dean Witter Realty Credit Corporation
Dean Witter Realty Fourth Income Properties Inc.
Dean Witter Realty Growth Properties Inc.
Dean Witter Realty Income Associates I Inc.
Dean Witter Realty Income Associates II Inc.
Dean Witter Realty Income Properties I Inc.
Dean Witter Realty Income Properties II Inc.
Dean Witter Realty Income Properties III Inc.
Dean Witter Realty Securitization Inc.
Dean Witter Realty Yield Plus Assignor Inc.
Dean Witter Realty Yield Plus Inc.
Dean Witter Realty Yield Plus II Inc.
DW Arboretum Plaza Inc.
DW Bennington Property Inc.
DW Chesterbrook Investors Inc.
DW Duportail Investors Inc.
DW Greycoat Inc.
DW Morris Drive Incorporated
DW 1200 Incorporated
DW Reston Technology Park Inc.
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DW Tech Park II Inc.
GF Braker Inc.
Green Orchard Inc. (Massachusetts)
LLJV Funding Corporation (Massachusetts)
LS Atlanta Associates Inc.
LS Bayport, Inc.
LS Lake, Inc.
LS Richmond Mall Inc.
Realty Management Services Inc.
SBA/DW/CB Temp Inc.
SBA/DWR, Inc.
Dean Witter Reynolds Inc.
Dean Witter Reynolds Insurance Agency (Massachusetts ) Inc.
(Massachusetts)
Dean Witter Reynolds Insurance Agency (Ohio) Inc. (Ohio)
Dean Witter Reynolds Insurance Agency (Oklahoma) Inc. (Oklahoma)
Dean Witter Reynolds Insurance Agency (Texas) Inc. (Texas)
Dean Witter Reynolds Insurance Agency (Alabama) Inc. (Alabama)
Dean Witter Reynolds Insurance Services (Arizona) Inc. (Arizona)
Dean Witter Reynolds Insurance Services (Arkansas) Inc. (Arkansas)
Dean Witter Reynolds Insurance Services (Illinois) Inc. (Illinois)
Dean Witter Reynolds Insurance Services Inc.
Dean Witter Reynolds Insurance Agency (Indiana) Inc.
(Indiana)
Dean Witter Reynolds Insurance Services, Inc. (Puerto Rico) (Puerto
Rico)
Dean Witter Reynolds Insurance Services (Maine) Inc. (Maine)
Dean Witter Reynolds Insurance Services (Montana) Inc. (Montana)
Dean Witter Reynolds Insurance Services (New Hampshire) Inc. (New
Hampshire)
Dean Witter Reynolds Insurance Services (South Dakota) Inc. (South
Dakota)
Dean Witter Reynolds Insurance Services (Wyoming) Inc. (Wyoming)
DWR Special Partners Inc.
Dean Witter Reynolds International Incorporated
Dean Witter Reynolds GmbH (Germany)
Dean Witter Reynolds (Hong Kong) Limited (Hong Kong)
Dean Witter Reynolds International, Inc. (Panama)
Dean Witter Reynolds (Geneva) S.A. (Switzerland)
Dean Witter International Ltd. (U.K.)
Dean Witter Capital Markets International Itd. (U.K.) (U.K.)
Dean Witter Futures Limited (U.K.)
Dean Witter Reynolds Limited (U.K.)
Dean Witter Reynolds International, S.A. (France)
Dean Witter Reynolds (Italy) Inc.
Dean Witter Reynolds (Luasanne) S.A. (Switzerland)
Dean Witter Reynolds (Lugano) S.A. (Switzerland)
Dean Witter Reynolds S.p.A. (Italy)
Dean Witter Reynolds Partners Inc.
DWR Special Advisors Inc.
Dean Witter Reynolds Venture Equities Inc.
Dean Witter Venture Management Inc.
Dean Witter Trust FSB (Federal Charter)
Dean Witter Venture Inc.
Demeter Management Corporation
DWD Electronic Financial Services Inc.
Discover Brokerage Direct Inc. (California)
Bay One Technologies Group, Inc. (California)
DWR Partnership Administrators Inc.
DWR Wind Technologies Inc.
NOVUS Credit Services
Bank of New Castle
Discover Card Bank Limited (Gibraltar)
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Discover Services Corporation
Greenwood Trust Company
Mountain Receivables Corp.
Mountain West Financial Corporation (Utah)
NOVUS Consumer Discount Company (Pennsylvania)
NOVUS Development Corporation
NOVUS Financial Corporation
NOVUS Financial Corporation of Iowa (Iowa)
NOVUS Financial Corporation of Minnesota (Minnesota)
NOVUS Financial Corporation of Tennessee (Tennessee)
NOVUS Financial Corporation of Washington (Washington)
NOVUS Services (Canada), Inc. (Canada)
NOVUS Services, Inc.
SCFC Receivables Corp.
Discover Receivables Financing Corporation
Discover Receivables Financing Group, Inc.
SCFC Receivables Financing Corporation
SPS Transaction Services, Inc.
Hurley State Bank (South Dakota)
SPS Payment Systems, Inc.
MedCash, Inc.
Med-Link Technologies, Inc.
Quality Asset Management, Inc.
Ruf Corporation (Kansas)
SPS Commercial Services, Inc.
SPS Newco, Inc.
SPS Receivables Financing Corporation
Utah Receivables Financing Corporation
One Water Corporation (Massachusetts)
Reynolds Securities Inc.
Tempo-GP, Inc.
Tempo-LP, Inc.
- - -----------------------------
* 95% owned by Morgan Stanley Asset Management Holdings Inc., 3% owned by MSL
Incorporated and 2% owned by MS Holdings Incorporated.
** 25% owned by Morgan Stanley Asia Pacific (Holdings) I Limited.
*** 25% owned by non-Morgan Stanley entities.
ITEM 27. NUMBER OF CONTRACT OWNERS
As of August 31, 1997 there were 2,794 contract owners of
Pinnacle(version II) and 140 contract owners of Pinnacle(version III) of
Separate Account II of Integrity.
ITEM 28. INDEMNIFICATION
BY-LAWS OF INTEGRITY. Integrity's By-Laws provide, in Article V, as follows:
Section 5.1 INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND
INCORPORATORS. To the extent permitted by the laws of the State of Ohio,
subject to all applicable requirements thereof:
(a) The Corporation shall indemnify or agree to indemnify any person
who was or is a party or is threatened to be made a party, to any
threatened, pending, or completed action, suit, or proceeding, whether
civil, criminal, administrative, or investigative, other than an
action by or in the right of the Corporation, by reason of the fact
that he is or was a Director, officer, employee, or agent of the
Corporation or is or was serving at the request of the Corporation as
a Director, trustee, officer, employee, or agent of another
corporation, domestic or foreign, non-profit or for profit,
partnership, joint venture, trust, or other enterprise, against
expenses, including attorney's fees, judgements, fines, and amounts
paid in settlement actually and reasonably incurred by him in
connection with such
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action, suit, or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests
of the Corporation, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was
unlawful. The termination of any action, suit, or proceeding by
judgment, order, settlement, or conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests
of the Corporation and, with respect to any criminal action or
proceeding, he had reasonable cause to believe that his conduct was
unlawful.
(b) The Corporation shall indemnify or agree to indemnify any person
who was or is a party or is threatened to be made a party to any
threatened, pending, or completed action or suit by or in the right of
the Corporation to procure a judgment in its favor by reason of the
fact that he is or was a Director, officer, employee, or agent of the
Corporation, or is or was serving at the request of the Corporation as
a Director, trustee, officer, employee, or agent of another
corporation, domestic or foreign, non-profit or for profit,
partnership, joint venture, trust, or other enterprise, against
expenses, including attorney's fees, actually and reasonably incurred
by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the Corporation,
except that no indemnification shall be made in respect to any of the
following:
(1) Any claim, issue, or matter as to which such person is
adjudged to be liable for negligence or misconduct in the
performance of his duty to the Corporation unless, and only to
the extent the court of common pleas or the court in which such
action or suit was brought determines upon application that,
despite the adjudication of liability, but in view of all
circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses as the court of common
pleas or such other court shall deem proper;
(2) Any action of suit in which the only liability asserted
against a Director is pursuant to Section 1701.95 of the Ohio
Revised Code.
(c) To the extent that a Director, trustee, officer, employee, or
agent has been successful in the merits or otherwise in defense
of any action, suit, or proceeding referred to in division (a)
and (b) of this Article, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses,
including attorney's fees, actually and reasonably incurred by
him in connection with the action, suit, or proceeding.
(d) Any indemnification under divisions (a) and (b) of this Article,
unless ordered by a court, shall be made by the Corporation only
as authorized in the specific case upon the determination that
indemnification of the Director, officer, employee, or agent is
proper in the circumstances because he has met the applicable
standard of conduct set forth in divisions (a) and (b) of this
Article. Such determination shall be made as follows:
(1) By a majority vote of a quorum consisting of Directors of
the Corporation who were not and are not parties to or threatened
with any such action, suit, or proceeding;
(2) If the quorum described in division (d)(1) of this Article
is not obtainable or if a majority vote of a quorum of
disinterested Directors so directs, in a written opinion by
independent legal counsel other than an attorney, or a firm
having associated with it an attorney, who has been retained by
or who has performed services for the Corporation or any person
to be indemnified within the past five years;
(3) By the Shareholders; or
(4) By the court of common pleas or the court in which such
action, suit or proceeding was brought.
Any determination made by the disinterested Directors under Article
(d)(1) or by independent legal counsel under Article (d)(2) shall be
promptly communicated to the person who threatened or brought the
action or suit by in the right of the Corporation under (b) of this
Article, and within ten days after receipt of such notification, such
person shall have the right to petition the court of common pleas or
the court in which such action or suit was brought to review the
reasonableness of such determination.
(e) (1) Expenses, including attorney's fees, incurred by a Director
in defending the action, suit, or proceeding
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shall be paid by the Corporation as they are incurred, in advance of
the final disposition of the action, suit, or proceeding upon receipt
of an undertaking by or on behalf of the Director in which he agrees
to do both of the following:
(i) Repay such amount if it is proved by clear and
convincing evidence in a court of competent jurisdiction
that his action or failure to act involved an act or
omission undertaken with deliberate intent to cause injury
to the Corporation or undertaken with reckless disregard for
the best interests of the Corporation;
(ii) Reasonably cooperate with the Corporation concerning
the action, suit or proceeding.
(2) Expenses, including attorney's fees, incurred by a Director,
officer, employee, or agent in defending any action, suit, or
proceeding referred to in divisions (a) and (b) of this Article,
may be paid by the Corporation as they are incurred, in advance
of the final disposition of the action, suit, or proceeding as
authorized by the Directors in the specific case upon receipt of
an undertaking by or on behalf of the Director, officer,
employee, or agent to repay such amount, if it ultimately is
determined that he is not entitled to be indemnified by the
Corporation.
(f) The indemnification authorized by this section shall not be
exclusive of, and shall be in addition to, any other rights granted to
those seeking indemnification under the Articles or the Regulations
for any agreement, vote of Shareholders or disinterested Directors, or
otherwise, both as to action in his official capacity and as to action
in another capacity while holding such office, and shall continue as
to a person who has ceased to be a Director, officer, employee, or
agent and shall inure to the benefit of the heirs, executors, and
administrators of such a person.
(g) The Corporation may purchase and maintain insurance or furnish
similar protection, including but not limited to trust funds, letters
of credit, or self insurance, on behalf of or for any person who is or
was a Director, officer, employee, or agent of the Corporation, or is
or was serving at the request of the Corporation as a Director,
officer, employee, or agent of another corporation, domestic or
foreign, non-profit or for profit, partnership, joint venture, trust,
or other enterprise, against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as
such, whether or not the Corporation would have the power to indemnify
him against such liability under this section. Insurance may be
purchased from or maintained with a person in which the Corporation
has a financial interest.
BY-LAWS OF ARM SECURITIES. ARM Securities' By-Laws provide, in Sections 4.01
and 4.02, as follows:
SECTION 4.01 INDEMNIFICATION. The Corporation shall indemnify its
officers and directors for such expenses and liabilities, in such manner, under
such circumstances, and to such extent, as required or permitted by Minnesota
Statutes, Section 302A.521, as amended from time to time, or as required or
permitted by other provisions of law.
SECTION 4.02 INSURANCE. The Corporation may purchase and maintain
insurance on behalf of any person in such person's official capacity against any
liability asserted against and incurred by such person in or arising from that
capacity, whether or not the Corporation would otherwise be required to
indemnify the person against the liability.
INSURANCE. The directors and officers of Integrity and ARM Securities are
insured under a policy issued by National Union. The total annual limit on such
policy is $10 million, and the policy insures the officers and directors against
certain liabilities arising out of their conduct in such capacities.
AGREEMENTS. Integrity and ARM Securities, including each director, officer and
controlling person of Integrity and ARM Securities, are entitled to
indemnification against certain liabilities as described in Sections 5.2, 5.3
and 5.5 of the Selling/General Agent Agreement and Section 9 of the Form of
Variable Contract Principal Underwriter Agreement incorporated as Exhibit 3 to
this Registration Statement. Those sections are incorporated by reference into
this response. In addition, Integrity and ARM Securities, including each
director, officer and controlling person of Integrity and ARM Securities, are
entitled to indemnification against certain liabilities as described in Article
VIII of the Participation Agreement incorporated as Exhibits 8(a), 8(b) and 8(c)
to this Registration Statement. That article is incorporated by reference into
this response. Certain officers and directors of Integrity are officers and
directors of ARM Securities (see Item 25 and Item 29 of this Part C).
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UNDERTAKING. Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) ARM Securities is the principal underwriter for Separate Account II.
ARM Securities also serves as an underwriter for Separate Account I of
Integrity, Separate Accounts I and II of National Integrity Life Insurance
Company, and The Legends Fund, Inc. Integrity is the Depositor of Separate
Accounts II, I and VUL.
(b) The names and business addresses of the officers and directors of, and
their positions with, ARM Securities are as follows:
Name and Principal Business Address Position and Offices with Arm Securities
- - ----------------------------------- ----------------------------------------
Edward J. Haines Director and President
515 West Market Street
Louisville, Kentucky 40202
John R. McGeeney Director, Secretary, General Counsel and
515 West Market Street Compliance Officer
Louisville, Kentucky 40202
Peter S. Resnik Treasurer
515 West Market Street
Louisville, Kentucky 40202
Walter W. Balek Vice President
8400 Normandale Lake Blvd., Suite 982
Minneapolis, Minnesota 55435
Dale C. Bauman Vice President
100 North Minnesota Street
New Ulm, Minnesota 56073
Robert Bryant Vice President
1550 East Shaw #120
Fresno, California 93710
Ronald Geiger Vice President
100 North Minnesota Street
New Ulm, Minnesota 56073
Barry G. Ward Controller
515 West Market Street
Louisville, Kentucky 40202
William H. Guth Operations Officer
515 West Market Street
Louisville, Kentucky 40202
David L. Anders Marketing Officer
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515 West Market Street
Louisville, Kentucky 40202
Robert L. Maddox Assistant Secretary
515 West Market Street
Louisville, Kentucky 40202
Sheri L. Bean Assistant Secretary
515 West Market Street
Louisville, Kentucky 40202
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The records required to be maintained by Section 31(a) of the Investment Company
Act of 1940 and Rules 31a-1 to 31a-3 promulgated thereunder, are maintained by
Integrity at 515 West Market Street, Louisville, Kentucky 40202.
ITEM 31. MANAGEMENT SERVICES
The contract under which management-related services are provided to Integrity
is discussed under Part 1 of Part B.
ITEM 32. UNDERTAKINGS
The Registrant hereby undertakes:
(a) to file a post-effective amendment to this registration statement as
frequently as is necessary to ensure that the audited financial
statements in the registration statement are never more than 16 months
old for so long as payments under the variable annuity contracts may
be accepted;
(b) to include either (1) as part of any application to purchase a
contract offered by the prospectus, a space that an applicant can check
to request a Statement of Additional Information, or (2) a postcard or
similar written communication affixed to or included in the prospectus
that the applicant can remove to send for a Statement of Additional
Information; and
(c) to deliver any Statement of Additional Information and any financial
statements required to be made available under this Form promptly upon
written or oral request.
Integrity represents that the aggregate charges under variable annuity contracts
described in this Registration Statement are reasonable in relation to the
services rendered, the expenses expected to be incurred, and the risks assumed
by Integrity.
15
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant and the Depositor certify that they meet all of the
requirements for effectiveness of this post-effective amendment to their
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and have duly caused this amendment to the Registration Statement to be signed
on their behalf, in the City of Louisville and State of Kentucky on this 20th
day of October, 1997.
SEPARATE ACCOUNT II OF
INTEGRITY LIFE INSURANCE COMPANY
(Registrant)
By: Integrity Life Insurance Company
(Depositor)
By: /s/ John R. Lindholm
------------------------------
John R. Lindholm
President
INTEGRITY LIFE INSURANCE COMPANY
(Depositor)
By: /s/ John R. Lindholm
------------------------------
John R. Lindholm
President
16
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Depositor has duly caused this amendment to the Registration Statement
to be signed on its behalf, in the City of Louisville and State of Kentucky on
this 20th day of October, 1997.
INTEGRITY LIFE INSURANCE COMPANY
(Depositor)
By: /s/ John R. Lindholm
------------------------------
John R. Lindholm
President
As required by the Securities Act of 1933, this amendment to the Registration
Statement has been signed by the following persons in the capacities and on the
date indicated.
PRINCIPAL EXECUTIVE OFFICER: /s/ John R. Lindholm
------------------------------
John R. Lindholm, President
Date: 10/20/97
PRINCIPAL FINANCIAL OFFICER: /s/ Edward L. Zeman
------------------------------
Edward L. Zeman, Executive Vice President-
Chief Financial Officer
Date: 10/20/97
PRINCIPAL ACCOUNTING OFFICER: /s/ Barry G. Ward
------------------------------
Barry G. Ward, Controller
Date: 10/20/97
DIRECTORS:
/s/ Mark A. Adkins /s/ Jeffrey A. Trainer
- - ------------------------------ ------------------------------
Mark A. Adkins Jeffrey A. Trainer
Date: 10/20/97 Date: 10/20/97
/s/ John R. Lindholm /s/ Martin H. Ruby
- - ------------------------------ ------------------------------
John R. Lindholm Martin H. Ruby
Date: 10/20/97 Date: 10/20/97
/s/ Gerald J. Rusnak /s/ John Franco
- - ------------------------------ ------------------------------
Gerald J. Rusnak John Franco
Date: 10/20/97 Date: 10/20/97
/s/ William H. Guth
- - ------------------------------
William H. Guth
Date: 10/20/97
<PAGE>
EXHIBIT INDEX
Exhibit No.
10. Consents of Ernst & Young LLP.
20
<PAGE>
Exhibit No. (10)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Financial
Statements" in Post-Effective Amendment No. 8 to the Registration Statement
(Form N-4 No. 33-51268) and Amendment No. 9 to the Registration Statement
(Form N-4 No. 811-7134) and related Prospectuses of Integrity Life Insurance
Company's Separate Account II and to the incorporation by reference therein
of our reports (a) dated February 12, 1997, with respect to the statutory
basis financial statements of Integrity Life Insurance Company and (b) dated
April 18, 1997, with respect to the financial statements of Separate Account II
of Integrity Life Insurance Company, both included in the Registration
Statement (Form N-4) for 1996 filed with the Securities and Exchange
Commission on May 1, 1997.
/s/ Ernst & Young LLP
Louisville, Kentucky
October 15, 1997
